Accounting for Available for Sale Securities: Definition, Type, Example and Journal Entries

Definition for Available for Sale Security

Available for Sale Security, can be defined as debt or equity securities that are purchased with the intent of selling before they reach maturity. These financial instruments are mentioned at fair value on the Balance Sheet.

In technical terms, it can be seen that an Available for Sale security is a debt instrument that is not classified as one of the following:

  • Trading Securities: This classification is mainly assigned to investments where the main intent is to sell them in the short term to earn profits.
  • Held-to-Maturity Securities: The classification is assigned to investments where the main intent is to hold these instruments till the maturity date.

These classifications are mostly laid out by the Accounting bodies, including both, IFRS and GAAP. Hence, these instruments need to be treated in accordance with the accounting principles, since their income recognition, and realization is different as compared to other financial instruments.

The main reason why organizations invest in Available for Sale Securities are as follows:

  • Available for Sale Securities provide liquidity to the company
  • These securities are resourceful in diversifying portfolio risk.

Types of Securities

There are three broad classifications for securities. They include available for sale securities, held for trading, as well as held for maturity securities.

  • Held-for-Trading Securities: They are purchased and held primarily for short-term gain. The main aim of the organization is to make a profit from a quick trade, as compared to a long-term investment.
  • Held-for-Maturity Securities: These are the security instruments that the company plans on holding till the maturity date. The aim of profit generation via these sale of securities is to ensure that long-term gains are realized, across the course of the life of the security.
  • Available-For-Sale Securities: They mostly comprise of both, traits of Held-for-Trading Securities, as well as Held-for-Maturity Securities. They can be kept till maturity, or they can be sold off before the maturity date. It entirely depends on the gains that are available to be realized by the company across this timeframe.
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The accounting treatment for all these securities is different. This is because the losses and gains that are realized in the security are also supposed to be treated accordingly.

Explanation of Available for Sale Securities

Available for Sale Securities is coined as an accounting term that is used to describe and classify all financial assets. AFS securities are mostly non-strategic, and therefore, they have a ready market price available.

As mentioned earlier, available-for-sale securities are defined as a debt of equity instruments that are purchased for a short-term period by the organization. They are declared at fair value on the Balance Sheet of the company.

Unrealized gains and losses are also included in the accumulated other comprehensive income that is included in the equity section of the Balance Sheet.

Since these financial instruments are mostly kept for reselling purposes, it is important to note the fact that they might incur a loss or a profit on the sale. These profits and losses need to be recorded in the financial statements.

On the other hand, unrealized gains and losses are included in accumulated other comprehensive income within the equity section of the Balance Sheet.

Accounting Treatment for Available for Sale Securities

Normally, when companies purchase Available for Sale Securities, they record it at the historic value of the financial instrument (since that is equivalent to the fair value of the market). However, for these financial instruments, the fair value at the year-end might be different than the fair value at the beginning of the year.

Since these securities need to be evaluated and then recorded at their fair value on the financial statements, journal entries need to be made in order to reflect the change in the value of these financial instruments.

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Since AFS securities are long-term investments, they are recorded as assets on the financial statements. In the case where there is a decrease in the value of these assets, companies need to reduce the value of the asset by crediting the asset account.

The corresponding debit would be made to the Income Statement since the reduction in asset value is a loss from the perspective of the company.

In the same manner, when AFS Securities increase in value, it is similar to a profit from the perspective of the company. In order to record this increase, there is a debit that needs to be made to the asset account, in order to record the increased value.

Similarly, the corresponding credit entry would be an increase in income, which would be credited in the Other Comprehensive Income.

Journal Entries for Available For Sale Securities

When an organization purchases security classified as Available for Sale, the following journal entries are made:

ParticularDebitCredit
Available for Sale Securitiesxxx 
 Bank (Available for Sale Investments)xxx

Normally, the fair value of Available for Sale securities tends to change every year. They are supposed to be recorded as such in the financial statements too. The value of the Securities can increase, or decrease over time.

If there is a reduction in the value of Available for Sale Securities, the following journal entries are made:

ParticularDebitCredit
Loss on Available for Sale Securitiesxxx 
  Available for Sale Securitiesxxx

In the same manner, if there is an increase in value for Available for Sale Securities, the following journal entries are required:

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ParticularDebitCredit
Available for Sale Securitiesxxx 
 Profit on Available for Sale Securitiesxxx

Subsequently, when these financial instruments are sold on the market, the following transaction is made:

ParticularDebitCredit
Bank (Sale of AFS Securities)xxx 
 Available for Sale Securities xxx

Example of Available for Sale Securities

The concept of Available for Sale Securities is illustrated in the following example:

Brilliant Co. is a trading concern that invests in a number of financial instruments to ensure diversity across its portfolio. On 1st January 2019, they purchased security (intended to be an Available for Sale Security) for a price equivalent to $15,000.

At the year-ended of 31st December 2019, the price of the security amounted to $14,000. At the year-end 31st December 2020, the price of the security increased to $17,000. At this point, Brilliant Co. decides to sell off the security in the open market.

In the example mentioned above, it can be seen that three main steps are involved. They include the purchase of the security, subsequent losses and gains, and then eventual disposal of the security.

The journal entries required to record the purchase of this particular security in the books of Brilliant Co. is going to be as follows:

ParticularDebitCredit
Available for Sale Securities$15,000 
 Bank (Available for Sale Investments)$15,000

Subsequently, when there is a revaluation of the given security, the following journal entries are made:

ParticularDebitCredit
Loss Available for Sale Securities$1,000 
 Available for Sale Securities$1,000

For the year ended December 31, 2020, the value of the security increased to $17000. This represents a $3000 gain in the financial records. Therefore, the following journal entries are required:

ParticularDebitCredit
Available for Sale Securities $3,000 
 Gain on Available for Sale Securities$3,000

Lastly, when these securities are sold for a price of $17,000, the following journal entries are required:

ParticularDebitCredit
Cash $17,000 
 Available for Sale Securities $17,000
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