Companies can invest in either debt or equity. Debt is when the company allows another entity to borrow money and pay the money back with interest. Equity is an ownership interest in another company. To account for investments, an accountant must first classify the security and then use the accounting methods for the classification to properly account for the investment.

Classifying Investment

An investment can have three possible classifications: trading, available-for-sale or held-to-maturity securities. Trading securities are investments bought just for the purpose of selling the investment in the future. Held-to-maturity securities are debt investments that the company plans on holding onto until the debt matures. Available-for-sale securities are any security not fitting into the classification of trading or held-to-maturity.

Recording Investments

Accountants record held-to-maturity investments at the amortized cost. Trading and available-for-sale securities are valued at the current market value and are adjusted at the end of each period to the current market value.

Gain or Loss on Trading Securities

Each period trading securities are revalued to their current market value. The change in value creates an unrealized gain or loss. To record the change, debit "Unrealized Loss" and credit "Value of Trading Security" if there is a loss on the investment. Debit "Value of Trading Security" and credit "Unrealized Gain" if there is a gain on the investment. The gain or loss goes on the company's income statement. This is an operating cash flow on the cash flow statement.

Gain or Loss on Available-for-Sale Securities

Each period available-for-sale securities are revalued to their current market value. The change in value creates an unrealized gain or loss. To record the change, debit "Unrealized Loss" credit "Value of Available-For-Sale Security" if there is a loss on the investment. Debit "Value of Available-For-Sale Security" and credit "Unrealized Gain" if there is a gain on the investment. The gain or loss goes on the company's Other Comprehensive Income Statement. This is an investing cash flow on the cash flow statement.

Gain or Loss on Held-to-Maturity Securities

Held-to-maturity securities do not report any unrealized gain or loss. This is an investing cash flow on the cash flow statement.