Trade date vs. settlement date accounting

When trade date accounting is used, an entity entering into a financial transaction records it on the date when the entity entered into the transaction. When settlement date accounting is used, the entity waits until the date when the security has been delivered before recording the transaction. This timing difference can have a significant impact on a firm's financial statements, since trade date accounting might result in the appearance of an investment in the balance sheet in one month, while settlement date accounting might delay the recordation of the asset until the following month.

Trade date accounting gives the users of an organization's financial statements the most up-to-date knowledge of financial transactions, which can be used for financial planning purposes. Settlement date accounting is the more conservative approach, since it results in a delay of a few days before recordation occurs. It also means that there is no need to back out of a previously-recorded transaction if the transaction is not completed. Further, use of the settlement date means that the actual cash position of a business is more accurately portrayed in the financial statements.

Whichever method a business elects to use, it should do so consistently. This results in a reliable level of presentation in the financial statements.

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