The Various Methods Used in Investment Accounting

Various asset classes have various ways when it comes to investment accounting. Because any asset can be put to several uses, it is important to use perspective in deciding how a particular asset should be used. It is with the use of an asset that gives the different values that the market is constantly trying to reevaluate in accordance to today’s changing economic circumstances.

Market-to-Market Accounting. This is the most important investment accounting technique, which immediately tells the investor if he has a profit or loss in his investment. Mark to market is pretty basic: you look at the last trade in a security and assume that the following trade will be close to the same value. Investors risk the possibility of market news affecting and changing the worth of the asset.

Mark to Model Accounting. This investment accounting technique presumes investments that regularly trade are interchangeable or fungible. For those that do not regularly trade, a theoretical value is made by using various scenarios of valuation. Much risk premium should be added for the uncertainly of using this model as its logic can be viewed as outdated or just plain wrong.

Accrual Accounting. Investors who are looking at balance sheets of companies are constantly faced with a statement of values when the values are already predicated on events that may not have occurred yet. Accrual accounting shows the difference between a sale is made and the receipt of the cash payment. This investment accounting is a basic concept of balanced sheet analysis.

Risk-Based Accounting. Accounting for bonds goes over their value on a certain date. Changing interest rates or variations in credit both affect bond values. Also, mandatory calls or options calls can have an effect on price. Investment accounting procedures stress test the value of bonds. Such procedures vary interest rates of individual securities and the relationship of interest rates along the yield curve.

Cost Accounting. This is the most technical of all investment accounting techniques that are used in business, and yet is misapplication can result to catastrophic mistakes. Cost accounting refers to the allocation of costs in asset production. It can be as simple as deciding on how long amortization should take to depreciate assets.

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