Trading securities are a form of short-term marketable security which a business can invest in with the intent of generating a profit by reselling the investment in the near future (usually within one year of the balance sheet date).
A trading security can be either an equity or debt security such as a stock or bond, and is recorded at fair value and classified as a current asset in the balance sheet of the business.
Purchase of Trading Securities
When purchased trading securities are recorded at cost including associated fees.
Suppose for example a trading security is purchased for 1,000 including fees, then the following double entry bookkeeping journal would be used when accounting for trade securities.
The Trading Securities Decrease in Value
If at the period end the trading security has decreased in value, then the investments must be written down to the new value and the unrealized loss charged against the income of the business.
For example, if at the end of the accounting period the trading securities are worth 800 and the carrying value on the balance sheet is 1,000, then the following journal is used to record the unrealized loss.
|Unrealized loss on trading securities||200|
Following this journal, the trading securities are carried on the balance sheet at the fair value of 1,000 – 200 = 800, and the 200 unrealized loss has been charged against the income of the business. The loss is unrealized as the trading security has not yet been sold.
The Trading Securities Increase in Value
If at the period end the trading security has increased in value, then the investments must be increased to the new fair value and the unrealized gain credited to the income statement of the business.
For example, if the investments now increase in value to 1,400 and the carrying value on the balance sheet is 800, then the following journal is used to record the unrealized gain.
|Unrealized gain on trading securities||600|
Following this journal, the trading investments are carried on the balance sheet at the fair value of 800 + 600 = 1,400, and the 600 unrealized gain has been credited to the income statement of the business. The gain is unrealized as the trading security has not yet been sold.
It should be noted that the total unrealized gain to date following these two revaluations is 400 (600-200) which represents the difference between the original cost of 1,000 and the current fair market value of 1,400.
Sale of the Trading Securities
When a trading security is sold, the difference between the proceeds and the carrying value of the trading security in the balance sheet results in a realized gain or loss.
If for example, the trading security is carried on the balance sheet at the fair value of 1,400 and the proceeds from sale are 1,300, then a loss of 100 is realized and recorded with the following journal.
|Realized loss on trading securities||100|
Dividend and Interest from Short-Term Marketable Securities
Dividends and interest receivable on short-term marketable securities are treated as normal and credited to income in the income statement.
Trading securities are only one type of marketable security others include available for sale securities and held to maturity securities, where the business has the intent to hold the security until a fixed maturity date.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.