Final answer:
Marketable equity securities are recorded at fair value with gains and losses reflected in financial statements, whereas nonmarketable equity securities are recorded at cost or using the equity method due to their lack of liquidity and the difficulty in obtaining fair value estimates.
Step-by-step explanation:
The accounting treatment for marketable versus nonmarketable equity securities varies primarily due to their liquidity. Marketable equity securities are readily traded in the financial markets and can be converted into cash easily.
The accounting for marketable equity securities involves recording them at fair value in the balance sheet, and any unrealized gains or losses are typically reported in the income statement or as other comprehensive income depending on whether they are classified as trading or available-for-sale securities. On the other hand, nonmarketable equity securities are not easily sold or exchanged for cash because they are not traded on major markets, making them less liquid. These securities are often recorded at their original cost or using the equity method if significant influence is exerted over the investee. Since they are not frequently traded, changes in their fair value are not readily obtainable, and hence, they are not generally revalued in each period as marketable equities are.
Understanding these differences is critical for evaluating a firm's liquidity position and the risk associated with its investment portfolio, as well as for compliance with accounting standards. Furthermore, recognizing the classification between marketable and nonmarketable equities is important for investment analysis, as it dictates the way returns are realized and reported.