What are Marketable Securities?
These are short term securities that are easily convertible into cash within short period, mostly less than 1 year. If an entity has temporary excess of cash, rather than or in addition to investing it in certificates of deposit, the entity may invest it in marketable securities.
Types of Marketable Securities
There are several types of marketable secuities
- Commercial Paper – A short term interest bearing promissory notes, mainly issued by large organisations having high credit ratings. They issue it to fulfill their cash requirements for the shortest time.
- Treasury Bills – This is a instrument issued by government of India for short term borrowings. It is issued at discount and is redeemable at the par value.
Stock of companies as well as bonds of firm and government entities are also part of these securities, if they are marketable that is, they can be readily sold.
Accounting Treatment of Marketable Securities
GAAP set out explicit rules for the Balance Sheet valuation of marketable securities. GAAP classify these securities into three categories –
- Held To Maturity Securities – These are the debt securities that the entity intends to hold to maturity. They appears on the Balance Sheet at cost.
- Trading Securities – These are debt or equity securities that are held for current resale. They appears at the market value, with any unrealized gains or losses of the period included in the calculation of the period’s income.
The entry for the unrealized gain is as follows –
Marketable Securities Dr.
To Gain on Marketable Securities
- Available for sale securities – This category of security involves those marketable securities which are neither debt nor securities. They also appear at their current value. But the gain is place directly under owner’s equity.