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Mark to Market Accounting | Top Examples | Journal Entries - YouTube
Channel: WallStreetMojo
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the bell ican today we have topics with
us is called mark to market accounting
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m2m marketing m2m accounting is or m2m is done very it's very normal
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or a common thing in finance for stock
market so first what is the m2m
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marketing or m2m accounting okay fine
see m2m accounting is very simple
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concept which means you know recording
the value of the given asset at the
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current market value instead of the
historical buying price instead of the
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historical buying price so m2 marketing
m2m accounting means you know recording
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the value of the balance sheet assets
and liabilities at the current market
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value okay with the aim to provide a
fair appraisal of the company's
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financials now let's discuss the m2m
that is Mark to marketing accounting
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versus historical accounting
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now see accounting data is historical in
nature accounting data is historical
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nature so if an asset is purchased the
cost or the cost which is paid to
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acquire the asset along with all the
realized cost for bringing the asset to
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its location in the required state can
also be added to the purchase cost so
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these cost is then you know depreciated
these cost are basically depreciated
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here on your pieces and the net value is
reflected in the balance sheet of the
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company so these value is independent of
the market value so the market value can
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be it can be higher okay then the then
or equal it can be higher or equal to
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the same or even lower than the net
depreciated value recorded in the books
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of accounts so accounting does not
consider the mark-to-market value then
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the the recorded is carried out the
recorded is carried out at the
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historical because of one of the basic
accounting principle of prudence the as
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for the principle of accounting are
expected to accountants to be cautious
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while recognizing the gains now if we
tended to value over asks to the M to M
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we will recognize the unrealized gains
in the books further there is no
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specific basis for arriving at the
market value in the most of the cases so
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the booking assets at the booking the
assets at the book value might end up
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giving up very unrealistic picture to
use of the financial statement so these
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are certain exception to the above rules
of reflecting assets at the historical
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value on the face of the balance sheet
now as for the accounting standard there
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are certain assets which are
specifically shown at the market value
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at the end of the accounting period and
these rule is more specifically these
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rules are most specifically designed
for the financial instrument rather than
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the physical long-term assets like land
buildings computer and so on and so
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forth so the reason for marketing these
securities to the market value gives us
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a true picture and the value is more
relevant as compared to the historical
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value so financial securities are
generally volatile in nature and the
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market value is the only true value of
these securities especially if these
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assets are classified as available for
sale or trading now we will take some of
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the examples here
who understand this the first is
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available
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for sale securities now available for
sale securities is the most common
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example of the mark-to-market accounting
and available for sale asset it is the
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financial security which can either be
in the form of debt or equity purchased
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with the intent of selling these
securities before it reaches to its
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maturity so in cases of the security
which do not have maturity these
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securities will be sold prior you know
to our long time period for which you
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know these securities are generally held
so any gains or loss from fluctuation in
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the market value of the asset is
classified as available for sale will be
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reported okay in the other comprehensive
income account in the equity section of
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the balance sheet now the second is
called the held for trading example now
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another common example mark to marketing
accounting is held for trading asset is
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a financial security which can either be
in the form of debt which can be either
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we in the it can be either in the form
of debt or equity and is purchased with
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intention of selling the security within
a short period of time and which is
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generally less than your thanksful so
any gains or losses from the
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fluctuations in the market value of the
asset classified as available for
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trading and will be reported as
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unrealized gains or losses on the income
statement now we will do the journal
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entry part here first is the
available-for-sale securities so in this
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case the value of the asset is written
down or increases for the market value
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of the gains or losses above and the
equity shares of the value let's say it
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ample equity shares of the value of
let's say 10,000 are purchased on 1st of
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September 2016 okay now as on 31st of
December 2016 that is the close of D
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financially or 2016 the value of the
equity is let's say we here $8,000 so
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assuming that these equity shares are
available for sale the security should
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be recorded at the market value and the
Mar mark the market value journal entry
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will be loss on securities loss on
securities available for sale account
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that is $2,000 to investment available
for sale account that is again 2000 so
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in the balance sheet the investment will
be shown at a new amount of how much
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10,000 - mm that is 8,000 and the loss
will be recorded in the other
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comprehensive income so now assuming
that you know the close of the next
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accounting year that is 31st of December
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2017 or 31st of December 2017 is only
the market value the market value of
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these equity shares is 11,000 and as
compared to the previous year the gain
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is of $3,000 to the market to mark the
market accounting journal entry for the
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sale for the same will be
investment for available investment
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available for sale that would be 3000
and to credit will be given to gain on
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securities available that is 1002 loss
on securities that is 2000 so that's it
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in terms of journal entries now there
are there also like helpful trading we
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have for them you know the different
sort of accounting is done you know a
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separate accounting account is known as
for helpful trading case which is the
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second one held for trading it is known
as the security fair value adjustments
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account ok which will be shown on the
face of the balance sheet along with the
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security account is created in any
increase or decrease okay in the fair
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value is to be adjusted or in this
account any fair value is to be just so
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the equity share value of let's say 10000 are purchased on let's say
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first of September 2016 as on 31st
December the closer financial year at
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the value of the equity shares is $12,000
so the difference of $2,000 gain is on
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account of the marking the securities to
the market and mark to market accounting
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journal entry of the same will be
something like this
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security fair value adjustments account
debit that is 2002 unrealized gain or
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loss that is 2000 so
that's it for this particular topic know
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if if you have any other questions you
can ask them in the comments so that's
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