Introduction to securities accounting

Portfolio Management

Managing securities in accounting is different from managing the performance of securities on the market.

Managing securities and their performance in the market is not easy and requires know-how in the field, which is why this part of the job is usually assigned to specialised entities in the field, who know the market and can assure their clients a proper securities management.

Often, these companies rely on special software developed precisely with a view to providing a report on the performance of securities in relation to the buying and selling of those securities, in some cases even complex data and metrics.

The data processed by these softwares are normally also made available to the owner of the securities, some of them via an interface, perhaps on their own portal, which allows access via an account to check their assets, while others communicate this via reports or others in other ways.

The accounting of transactions with securities, on the other hand, takes place after the market transaction has been concluded, and focuses on the book value of the security.

Securities accounting

Use the Transactions table to keep your securities accounts, record buying and selling movements and accrued interest on a security. Add the list of your securities to the Items table and use the 'Item' column in the Transactions table to retrieve the id (ISIN) of the security and its data when you want to record a new transaction for that security.

When recording a securities transaction in accounting, is assumed that one already has the data derived from the market transaction, such as

•     Security identifier (ISIN number)
•     Price at which the security was sold
•     Quantity of securities sold

As mentioned before, this data is transmitted to the securities holder at regular intervals by the person managing his portfolio, i.e. the bank or trust company, otherwise for investors without the help of third parties (e.g. via special applications) this information is accessible at any time.

Banana offers the possibility of managing securities in the Items table. The use of this table gives a strong added value to securities accounting as it allows one to:

•     Assign them an id (ISIN)
•     Keep track of their quantity
•     Group them by type (Shares, Bonds, ...)
•     Indicate their current market value
•     Assign them a balance sheet account

Book value of a security

The book value of a security, also known as book cost or average cost, represents the average amount paid for its/their purchase, which may vary over time. When you sell your securities, the book value is used to determine a gain or loss on the sale, which is useful information not only for accounting purposes but also for tax purposes.

Determining the book value of a security is more laborious than determining its market value. With Banana you have the possibility of calculating this automatically, as well as the accounting result after a sale.

In the securities account, all transactions relating to one or more securities are recorded. The balance of the account is the book value of the securities. It comprises:

•     The opening value
•     The purchase value
•     The sale value
•     The profit or loss on sales
•     It is recorded at the time of the sale
•     The exchange rate profit or loss of the sale (for multiple currencies)
•     The market price adjustment
•     When preparing the balance sheet, it is necessary to adjust the price of securities to the market price

Market value of a security

The market value of a security is the price assigned to it in the market, again a variable amount. When buying and selling securities, the person in charge of managing the portfolio always informs the holder of the securities of the market price at which they were sold (or bought), so it is not up to the holder of the securities to find the market price, as is the case with the book value.

In accounting you can enter the market value of a security within the Items table in the 'Price Current' column. By setting the market price, you can use the valuation report to find the unrealised gain or loss.

Calculation of Accounting Gains and Losses on Securities

The accounting gain or loss on the sale of a security depends on its book value compared to the market value at which it was sold.

Use the extension ' Calculate the accounting profit/loss on sale ' to calculate the sale result.

The accounting result of the sale may be different from the result of the sale of the security in the market, this is because a security may change in value in the market from when it was purchased (thus recorded in the accounts) while the book value always remains the same as it was initially recorded.

Accounting Records

In some cases, portfolio accounting can be quite complicated, especially if you want to create records that display information in a useful and clear manner.

We explain you how to set up accounting transactions for the purchase and sale of securities in such a way that each transaction:

•     Is clear to read
•     Correctly shows the change in the accounting amount of the security
•     Has a compatible report format