What is the difference between trading securities and available-for-sale securities? What are the similarities in terms of their accounting treatment?
What will be an ideal response?
Trading securities are debt or equity investments that management intends to sell in the very short term, typically less than one month. Available-for-sale securities are debt or equity investments that management intends to sell in the future, but not necessarily in the very short term. Both of these are considered "passive" investments, as management does not attempt to exert influence over the operating and financial policies of the corporations in which they are investing.
In both cases, the fair value method of accounting is used. This means that the investments are recorded at their fair value, which results in marking to market any investments that meet the criteria of trading and available-for-sale securities. Any resulting unrealized holding gain or loss is reported on the income statement for trading securities and as part of other comprehensive income in stockholders' equity for available-for-sale securities.
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