Final answer:
Gains or losses for trading securities are recorded on the income statement under 'Other Income' or 'Other Expense,' reflecting changes in fair value since the last reporting period.
Step-by-step explanation:
When recording the gain/loss for trading securities, it is important to follow the guidelines of the financial accounting standards. Trading securities are a type of investment typically held by a company to capitalize on short-term price fluctuations. They are reported on the balance sheet at fair value, and the unrealized gains and losses—the changes in the fair value since the last reporting period—are recognized in earnings. This means they affect the income statement directly.
The gain or loss is typically recorded in the 'Other Income' or 'Other Expense' sections of the income statement. For example, if a company's trading securities have increased in value since the previous reporting period, they will record a gain in the 'Other Income' section. Conversely, if the securities have decreased in value, they will record a loss under 'Other Expenses'.
The financial statement where these changes are recorded is critical because it not only affects the net income for the period but also the equity section of the balance sheet through retained earnings. This process is part of accrual accounting, which aims to match revenues with expenses in the period in which they occur, regardless of when the cash transactions happen.