What Is a Business Investment and How Should it be Accounted for?
Written by Eddy Hood
If you plan to make money, you probably plan to invest. There are many different kinds of business investments and many ways to account for them. Lean about the different types of investments here:
What Are Business Investments?
It’s actually quite difficult to define “investments” because the term is used frequently both when discussing finances and in everyday life. An investment refers simply to the action or process of devoting time, money, or resources to something in the hopes that it could be profitable. In that sense, investments could colloquially refer to anything from a multimillion-dollar bit of real estate to a few hundred dollars in stocks to a college education to a new oven for a bakery. It’s not about amount but intent. Because the definition is so general, it’s easy to get confused about what’s not a business investment and what is. Business investment accounting, on the other hand, refers usually to accounting for assets that are purchased in the hopes that the asset will either provide income or appreciate in the future. It’s unlikely that a baker is going to get paid back for an oven, for instance. It might help the business be more profitable, but the oven is not an investment in a financing or business sense.
What Are the Main Types of Investments?
There are three main types of investments in accounting.
- Ownership Investments: Referring largely to things like stocks, real estate, precious objects, and business investments, ownership investments refer to investments in which the buyer actually owns the asset. This is the most common type of investment. Accounting professionals would help to ensure that these investments are still producing income or appreciating.
- Lending Investments: As a lending investor, you serve as a banker. You’re essentially buying debt in the hopes and expectation that that debt will be repaid. Bonds, savings accounts, and treasury inflation-protected securities (or TIPS) are all lending investments.
- Cash Equivalents: These investments are “as good as cash.” It’s very simple and easy to liquidate them, or convert them back to cash, if necessary. Money-market funds are cash equivalents.
A good portfolio should have a few of all three of these types of investments. While building a portfolio, an investor might also hear about mutual funds, which pool money from multiple investors together to make larger investments. An exchange-traded fund, or ETF, is similar to that concept but is traded like stock.
How Do Accountants Account for Investments?
Accounting experts, like those here at Ignite Spot, have several methods for accounting for investments. The way that investments are accounted for on a balance sheet depends on the type they are:
- Held to Maturity: Often relating to lending investments, these are debt securities that are held until a fixed future date.
- Held for Trading: These are debt securities held in the hopes to turn a profit after reselling within a specific time.
- Available for Sale: This is a default category that cannot be considered as held for maturity or trading.
For those with a robust portfolio full of many different investments, hiring an online or outsourced accounting firm may be the best choice. With reliable online bookkeeping and accounting services, Ignite Spot can help a small business keep investments accounted for. Contact us today or download our free pricing form.