Accounting for Marketable Securities

Marketable Securities are unrestricted financial instruments that can be sold or converted into cash in less than one year.

Marketable securities are assets that can be quickly liquidated into cash. This type of security is typically traded on an exchange and can include stocks, bonds, and other financial instruments. In addition, these securities tend to offer a higher yield than other types of investments, such as CDs or money market accounts. For these reasons, short-term liquid securities are often used as a tool for managing cash flow or taking advantage of short-term opportunities in the markets.

The company can sell these securities to the market and receive cash almost immediately. It will depend on the market, but the transactions can be executed much faster if compare to normal assets such as vehicles or machinery.

When it comes to investing, there are a lot of different options out there. One type of security that can be particularly attractive is marketable security. There are a few key benefits that make marketable securities an attractive investment option. First, they tend to be pretty liquid, which means that they can be easily converted into cash. Second, they offer a high degree of safety and stability. And third, they often provide a good return on investment. Given these advantages, it’s no wonder that so many investors choose to put their money into marketable securities.

Investing in marketable securities can be a risky proposition, as their value can fluctuate rapidly. However, they can also provide investors with the opportunity to earn high returns.

They have included both debt securities and equity securities which are listed in the capital market. These companies issue securities to raise funds to expand the business. Not only the company but the government also issue financial instruments to raise funds to support expenditure and public projects. The government only issues debt securities to raise funds as they cannot sell the equity securities.

These securities are highly liquid as they are easily converted to cash without impacting the market valuation. The company simply sells these securities in the market and they can receive the cash within a short time.

Characteristics of Marketable Securities

Marketable Securities have the following features:

  • They are available to sell and purchase in the capital market.
  • They are easily converted to cash in less than a year
  • Their maturities are equal or less than a year
  • They have a strong secondary market that enables them to sell or purchase publicly without any impact on their value.

Type of Marketable Securities

There are many kinds of marketable securities but they fall into two main categories which are debt and equity securities.

Debt Securities

Debt securities are the short-term debt bond that will be matured in less than a year. They represent the debt that issuers need to pay back to investors (holders) on the maturity date. The issuers have obligation to pay both principal and interest based on the bond term. The investors can wait until the maturity date or sell the instrument to the public market to immediately cash out. These types of securities mostly have low returns as they contain a very low risk as well. Even in the event of bankruptcy, companies must sell their asset to settle debtors before equity holders.

These are the type of debt securities:

  • Government bonds: these are the bonds issued by the government to raise money for public service.
  • Corporate bonds: these are the bonds issued by companies listed in the capital market.
  • Certificates of deposit: is the security issue by the bank or financial institute.
  • Treasury bills: is a short-term debt instrument issued by the US government. They will be settled by the Treasury Department within a year or less.

Equity Securities

Equity securities are the equity in which the company sells its ownership to the public market. Equity securities holders are the owner of the companies (issuer) and will benefit when the company makes a profit by receiving the dividend. The equity holders will have an influence on company strategy depending on the share percentage. They have the right to vote for the board of directors in the annual meeting.

The companies do not have any obligation to pay back dividends, it depends on the companies’ performance and BOD decision. The investors will receive both dividends and capital gains when share price increases. These securities usually have high returns if compare to debt securities while also having high risk.

Accounting for Marketable Securities

The investors classified their investments in marketable securities as assets on the balance sheet. However, there are a few categories that these instruments can belong to.  They can classify them into the following categories base on their investment purpose.

  • Held for trading

These are the securities that the company wishes to sell for a profit in short term. They are not willing to hold the investment for longer than one year.

Assets that are held for trading purposes are recorded on the balance sheet at their fair value. Trading assets are bought and held primarily for the purpose of selling in the near term to generate profits on short-term price differences. The fair value of held-for-trading assets is determined using active market prices, if available. Any change will result in the unrealized gain/loss record in the income statement.

The distinction between held-for-trading and other securities is important, as it can have a significant impact on a company’s reported earnings.

  • Held to Maturity

These are the marketable debt securities that investors tend to hold until the maturity date. They are not willing to sell the securities before the maturity date.

Investments that are classified as held to maturity are those that the investor has the intent and ability to hold until they reach their maturity date. These types of investments are typically debt instruments, such as bonds, that have a specific maturity date at which the principal and interest payments are due.

Held to maturity investments are reported on the balance sheet at their amortized cost, which is the cost of the investment adjusted with any discount or premium. These investments are not subject to mark-to-market accounting, so they will not fluctuate in value on market price.

  • Available for Sale

Available for Sale are the securities instrument that does not fall under the above categories. The investors purchase them with the intention to sell before the maturity date or hold them for a longer time. They are required to present the balance sheet base on the market value. Any change in value will be reflected in the income statement as an unrealized gain/loss.