Accounting for Trading Securities

Trading securities (also called held-for-trading securities/investments) are equity or debt securities held by a company for active buying and selling. They are carried at their fair value and any gains or losses and dividend or interest income are recognized in profit or loss.

Trading securities are also called short-term marketable securities.

Only US GAAP uses the trading securities classification. Under IFRS, such securities are classified in the ‘fair value through profit or loss’ category.

Presentation in balance sheet and income statement

In the balance sheet, trading securities are classified as current assets and their carrying value is updated on each reporting date to reflect the latest fair value. Any increase or decrease in fair value is recognized in profit or loss as unrealized gain or loss, respectively.

When trading securities are ultimately sold off, the gain or loss is recalculated (based on the selling price) and reclassified to realized gain or loss.

Any interest or dividend income on trading securities is recognized as income in the period in which it accrues.

Example and journal entries

On 1 January 20X2, HTI Ltd. acquired 10,000 shares of FV Ltd. at $55 per share. During the quarter ending 31 March 20X2, FV Ltd. declared a dividend of $0.9 per share and the market value dropped to $49 per share. On 30 April 20X2, the securities were sold for $58 per share.

The acquisition of securities shall be recorded through the following journal entry:

Investment in HTI - trading securities550,000
Cash550,000

In the 1 January 20X2 balance sheet, the investment shall be reported at $550,000.

The dividend income in the first quarter of 20X2 shall be recognized in profit or loss as follows:

Cash9,000
Dividend income9,000

HTI shall also update the fair value by recognizing an unrealized gain or loss. In the balance sheet as at 31 March 20X2, the investments shall appear at $490,000 and a loss of $60,000 [=($55-$49) × 10,000] shall be recognized in profit or loss.

Unrealized gain or loss60,000
Investment in HTI60,000

On 30 April 20X2, when the securities are actually sold, the gain or loss is recalculated as follows:

Cash ($58 × 10,000)$580,000
Investment in HTI$490,000
Unrealized gain or loss$60,000
Realized gain or loss$30,000

by Obaidullah Jan, ACA, CFA and last modified on

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