In accounting, you can have three types of securities: a trading security, an available-for-sale security or a held-to-maturity security. All of these securities are assets, so on your balance sheet, they need to be reported as assets. Even though they are balance sheet assets, they do flow through to your income statement and cash flow statement. All these aspects need to be taken together to correctly report your trading security.
Knowing Whether You Have a Trading Security
Because there are three types of securities, you need to correctly identify you have a trading security before you can report it correctly. A trading security can either be equity or debt securities. However, trading securities are bought for the sole purpose of selling them in the near future, which is typically in a year or less. If you don't plan to sell for more than a year, it will either be held-to-maturity or available-for-sale.
Valuing the Security
When you report the security on your balance sheet, you need to know the value of the asset to properly account for it. With a trading security, the value of the asset is its fair market value. For example, for an equity security such as a stock, the value of the trading security is the stock's price at the date of your balance sheet. If you have a debt security, such as a loan to someone, the value is the amount the loan is worth or the price at which you could sell it to another party.
Placing the Security on the Balance Sheet
Because the trading security is a security you want to sell in less than a year, it is a current asset. Therefore, you will never find a trading security as a long-term asset. This means you need to enter the trading security as a current asset on your balance sheet. The amount next to the asset is the valuation of the trading security previously mentioned.
Flow Through to Other Statements
Because a trading security may appear on multiple financial statements, if you have a change in the fair market value of the asset at the time of the new statement, you need to recognize the gain or loss, depending on the change in price, on your income statement as an unrealized gain or loss. For example, if the trading security was valued at $100 on your last statement and it is now worth $110, you have a $10 unrealized gain. Also, when putting together your cash flow statement, all activities with trading securities go under your Operating Cash Flows section.
Carter McBride started writing in 2007 with CMBA's IP section. He has written for Bureau of National Affairs, Inc and various websites. He received a CALI Award for The Actual Impact of MasterCard's Initial Public Offering in 2008. McBride is an attorney with a Juris Doctor from Case Western Reserve University and a Master of Science in accounting from the University of Connecticut.