If you’re trading as a private investor or on behalf of a company or other individuals, you want to perform well and have good returns. Therefore, keeping good records and tracking your performance is essential, and good accounting processes, such as keeping a detailed balance sheet, are necessary. However, if you’re new to trading, you might be well-versed in the best trading apps in UK but not know much about accounting or classifying trading stock.
In accounting, the trading stock is seen as a form of current asset, be it short-term, which is recorded on the asset side of the balance sheet. They are noted at their current market value during the accounting period and adjusted for every other subsequent reporting. This piece will dig deep into trading stock classification and everything you need to know about accounting while trading.
How to Account for Trading Stock
A stock is an ownership claim on assets and profits of the issuing company. When you buy a stock, you purchase partial ownership of the company and its assets. As a stockholder, the issuing company is obligated to share a proportionate amount of its declared profits and earnings derived from selling or liquidating its assets.
However, most traders purchase stock to resell quickly for the short-term gains derived from their fluctuating value. When you or a company invests in stock from an adjacent company, you classify the purchase as a current asset when accounting for the abovementioned reason. In addition, you adjust the stock’s value for every accounting period and note any gains or losses made appropriately.
For instance, if you buy stock with $25,000 from company X and their price falls by 10% after a month. You would have to adjust their value to $22,500 and balance your books by noting a $2,500 loss on the credit side. The inverse is true if the stock was to gain in value.
Types of Stock Transactions
1. Stock’s Cash Sale
The most common stock transaction you will encounter is buying or selling the stock for cash. Stock is valued at the capital value per share, also known as the par value, indicated on a stock’s certificate. If you’re buying stock, record a debit into your stock account and credit the amount in your cash account. After selling the stock, you will record your transaction by noting either a profit or loss.
2. Exchange of Stocks for Non-cash Assets or Services
You don’t have to buy stocks from an exchange or over the counter to own part of a company. Many start-ups strategies involve the use of part of their stock as compensation for essential services and materials they require to run. As an investor, you might want to dedicate your time and expertise instead of cash to gain ownership of such stock.
In such scenarios, and for accounting purposes, you and the organization determine the value of your services or goods per market value at the time, as well as that of the stock. You then debit your stock account and credit the salary section on your balance sheet.
3. Stock Repurchase
Stock repurchasing mostly applies to publicly trade companies attempting to reduce the number of their stock in the market. They achieve this by repurchasing them from shareholders and increasing the company’s stake. In this case, the company credits the transaction in the stockholder’s equity account and debits the share’s account.
Furthermore, profits are debited in the paid-in capital account if the company opts to sell the stock again at a higher price. On the other hand, as the investor selling back stock to the company, you would credit your stock account ad debit your capital.
Stock trading is much more than keeping your eye out for current news and market shifts for trading opportunities. Although this is a significant portion of your day, it’s not the only essential thing you have to do. Proper bookkeeping is the other aspect you also have to get good at to help you keep proper records and an accurate assessment of your performance.
Now that you have a rough idea of how to classify stocks and scenarios you can expect to encounter in the trading waters. We hope you use this knowledge to good effect and elevate your trading career.