Companies with excess cash usually choose between different investment options for their money. These companies evaluate different investments based on the length of time they wish to hold an investment and their desired rate of return. Businesses investment accounting vary differently depending on the type of investments they choose.
While many companies may hold equity investments on their accounting books, financial institutions like banks and investment groups are the primary holders of equity investments. Companies must properly report these items on their investment accounting financial statements for outside stakeholders (external individuals or entities interested in a company, such as banks, investors, lenders or competitors).
Equity investments on investment accounting represent money spend to buy stocks or bonds from another company. These items are held as investments, with the holding company expecting a return on their invested capital. Stocks and bonds are the two most common investment accounting types of equity investments. Stock investments are reported as the price paid for the stock, while bonds should be reported at fair market value.
Equity investments are classified under one of three types of categories: held to maturity, trading or available for sale. Held to maturity investments indicate the company will sell the investments when they mature in value. Trading investments in investment accounting are actively traded by the company, and available for sale are matured investments the company is willing to sell.
Equity investments on investment accounting are reported at the end of each accounting period on the balance sheet company. Bond investment must be revalued at fair market value every time they are reported on the balance sheet. Equity investment accounting guidelines are found in Statement of Financial Accounting Standard No. 115, issued by the Financial Accounting Standards Board (FASB).