Final answer:
Available-for-sale equity securities are recorded at cost, with gains and losses reported in other comprehensive income until the securities are sold. Trading equity securities are continually revalued, with gains and losses immediately affecting earnings.
Step-by-step explanation:
The distinction between the accounting treatment for available-for-sale equity securities and trading equity securities lies primarily in how their value changes are recorded and how their disposal affects the financial statements. Available-for-sale equity securities are financial assets not classified as either trading securities or held-to-maturity investments. They are initially recorded at cost and subsequently re-evaluated at each reporting date at fair value. Unrealized gains and losses on available-for-sale securities are not reported in earnings but instead are included in other comprehensive income and accumulated as a separate component of equity until the security is sold.
Conversely, trading equity securities are bought and held principally for the purpose of selling them in the near term with the objective of generating profits on short-term price differences. These securities are also initially recorded at cost but are continually remeasured to fair value. The key difference is that unrealized gains and losses on trading securities are reported in the earnings of the period. Once sold, the gains and losses are then realized and reported within the income statement.
This treatment reflects the different intentions behind holding each type of security. Available-for-sale securities reflect a more passive investment strategy, hence the deferral of gain or loss recognition until sale. In contrast, trading securities are actively managed for profit, necessitating immediate recognition of value changes.