Securities Accounting

Updated on May 3, 2024
Article byJyotsna Suthar
Edited byJyotsna Suthar
Reviewed byDheeraj Vaidya, CFA, FRM

Securities Accounting Definition

Securities accounting refers to the accounting methods applied to the securities held in equity and debt instruments. It primarily includes stocks and bonds as securities. This accounting practice further helps firms to track, monitor, and record transactions related to financial securities.

Securities Accounting

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With equity and debt securities accounting, firms can easily monitor the buying and selling of securities. Also, it helps them find the closing balance of the securities held to date. Hence, different accounting treatments are used based on security behavior over time.

Key Takeaways

  • Securities accounting utilizes various methods to track and record transactions involving equity and debt instruments like stocks, bonds, mutual funds, options, and derivatives contracts.
  • The three primary methods are available-for-sale (recorded in other comprehensive income), held to maturity (recorded at amortized cost), and trading securities (in net income).
  • As per the SFAS No. 115 of the Financial Accounting Standard Board (FASB) code, accounting for securities is compulsory.

Securities Accounting Explained

Securities accounting in finance is an accounting treatment done on securities. It mainly focuses on equity and debt securities. However, this classification extends beyond mere classification. Equity securities include stocks, mutual funds, options, and other derivatives contracts. Likewise, debt securities comprise bonds, collateralized debt obligations (CDOs), and commercial papers, among others. When a firm invests around $1 million in these assets, it will follow a different accounting treatment. However, it depends on the position of the securities.

There are three types of marketable securities accounting methods: available-for-sale, held-to-maturity, and trading securities. Let us look at them in detail:

#1 – Available For Sale Securities Accounting

This accounting exists when the securities are available for sale at a fair value. These securities are lying in the trading account with no specific purpose of trading or redemption. They are available to be sold anytime. However, the firm may sell them in the short run.

The treatment for available-for-sale securities excludes any unrealized holding profits or losses. Instead, they get recorded as other comprehensive income until realized on sale. 

#2 – Held To Maturity

Some securities are bought with the intention of selling them on maturity. Instruments like bonds and mutual funds are prominent examples of such securities. Investors hold them for a longer term to realize the profits associated with it. Hence, firms record them at their amortized cost (initial purchase price less principal repayments).

#3 – Trading Securities Accounting

Trading securities accounting acts opposite to the available-for-sale securities. Here, the primary purpose is to trade these equity and debt securities. Hence, any unrealized gains or losses get recorded in the net income

Examples

Let us look at some examples of marketable securities accounting to understand the concept in a better manner:

Example #1

Suppose Samuel owns a firm that operates in the textile industry. They acquired several small companies and invested in many other firms. Due to this, the company has made huge profits from their investments and their business. However, in the upcoming month, the firm has to close its books of accounts. So, Samuel decides to prepare consolidated financial statements for the financial year 2023-2024. However, Kevin, the chief financial officer, advises him to do a separate treatment for the following securities. Let us look at the treatment:

Equity stocks worth $30,000 faced a value reduction to $29,000, but after a month, it increased to $33,000. Bonds were purchased for $70,000 recently, with their fair value rising by 5% ($3500).

Here, in the equity securities, there was an unrealized gain of $3000 and a loss of $1000. Hence, both amounts became a part of comprehensive income. Similarly, bonds received a fair value of $3500 in the net income (profit and loss account).

Example #2

As of December 2023, the Financial Accounting Standards Board (FASB) has denied implementing any changes in securities accounting following major bank failures. The proposed change specifically targeted the accounting treatment for held-to-maturity securities. Under the current rules, firms can record all amounts under the same name. Hence, if they include bonds under held-to-maturity securities, they can remove any unrealized losses from equity. However, this debate has existed since the 1990s to last year; the FASB has disclaimed the rumors.

Benefits

Securities accounting is a valuable tool to analyze and track financial transactions based on securities. However, there are various benefits apart from record purposes. Let us look at them:

#1 – Evaluation Of Investments Made In Securities

The prime benefit of using this accounting method is visible in the securities themselves. By using this tool, companies can state the flow of investment activities in their financial statements. So, if there is excess sale of securities, it demands a loss-making position. Likewise, higher purchase depicts the firm’s investing behavior. 

#2 – Helps In Proper And Accurate Financial Reporting Of Transactions

Similarly, proper accounting of securities enables accurate financial reporting of transactions. It allows firms to prepare financial statements in a defined manner as per the standards. Hence, investors can witness transparency in the company’s financials.

#3 – Allows Adherence To Compliances

This accounting method allows companies to adhere to the standards imposed by financial regulators. The SFAS No. 115 of the FASB mandates firms to list securities and account for them.

#4 – Helps To Mitigate Risk

By evaluating and managing securities, firms can detect potential risks. It is possible to prevent any contingent loss or threat that may arise in the future by implementing corrective measures.

#5 – Enhance Investment Decisions

Securities act as a crucial component of the firm’s investments. This accounting helps firms quickly detect the cash flows in the business. For instance, if equity securities have yielded more losses than gains, firms can restructure their investment strategy and trade.

Frequently Asked Questions (FAQs)

1. What are the trading securities accounting journal entries?

The journal entries for trading securities are usually recorded in the income statement. However, there are three kinds of accounting treatment for each stage. Let us look at them:

• At the initial purchase, the trading securities (equity or debt) get debited, and cash (or accounts payable) gets credited.
• On recognizing the fair value of security, the gain or loss is recorded. If it is a gain, the unrealized gain gets debited, and trading securities get credited, and vice-versa for loss.
• For realized gains, the cash and gain get debited, along with credited securities. However, for loss, cash gets debited with trading securities, and loss gets credited.

2. How are dividends and interest treated in securities accounting?

Dividends and interest act as income for the firm. Thus, it resides in the income statement as interest income.

3. What is the accounting treatment for impairment in securities accounting?

When an impairment occurs on an investment, it depicts a fall in value that is unrecoverable. Hence, it acts as a loss to the firm.

This article has been a guide to Securities Accounting and its definition. Here, we explain the concept in detail along with its examples and benefits. You may also find some useful articles here –

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