Journal entry for purchase and sale of trading securities
Overview
Trading securities are the types of short-term investments that the company usually purchases with the intention of selling them back in a short period of time for a profit. Likewise, it needs to make the journal entry for the purchase of trading securities in order to account for the increase in short-term investments on the balance sheet.
And, when the company sells the trading securities at a profit, it can make the journal entry for the gain on sale of trading securities in order to recognize the profit as a realized gain in the income statement on the date of the sale. Of course, the company may also make a loss on the sale of trading securities which it needs to record the loss to the income statement instead.
The trading securities are classified as current assets on the balance sheet as they will be sold in a short period of time in the future which is usually less than three months. The realized gain or loss on the sale of trading securities is the difference between the total cost of trading securities and their selling price (including brokerage fee).
Purchase of trading securities
The company can make the journal entry for the purchase of trading securities by debiting the trading securities account and crediting the cash account.
| Account | Debit | Credit |
|---|---|---|
| Trading securities | 000 | |
| Cash | 000 |
This journal entry for the purchase of the trading securities will increase a short-term asset (trading securities) on one hand while decreasing another short-term asset (cash) by the same amount.
Sale of trading securities
Gain on sale of trading securities
The company can make a gain on the sale of trading securities when the sale price (including brokerage fee) is more than the cost it pays for at the purchasing date. The gain on the sale of trading securities is recognized and recorded as the realized gain on sale of investments in the income statement to distinguish this type of gain from those of unrealized gain on securities investments.
Likewise, the company can make the sale of trading securities journal entry by debiting the cash account and crediting the realized gain on sale of investments account and trading securities account if there is a gain on the sale transaction.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Realized gain on sale of investments | 000 | |
| Trading securities | 000 |
Loss on sale of trading securities
On the other hand, if the sale proceeds the company receives from the sale of trading securities are less than the total cost of such securities (including brokerage fee), the company will make a loss on the sale of trading securities. Again, the company recognizes and records the loss as a result of the sale of trading securities as the realized loss on sale of investments in the income statement to distinguish it from those of the unrealized loss on securities investment.
Likewise, if the company makes a loss in the sale of trading securities, it can make the journal entry by debiting the cash account and the realized loss on sale of investments account and crediting the trading securities account.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Realized loss on sale of investments | 000 | |
| Trading securities | 000 |
Realized gain or loss on sale of investments is an income statement item in which it is recorded for the difference amount between the cost of securities that the company pays for and the sales proceeds that the company receives from the sale of trading securities.
Trading securities example
For example, on June 1, the company ABC purchase 10,000 shares of X corporation for $200,000. The purchase that the company ABC made on these shares is for the trading purpose in which the company intends to realize a gain by holding the shares for a short period of time. Likewise, on August 31, the company ABC sells all 10,000 of the purchased shares of X corporation for $220,000.
What are the journal entries for the trading securities above?
Solution:
On June 1
The company ABC can make the journal entry for the purchase of trading securities when it buys the 10,000 shares of X corporation for $200,000 on June 1, by debiting the $200,000 to the trading securities account and crediting the same amount to the cash account as below:
| Account | Debit | Credit |
|---|---|---|
| Trading securities | 200,000 | |
| Cash | 200,000 |
On August 31
When the company ABC sells the 10,000 shares of X corporation for $220,000 on August 31, it can make the sale of trading securities journal entry by recording the $20,000 ($220,000 – $200,000) in the realized gain on sale of investments account as below:
| Account | Debit | Credit |
|---|---|---|
| Cash | 220,000 | |
| Realized gain on sale of investments | 20,000 | |
| Trading securities | 200,000 |
Example 2
For example, on July 1, the company ABC purchases 5,000 shares of Z corporation for trading purposes. On the purchasing date, the company ABC pays $5 per share which totals to $25,000 for the 5,000 shares of Z corporation (including brokerage fee). On September 30, due to the market situation, the company ABC decides to sell all 5,000 shares of Z corporation for $20,000 resulting in a loss of $5,000.
What are the journal entries for the purchase and sale of trading securities from Z corporation above?
Solution:
On July 1
When the company ABC purchases the shares of Z corporation for $25,000 for the purpose of trading on July 1, it can make the journal entry for trading securities as below:
| Account | Debit | Credit |
|---|---|---|
| Trading securities | 25,000 | |
| Cash | 25,000 |
On September 30
When the company ABC sells the trading securities for a loss of $5,000 on September 30, it can make the journal entry for the loss on sale of trading securities as below:
| Account | Debit | Credit |
|---|---|---|
| Cash | 20,000 | |
| Realized loss on sale of investments | 5,000 | |
| Trading securities | 25,000 |
Unrealized gain or loss on trading securities
Unlike held-to-maturity securities, trading securities are recorded at fair value. This means that any change in the market value will affect the value of the trading securities on the balance sheet.
Hence, at the period-end adjusting entry, the company needs to make a necessary fair value adjustment for the trading securities on the balance sheet to match the market value. And the difference between the market value and the carrying value will be recorded as an unrealized gain or an unrealized loss to the income statement.
Unrealized gain on trading securities
The company has an unrealized gain on trading securities when the market value is more than the cost of the trading securities.
In this case, the company can make the journal entry for unrealized gain on trading 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 the adjustment account that is made to the value of the trading securities on the balance sheet. And the unrealized gain on investments will be recorded as revenue to the income statement for the period.
Unrealized loss on trading securities
On the other hand, the company has an unrealized loss on trading securities when the market value is less than the cost of the trading securities.
In this case, the company can make the journal entry for unrealized loss on trading securities by debiting the unrealized loss on investments account and crediting the the fair value adjustment account.
| Account | Debit | Credit |
|---|---|---|
| Unrealized loss on investments | 000 | |
| Fair value adjustment | 000 |
The unrealized loss on investments in this journal entry will be also recorded as an expense to the income statement for the period.
Example
For example, on November 30, the company ABC purchased 10,000 shares of corporation XYZ for $100,000 ($10 per share) for trading purposes. And these 10,000 shares are still on the balance sheet as at December 31, as the company ABC has not sold them out yet.
However, on December 31, the share price of the corporation XYZ increase to $12 per share. This means that the company ABC has an unrealized gain of $2,000. And December 31 is the company ABC’s period-end adjusting entry.
In this case, the company ABC can make the journal entry for the $2,000 unrealized gain on trading securities by debiting this $2,000 to the fair value adjustment account and crediting the same amount to the unrealized gain on investments account as below:
| Account | Debit | Credit |
|---|---|---|
| Fair value adjustment | 2,000 | |
| Unrealized gain on investments | 2,000 |
The $2,000 unrealized gain on investments in this journal entry will be recorded as an expense for the period to the income statement.
