Journal Entry for Purchase Trading Securities
Trading securities is the buying and selling of stocks, bonds, and other financial instruments in the capital market.
When an investor purchases a bond, they are essentially entering into a contract with the issuer of that security, who has agreed to pay back the principal amount of the loan plus interest.
The terms of the loan are spelled out in the security’s prospectus, which is a document that outlines the terms of the offering. In order to trade securities, an investor must first open an account with a broker-dealer. Once an account is opened, the investor can then place orders for securities with the broker-dealer.
The broker-dealer will execute the order on behalf of the client and will usually charge a commission for their services. Trading securities can be risky, but it can also lead to high returns if done correctly. For this reason, it is important to consult with a financial advisor before making any decisions about trading securities.
Trading securities are characterized by their high liquidity, which means they can be easily converted into cash. They are also highly susceptible to price changes, which can provide opportunities for profit or losses. For these reasons, trading securities are often only suitable for investors who are willing and able to take on a higher degree of risk. However, with careful research and analysis, trading securities can provide a profitable investment opportunity.
Due to the highly liquidate, the trading securities are classified as short-term investments. The company intends to keep them for short term for some capital gain from the trading. They have no intention to keep it for the long term.
Journal Entry for Purchase Trading Securities
The trading securities are classified as a short-term investment when the company purchase and hold them.
They will be recorded as part of the current assets on the balance sheet.
The journal entry is debiting short-term investment and credit cash paid.
| Account | Debit | Credit |
|---|---|---|
| Short-term Investment | XXX | |
| Cash | XXX |
The purchase of trading security will be recorded as current assets on the balance sheet. It is called short-term investment. The cash balance will be reduced from the balance sheet.
When the price of trading securities changes, the balance of short-term investment will be reflected with the current price as well.
The increase in price will increase the short-term investment and gain on the income statement.
The journal entry is debiting short-term investment and credit gain on trading security.
| Account | Debit | Credit |
|---|---|---|
| Short-term Investment | XXX | |
| Unrealized Gain on trading security | XXX |
The short-term investment will increase according to the actual market price. It will generate an unrealized gain on trading security as the company has not yet sold to the market.
Example
Company ABC has purchased the other company’s share with the objective of getting an additional return for the surplus fund. The company spends $ 100,000 to purchase the shares.
At the end of the year, the shares have increased value by around 10%. The company investment has increased to $ 110,000. However, the company is not willing to sell yet.
Please prepare a journal entry for the purchase of trading security and related entry.
The company has invested in the capital market by purchasing other companies’ shares. It has to record as the short-term investment which the company holds for profit.
The journal entry is debiting short-term investment $ 100,000 and credit cash $ 100,000.
| Account | Debit | Credit |
|---|---|---|
| Short-term investment | 100,000 | |
| Cash | 100,000 |
The entry will increase the short-term investment by $ 100,000 and cash reduce by the same amount.
At the end of the year, the share price increased by 10% ($ 10,000), and the company needs to reflect this amount on the balance sheet. The short-term investment will increase by $ 10,000 and the unrealized gain increase $ 10,000.
The journal entry is debiting short-term investment $ 10,000 and credit unrealized gain on trading security $ 10,000.
| Account | Debit | Credit |
|---|---|---|
| Short-term Investment | 10,000 | |
| Unrealized Gain on trading security | 10,000 |