Updated July 10, 2023
Definition of Available for Sale of Securities
Available for sale of securities is a classification of securities held for sale in the short term and did not intend to keep it for the long term. The securities which are neither classified as held for trading nor held to maturity securities are called available for-sale securities.
Explanation
There are three types of securities classification per generally accepted accounting practices: trading securities, securities held for maturity, and available for sale securities. The securities classified as trading or intended to be held until maturity are classified under the available securities. There is a different accounting process for it as they are short-term securities. These types of securities are debt or equity securities intended to sell quickly and purchased to earn profits from the short-term funds available.
How Does Available for Sale for Securities Work?
Suppose the organization intends to purchase securities, whether equity or debt, to sell in a short period. In that case, these securities are classified as available for sale. These types of securities are classified under financial assets on the balance sheet. Normally, companies value these types of securities at their realizable value without recognizing unrealized gains or losses in the income statement. Additionally, there is a distinct accounting process for available-for-sale securities. The only purpose is to benefit the financial position and earn a profit, as these securities easily provide liquidity.
Types
It is mainly classified into two categories:
1. Financial Instruments
Financial instruments are available for sale for securities issued or sold by companies that require short-term business financing and aim to re-purchase or buy back the securities. The company may issue these securities as new equity shares or bonds. The company should provide interest to the bondholders. For shareholders, the company needs to make such a decision or perform so that the value of shares should increase at the buyback time. These securities are classified as liabilities as they intend to repay the financiers.
2. Investment Securities
Investment securities are the type of securities that a company and intention purchase to sell in the short term, and the purpose is to earn profit. It can also purchase to diversify the portfolio’s risk to reduce the risk. These securities are valued at a realizable price and classified as financial assets, i.e., short-term investments held for sale.
Accounting
As available for sale, securities intend to be sold in the short term, and due to the nature of securities, the price fluctuates in nature; hence these types of securities are valued at the market price, i.e., the price available for sales on the reporting date. Accordingly, the profit or loss due to valuation will be transferred to other comprehensive income until the available securities are sold. Then, the net profit or loss transfers to the income statement on sale. Accordingly, accumulated other comprehensive income is classified in the balance sheet below the retained earnings.
Example of Available for Sale for Securities
ABC Ltd. buys the securities amounting to $ 20,000, which it classifies as available for sale. On the balance sheet date, the value of securities standing in the market was $ 12,000. After the balance sheet date in the next reporting period, the securities’ value reached $ 21,000, and ABC Ltd. sold the securities at that price. Record the accounting treatment for the above securities.
Solution:
Year 1:
|
Date |
Particulars | Debit ($) |
Credit($) |
| Year 1 | Loss on available for sale securities A/c Dr | 8,000 | |
| To investment available for sale A/c | 8,000 | ||
| (being Loss on available for sale securities is to be shown in other comprehensive income ( $ 8,000) on the balance sheet. ) | |||
Now, if in the next accounting year, the value becomes $ 9,000, then the accounting entry will be as follows
Year 2:
|
Date |
Particulars | Debit ($) |
Credit($) |
| Year 2 | Investment Available for sales A/c Dr | 9,000 | |
| To gain on securities available for sales A/c | 1,000 | ||
| To Loss on Securities available for sales A/c | 8,000 | ||
| (Being change in the value of investment recorded) |
First, the previous loss is settling from the current gain to reflect the true and correct position in the accounts.
On Sale:
|
Date |
Particulars | Debit ($) |
Credit($) |
| On sale | Cash or Bank A/c Dr | 21,000 | |
| To investment available for sale A/c | 21,000 | ||
| (being entry to record sale of investment) | |||
Net gain on sale, i.e., sale value –original cost ($21,000 – $20,000) $ 1000, must transfer to a net income account.
Available for Sale for Securities in Banks
As the bank has to maintain the liquidity per different norms, varies from country to country, the banks invest in short-term securities to earn profit and maintain the liquidity, i.e., sell the securities at any time. Banks commonly offer for sale securities such as commercial paper, corporate debt securities, demand deposits, certificates of deposit, and demand loans. In banking accounting, these types of securities should be presented separately.
Available for Sale for Securities vs Trading Securities
The key differences are as follows:
- The company intends to sell short-term security while it holds trading securities for potential selling in the future, without a requirement for immediate or short-term selling.
- Available-for-sale securities depend on their realizable value, while trading securities are at face value.
- The unrealized gain on available for sale securities will transfer to other comprehensive income until sold. Then, the net gain or loss is transferred to the income statement on sale. In contrast, the profit or loss on sale in trading securities is directly recorded in the income statement, i.e., the profit and loss account.
Advantages
Some of the advantages are as follows::
- These types of securities are easy to liquidate.
- Buying aims to earn a profit from the funds available for a short period.
- Useful for managing portfolio risk.
- Recorded at fair value on the balance sheet date to show the true picture and accumulated loss or gain.
Conclusion
This type of security earns short-term profit from available funds. These types of securities can easily liquidate; hence banks also invest in available-for-sale securities as banks have to maintain the liquidity ratios. These securities are classified as financial assets on the balance sheet and will be recorded at fair value on each valuation date. The gain or loss on revaluation will transfer to other comprehensive income until sold. After adjusting the other comprehensive income, another comprehensive account is shown in the balance sheet liabilities below retained earnings. The net gain or loss on sale on actual sales will be transferred to the profit and loss account.
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