How to Record Stock Purchases in Accounting Entries: A Comprehensive Guide

When a company purchases stocks as an investment, the accounting treatment depends on its classification as trading securities, available-for-sale securities, or long-term equity investments. These categories are defined by the holding purpose and duration, with corresponding differences in initial recognition, subsequent measurement, and financial statement presentation. Below we break down the core accounting principles and practical entries in English format.

1. Initial Recognition of Trading Securities

For stocks classified as trading financial assets (short-term holdings for price fluctuations):
Key Principles:

• Initial cost includes the stock's fair value at acquisition.
• Transaction costs (brokerage fees, taxes) are expensed immediately to investment income.

Journal Entry:
借 (Debit): Trading Financial Assets – Cost (Fair value of stocks)
借 (Debit): Investment Income (Transaction costs)
贷 (Credit): Cash at Bank (Total payment including fees)

Example: Purchasing 10,000 shares at $10/share with $2,000 fees:
借: Trading Financial Assets – Cost $100,000
借: Investment Income $2,000
贷: Cash at Bank $102,000.

2. Treatment of Dividends and Interest

If the stock purchase includes declared but unpaid dividends:
Key Principles:

• Separate the dividend portion as receivables to avoid overstating the asset value.

Journal Entry:
借 (Debit): Trading Financial Assets – Cost (Stock price net of dividends)
借 (Debit): Dividend Receivable (Accrued dividends)
贷 (Credit): Cash at Bank (Total payment)

For instance, buying shares with a $1,000 pending dividend:
借: Trading Financial Assets – Cost $99,000
借: Dividend Receivable $1,000
贷: Cash at Bank $100,000.

3. Subsequent Measurement and Fair Value Adjustments

Trading securities are revalued at each reporting date:

• Fair value gains/losses are recorded in profit or loss.

Journal Entry for Increase in Value:
借 (Debit): Trading Financial Assets – Fair Value Adjustment
贷 (Credit): Fair Value Gain/Loss

Example: A $20,000 increase in stock value:
借: Trading Financial Assets – FV Adjustment $20,000
贷: Fair Value Gain/Loss $20,000.

4. Accounting for Long-Term Equity Investments

For long-term equity investments (e.g., strategic holdings with significant influence):
Key Principles:

• Initial cost includes directly attributable expenses (legal fees, due diligence).
• Subsequent measurement uses the equity method or cost method based on ownership level.

Initial Journal Entry (Cost Method):
借 (Debit): Long-Term Equity Investments
贷 (Credit): Cash at Bank

Example: Acquiring 30% ownership in a subsidiary for $500,000:
借: Long-Term Equity Investments $500,000
贷: Cash at Bank $500,000.

5. Disposal of Stocks

When selling trading securities:

1. Recognize the proceeds and derecognize the asset.
2. Recycle cumulative fair value adjustments to investment income.

Journal Entry:
借 (Debit): Cash at Bank (Sale proceeds)
贷 (Credit): Trading Financial Assets – Cost
贷 (Credit): Trading Financial Assets – FV Adjustment
贷 (Credit): Investment Income (Gain/Loss)

Example: Selling stocks originally costing $100,000 (with $20,000 FV gains) for $130,000:
借: Cash at Bank $130,000
贷: Trading Financial Assets – Cost $100,000
贷: Trading Financial Assets – FV Adjustment $20,000
贷: Investment Income $10,000.

This structured approach ensures compliance with IFRS and GAAP standards while providing clarity on financial impacts. Proper classification and consistent application of measurement rules are critical to maintaining transparency and accuracy in financial reporting.