What is 'Trade Date Accounting'

Trade date accounting is an accounting method company accountants and bookkeepers use to record transactions. Trade date accounting records the transaction as of the date at which an agreement has been entered (the trade date), instead of on the date the transaction has been finalized (the settlement date). However, if the transaction involves interest, the interest cannot be recorded on the books until the settlement date has arrived.

BREAKING DOWN 'Trade Date Accounting'

The distinction between trade date and settlement date accounting is an important one, as it can impact the company's financial statements. For example, assume ZXC Corporation, which has a fiscal year end of December 31, purchases a new factory with debt on December 26 and takes possession of this factor on January 31 of the next year. This transaction spans their fiscal year end. The accounting method used by ZXC Corporation will affect the year for which this transaction is recorded.

If ZXC Corporation uses trade date accounting, the asset and loan amount will be recorded in the company's books — without any interest accruing for the five days — on December 26. If they use settlement data accounting the asset and liability will be recorded in the company's books on January 31 of the following year. Regardless of the accounting method used, interest associated with the transaction will not be recorded until settlement.

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