How to account for investments on the books

Introduction

Accounting is often seen only as a requirement of the government.Accountants are often stereotyped as up-tight mathematicians who work alone.The fact is that all of us have done some form of accounting as we have made financial decisions based on the facts that were present at the time of the decision.Accounting for funds is essential to managing one's own finances and especially in the managing of the finances for a company.When we practice principles of accounting we are summarizing and making a record of funds that have and will be paid in order to determine our financial standing.Determining financial standing or creating a capital budget is essential in the successful management of investments.

Instructions

The way that you account for investment on the books can be as simple or as complex as your investments themselves.Some have a very basic way of accounting for investments as costs or expenses and then subsequently categorizing increases and losses accordingly.Below are several different methods for accounting for investments on the books.Feel free to choose from these options or from other accounting methods that are considered acceptable by the policy board that dictates generally acceptable accounting principles.

Ways to account for investments on the books

1. A beginner's method
a. If you are not obligated to share your accounting methods with anyone, as in you are not performing the accounting work for a business, then you can really adopt your own basic methods of accounting (while staying true to the basic principles of accounting, of course.)
b. To account for investments on your books simply classify investment dollars spent as a cost or expense (a debit to your account).
c. The returns on your investment (such as dividends and the sale of the investment) are then simply credited to your account.

2. Equity method
a. In this method of accounting for investments, the investment made is to be increased by the reported net income of the investor on the income statement.
b. Investment amounts should also be decreased by the amount received, in the form of dividends, for that investment.

3. Cost method
a. In the cost method of accounting for investments the subsidiary account is considered a cost.However this method of accounting is only used when one company owns less than 20% of the stock of another company (subsidiary).
b. The cost method of accounting for investments can be used in place of the equity method of accounting for investments if 20%-50% of stock of a subsidiary company is owned but there is no significant influence gained by this ownership.

4. Equity and debt securities method
a. Accounting for investments using the equity and debt securities method is the best way to assign a fair value to your investments.
b. To give you a basic idea for how to account for investments this way, you will need to know how to estimate fair value by using different pricing techniques.
c. Cash flows for investments are considered cash flow from operating activities.
d. Investment gains and losses are reported separately from the total amount of shareholder's equity.
e. Amortization is used in conjunction with the security.

More accounting tips - there is a right way and a wrong way

The accounting tips listed above are by no means meant to be a complete guide as learning how to account for investments on the books of large companies and investment firms can be quite complicated.When looking for a good set of accounting principles to start from, the GAAP is an excellent resource.The GAAP stands for generally accepted accounting principles and is a set of standards that lays out proper methods for accounting for your investments on the books.

In the GAAP you will find more information about how to account for your investments through the use of revenue recognition, balance sheet item classification and outstanding share measurements.The GAAP is not law, only a set of standards to help investors and companies achieve some sort of consistency in their financial statements.