Accounting for a portfolio of securities is essentially about determining gain or loss. This is especially important when an investment in the portfolio is sold. Closing a position causes a realized gain or loss. Before selling, the gain or loss since purchase is only an unrealized appreciation or decline in value. Conducting the accounting correctly requires an understanding of cost basis and holding period.
Realized Gain or Loss
The sale proceeds realized from selling a security in a portfolio is the entire amount received. This includes both cash and the fair market value of anything else received in exchange for the security. Determining gain or loss on the sale of a portfolio security involves comparing the amount received with the basis of the investment. A gain occurs when the sale proceeds exceed the basis in the sold investment. There's a loss when the sale proceeds are less than the basis.
The basis of a security in portfolio accounting is usually the cost of the purchase plus any associated commission and fees. The basis is different if a security is acquired by a different way than purchase. A gift during the life of a donor retains the basis of that donor. The portfolio accounting of the gift recipient uses the donor's basis. However, the recipient of inherited property accounts for basis as the fair market value of the investment on the date of the decedent's death. Occasionally, adjustments to the cost basis are required. For example, the basis is decreased by the amount of any nondividend distributions received. Stock splits do not reduce the entire cost basis. Instead, splits reduce the basis per share. Accounting for basis per share is important in case some --- but not all --- of the shares are sold. Portfolio accounting also requires a change in basis when additional shares of stock are received as dividends. In this event, the entire cost of the original shares is divided among the new and original shares.
Portfolio accounting for sold investments requires determining whether the holding period was long-term or short-term. A gain or loss is long-term when the investment is held for more than one year. The gain or loss is short-term if the investment is sold one year or less after purchase. The date of purchase is recorded to account for the holding period. The date of sale is the final day of a holding period. An investment received by inheritance is always accounted for as long-term, regardless of how long a recipient holds it before selling. The accounting for an investment received as a gift uses the donor's purchase date as the starting point of the recipient's holding period.