Journal entry for unrealized gain or loss on investment
Introduction
In accounting, the unrealized gain or loss on the investment is the difference between the cost of the investment securities and their fair value on the market. Likewise, we need to make the journal entry for the unrealized gain or unrealized loss on investment at the period-end adjusting entry when there is a change in its fair value.
The unrealized gains or losses on investments are usually considered as gains or losses on the paper since we have not sold the investments yet. However, we still need to record these unrealized gains or losses to the income statement or to the equity section of the balance sheet in order to have a fair presentation of financial statements at the year-end.
To comply with the accounting rule, we need to report the investment securities, either available-for-sale securities or trading securities investments, at their fair value. Likewise, we need to record the fair value adjustment at the year-end in order to adjust the value of the securities investments in our accounting record to the market value.
Journal entry for unrealized gain on investment
We can make the journal entry for unrealized gain on investment at the year-end adjusting entry by debiting the fair value adjustment account and crediting the unrealized gain on investments account.
| Account | Debit | Credit |
|---|---|---|
| Fair value adjustment | XXXX | |
| Unrealized gain on investments | XXXX |
In this journal entry, the fair value adjustment account is an asset account that will add (debit) to the investment account on the balance sheet. Likewise, we usually only see the net balance of the investment (after adding or deducting the fair value adjustment) on the balance sheet.
On the other hand, the unrealized gain account will be recorded to the balance sheet or the income statement based on whether the unrealized gain is from the available for sale securities or the trading securities investment.
In other words, the unrealized gain on available-for-sale securities investments will appear on the balance sheet under the equity section while the unrealized gain on trading securities investments will appear on the income statement as other revenues.
Journal entry for unrealized loss on investment
We can make the journal entry for unrealized loss on investment at the period-end adjusting entry by debiting the unrealized loss on investments account and crediting the fair value adjustment account.
| Account | Debit | Credit |
|---|---|---|
| Unrealized loss on investments | XXXX | |
| Fair value adjustment | XXXX |
Similar to the above, we need to record the unrealized loss on trading securities investments on the income statement as other expenses while recording the unrealized loss on the available-for-sale securities as a balance sheet item under the equity section.
On the other hand, the fair value adjustment in this journal entry will deduct the balance of the investments on the balance sheet in order to account for the unrealized loss that has occurred due to the change of the fair value of the securities investments on the market.
Example for unrealized gain or loss on investment
For example, on November 30, we have bought the 1,000 shares of the ABC corporation on the stock market for $100,000 ($100 per share). We have bought these shares for trading purposes as we intend to treat them as a short-term stock investment.
On December 31, which is our year-end date, the shares of the ABC corporation has increased to 120$ per share. In this case, the fair value of the 1,000 shares of the ABC corporation that we have bought on November 30, increase by $20,000 to $120,000 (1,000 shares x $120 per share) as of December 31.
In this case, we can make the journal entry on November 30, for the purchasing of the 1,000 shares of the ABC corporation as below:
November 30:
| Account | Debit | Credit |
|---|---|---|
| Trading securities | 100,000 | |
| Cash | 100,000 |
Then, on December 31, we can make the journal entry for unrealized gain on investment for the 1,000 shares of the trading securities as below:
December 31:
| Account | Debit | Credit |
|---|---|---|
| Fair value adjustment – trading | 20,000 | |
| Unrealized gain on investments | 20,000 |
In this journal entry, the unrealized gain of $20,000 will be recorded to the income statement as other revenues as this unrealized gain comes from the trading securities investment. On the other hand, the net book value of the trading securities on the balanc sheet will increase by $20,000 as of December 31.
Example 2:
For another example, on October 31, we have purchased 10,000 shares of the XYZ corporation for $20 per share which we have paid for $200,000 in total. As we see the potential increase of the stock value of the XYZ in long term, we intend to hold these 10,000 shares for longer than one year.
On December 31, the share price of the XYZ stock on the stock market is reported at $15 per share. In this case, there is an unrealized loss of $50,000 (10,000 shares x $5) as a result of the decrease of XYZ’s share price from $20 per share on October 31, to $15 per share on December 31.
In this case, we can make the journal entry on October 31, for the purchasing of the 10,000 shares of XYZ corporation as below:
October 31:
| Account | Debit | Credit |
|---|---|---|
| Available-for-sale securities | 200,000 | |
| Cash | 200,000 |
In this journal entry, we record the $200,000 to the available-for-sale securities account, instead of trading securities account, because we intend to hold these 10,000 shares of XYZ for some time before selling back to the market (e.g. for a profit). Hence, its nature is not the trading security investment but the available-for-sale security investment.
Later, on December 31, we can make the journal entry for unrealized loss on investment that we have in XYZ corporation as below:
December 31:
| Account | Debit | Credit |
|---|---|---|
| Unrealized loss on investments | 50,000 | |
| Fair value adjustment – available for sale | 50,000 |
In this journal entry, the $50,000 unrealized loss on investments account will be presented on the balance sheet under the equity section. This is because this unrealized loss comes from the available-for-sale security investment, in which we need to record it on the balance sheet instead of the income statement.
On the other hand, the net book value of the available-for-sale securities on the balance sheet that we have purchased on October 31, for $200,000 will decrease by $50,000 to $150,000 as of December 31.