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Recording Unrealized Gains and Losses of Investment Accounts

Last week I wrote about receiving stock from donors. This week, I’ll discuss how to record the investment earnings and change in values. If your nonprofit or church has investment accounts, you will notice on the brokerage statements the earnings may be divided into Realized and Unrealized Income. Realized income is money earned and received into your account. Typical examples are dividend income, interest income, gain (or loss) on the sale of stock. Unrealized income/loss reflects the impact of current market conditions on your holdings.

For example, assume the organization has 100 shares of stock in American Airlines it purchased at $40, for a book value of $4000. If the market price of American Airlines stock is $42 at the end of the quarter, the organization has an unrealized gain of $200 ($2 per share x 100 shares). If the stock price was $38, it would be an unrealized loss of $200. If American Airlines paid a 3% dividend, the $120 ($4000*.3%) would be a realized gain.

To keep your accounting records accurate, you will want the Statement of Financial Position and your Statement of Activities to reflect both the realized and the unrealized gains and losses. Many smaller organizations record them in a single investment income account, but I recommend showing the realized separate from the unrealized so the governing council can see what has actually been earned versus market fluctuations.

Using the example above, let’s walk through a sample journal entry.

                                                                        Debit                 Credit

1120-Investment Account                               $320.00   

4520-Realized Gain/Loss Investment                                        $120.00

4530-Unrealized Gain/Loss Investment                                     $200.00

The class can be your general/administrative class, or, if the investment account is to support a specific program, the realized gain/loss should be coded to the appropriate program or fund class. I prefer to keep the unrealized gains and losses in the general/administrative class, so the programs financials aren’t distorted by changing market conditions.

After the transactions are recorded, the ending balance in the 1120-Investment Account should equal the ending balance on the brokerage statement.

If your fiscal year end is December 31, you may want to review my early post getting the financial statements cleaned up. Click this link http://accountantbesideyou.com/blog/nonprofit-financials-ready-for-an-audit/ or use the search box on my QuickTips Blog page.