Accounting For Short-term Investments – Accounting Guide

Learn about accounting for short-term investments: trading securities and available-for-sale securities. Short-term investments are easily marketable securities (stocks and shares and bonds) that are intended to be sold within the period of current possessions. Logically, short-term investments are classified as current assets. Security investments that do not meet both criteria should be categorized as long-term.

For example, stocks of held companies are likely to have very limited markets privately, and as the full total end result, such equity investments would not meet the first criterion and really should be classified as long-term. Management might not have intent to sell the investment in the near term, and as the result, this investment should be classified as long-term. Exactly what does readily marketable mean?

Readily marketable securities can be converted into cash (i.e., sold) on demand. For example, shares and bonds sold on open public stock exchanges meet this criterion usually. Readily marketable securities can be classified as trading or available-for-sale (i.e., see next section). The second criterion is more challenging to evaluate. Management might have a motivation, not intent, to add its investments in the short-term section of the total amount sheet to enhance the company’s liquidity and working capital ratios.

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Trading securities are reported in today’s section of the total amount sheet. Designed for sale-securities can be reported in either the current or noncurrent portion of the total amount sheet, depending on the management’s intent to market the securities in the near term. Both trading and available-for-sale securities are reported at the fair market value. Held-to-maturity securities are classified as noncurrent assets usually, or after the balance sheet date unless the maturity of such securities is at one.

Held-to-maturity securities are recorded and measured on the balance sheet at their amortized cost. Note that only debts securities can be classified as held-to-maturity because equity securities don’t have a maturity day. Debt securities represent purchases of debt burden of another entity. Types of debt securities are the following: corporate bonds, convertible debt, U.S.

Debt investments can be categorized as trading, available-for-sale, or held-to-maturity. Equity securities represent buys of excellent stocks (common, preferred, or other) of another company. Companies spend money on equity securities to earn investment income and to have the ability to control another company’s management and table of directors. Equity investments can be current (short-term) or concurrent (long-term).

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