Journal Entry for Available for Sale Securities
Introduction
Available-for-sale securities are the type of investment securities that we purchase with the intention to hold for a period of time before selling them in the future. In this case, we need to make the journal entry for the purchase of the available-for-sale securities in order to account for the increase in the investment assets on the balance sheet.
And when we sell them back to the market, we need to also record any realized gain or loss on the available-for-sale securities to the incomes statement. This realized gain or loss can be determined by the difference between the cost of acquiring the securities and the proceed that we receive from the sale.
In accounting, the available-for-sale securities is measured at fair value which is usually the market value of the securities. This means that any change in the market value will affect the value of the available-for-sale securities that we have on the balance sheet. And this will lead to unrealized gain or unrealized loss on available for sale securities that we need to record at the period end adjusting entry.
Purchase of available for sale securities
We can make the journal entry for the purchase of available for sale securities by debiting the available-for-sale securities account and crediting the cash account.
| Account | Debit | Credit |
|---|---|---|
| Available-for-sale securities | 000 | |
| Cash | 000 |
This journal entry of available for sale securities do not impact total assets on the balance sheet as one asset increases, another decreases.
Sale of available for sale securities
When we sell the securities back to the market, there is usually a gain or a loss as a result of the sale. This gain or loss is difference between the cost of purchasing the available for sale securities and the proceeds we receive from selling of such securities back to the market.
And this gain or loss need to be recorded as a realized gain or a realized loss to the income statement for the period.
Realized gain on sale of available-for-sale securities
We can make the journal entry for the realized gain on sale of available for sale securities by debiting the cash account and crediting the realized gain on sale of investments account and the available-for-sale securities account.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Realized gain on sale of investments | 000 | |
| Available-for-sale securities | 000 |
In this journal entry, the realized gain on sale of investments account is a revenue item on the income statement which we usually record under the other revenues section.
Realized loss on sale of available for sale securities
On the other hand, we can make the journal entry for the realized loss on sale of available for sale securities by debiting the cash account and the realized loss on sale of investments account and crediting the available-for-sale securities account.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Realized loss on sale of investments | 000 | |
| Available-for-sale securities | 000 |
The realized loss on sale of investments account in this journal entry is an expense item which we usually record under the other expenses section.
Available for sale securities example
For example, on January 1, we purchased a 1,000 shares of the corporation ABC for $100 per share which cost a total of $100,000 for the purchase. We intend to hold these shares for sometime for selling them back to the market.
Hence, these stock investments will be classified available for sale securities on the balance sheet.
Later, on November 30, we sell these 1,000 shares back to the market for $120,000 resulting in a total gain of $20,000 as a profit from the sale.
In this case, we can make the journal entry for the $100,000 purchase of the available for sale securities on January 1, by debiting this amount to the available-for-sale securities account and crediting the same amount to the cash account as below:
January 1:
| Account | Debit | Credit |
|---|---|---|
| Available-for-sale securities | 100,000 | |
| Cash | 100,000 |
Later, on November 30, we can make the journal entry for the $20,000 gain on sale of the available for sale securities by crediting the $20,000 to the realized gain on investments as below:
November 30:
| Account | Debit | Credit |
|---|---|---|
| Cash | 120,000 | |
| Realized gain on sale of investments | 20,000 | |
| Available-for-sale securities | 100,000 |
Unrealized gain or loss on available for sale securities
Similar to trading securities, the available for sale securities are recorded at fair value in which any change in market value will affect the value of the available for sale securities on the balance sheet. Likewise, this change in market value will result in an unrealized gain or unrealized loss on available for sale securities.
However, difference from trading securities, we need to record the unrealized gain or unrealized loss on available for sale securities to the other comprehensive income which is on the equity section of the balance sheet.
Unrealized gain on available for sale securities
At the period end adjusting entry, we will have an unrealized gain on available for sale securities when the market of value of the available for sale security is higher than its cost on the balance sheet.
In this case, we can make the journal entry for unrealized gain on available for sale securities by debiting the fair value adjustment account and crediting the unrealized gain on investments account.
| Account | Debit | Credit |
|---|---|---|
| Fair value adjustment | 000 | |
| Unrealized gain on investments | 000 |
In this journal entry, the fair value adjustment account is an adjustment account that we make in order to match the value of the available for sale securities on the balance sheet to the market value.
And, the unrealized gain on investments in this journal entry will be recorded to the equity section on the balance sheet.
Unrealized loss on available for sale securities
On the other hand, we will have an unrealized loss on available for sale securities when the market of value of the available for sale security is lower than its cost on the balance sheet.
In this case, we can make the journal entry for unrealized loss on available for sale securities by debiting the unrealized loss on investments account and crediting the fair value adjustment account.
| Account | Debit | Credit |
|---|---|---|
| Unrealized loss on investments | 000 | |
| Fair value adjustment | 000 |
Similar to the unrealized gain, we also need to record the unrealized loss on investments in this journal entry to the equity section on the balance sheet.
Example
For example, on July 1, we purchased 10,000 shares of the corporation XYZ for $50 per share. And we intend to hold these 10,000 shares for longer than one year before selling back to the market.
Later, the price of these 10,000 shares decrease to $45 per share on December 31. And our period end adjusting entry is on December 31.
In this case, we can make the journal entry for the 10,000 shares purchase on July 1, by debiting the $500,000 (10,000 shares x $50) to the available-for-sale securities account as below:
July 1:
| Account | Debit | Credit |
|---|---|---|
| Available-for-sale securities | 500,000 | |
| Cash | 500,000 |
And on December 31, we will have a $50,000 (10,000 shares x $5) unrealized loss on available for sale securities as its market value decrease to $45 per share on December 31.
In this case, we can make the journal entry for the $50,000 unrealized loss on available for sale securities by debiting this $50,000 amount to the unrealized loss on investments account as below:
December 31:
| Account | Debit | Credit |
|---|---|---|
| Unrealized loss on investments | 50,000 | |
| Fair value adjustment | 50,000 |
In this journal entry of unrealized loss on available for sale securities, both total assets and total equity on the balance sheet decrease by $50,000 as of December 31.