Most assets on a company's balance sheet will be listed at their historical cost, which is the amount the company originally paid for them. That's because it can be difficult or even impossible to determine a reliable current value for many assets. But shares of stock that a company holds as short-term investments are different. Because the current market value of any stock is easily determined, and because the company is prepared to sell these shares at any time, accounting rules require that short-term investments be regularly marked to market, or adjusted to their current market value.
List the individual stocks that make up each investment. Identify each stock and the number of shares owned.
Look up the current market price of each stock. Up-to-the-minute market prices are readily available from hundreds of sources online.
Multiply the current market price of the stock by the number of shares owned. This is the new value of the investment that will appear on the balance sheet.
Enter the new value of the short-term investment in the current assets section of the balance sheet, replacing the previous value.
Compare the new value of the investment with the previous value. If the new value is higher, the investment is showing an unrealized gain, which is a gain that exists only on paper. If the new value is lower, the investment is showing an unrealized loss. Calculate the amount of the gain or loss by subtracting the smaller figure from the larger one.
Determine whether the stocks in the investment are trading securities or available-for-sale securities. Management chooses the classification based on what it intends to do with the securities. Trading securities are intended to be sold in the near future, while available-for-sale securities are held for longer, unless if it gets a good offer to sell. The classification determines the next steps.
Report any unrealized gains from trading securities as revenue on the income statement. Add the amount of the gain to retained earnings in the stockholders' equity section of the balance sheet.
Report any unrealized losses from trading securities as expenses on the income statement. In the stockholders' equity section of the balance sheet, reduce retained earnings by the amount of the loss.
Add the amount of any unrealized gains from available-for-sale securities to the accumulated other comprehensive income account in the stockholders' equity section of the balance sheet.
Subtract the amount of any unrealized losses from available-for-sale securities from the accumulated other comprehensive income account in the stockholders' equity section of the balance sheet.
- If the investments are made up of bonds, follow the same steps. Current bond prices are often harder to determine, so you may have to check with a broker.
- Make adjustments to both the assets section and the stockholders' equity section of the balance sheet. This keeps the balance sheet in balance.
- If stocks in short-term investments pay dividends, report the dividend income as revenue on the income statement. On the balance sheet, add the amount of the dividend to both the cash balance under assets and to retained earnings under stockholders' equity. Handle interest payments from bonds the same way.
- Do not enter gains or losses from available-for-sale securities on the income statement. Such gains or losses aren't recorded as revenue or expenses until available-for-sale securities are sold.
Items you will need
- Information about the stocks held as short-term investments
- "Financial Accounting for MBAs," Fourth Edition; Peter Easton, et al
- PrinciplesOfAccounting.com: Trading Securities
- PrinciplesOfAccounting.com: Available-for-Sale Securities