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.

Key Takeaways

  • Trade date accounting is a method of accounting used to record transactions. 
  • A company using trade date accounting would recognize a transaction when the transaction or deal is entered into. 
  • Trade date accounting is in contrast to settlement date accounting, which uses the delivery date as the transaction date. 
  • If interest is involved in the transaction, it cannot be recorded on the books until the settlement date. 

How Trade Date Accounting Works

Trade date accounting requires recording a transaction on the date the transaction is entered into. This is different from settlement date accounting, which uses the delivery date as the transaction date. That is, trade date accounting means the company doesn’t wait until funds are in the account or have left the account to record the transaction. The transaction is recorded as soon as the deal or agreement is made. 

Trade Date Accounting vs. Settlement Date 

Both of these dating options are part of Generally Accepted Accounting Principles (GAAP). A company can use either option but must stick to whichever one is chosen. The major difference between trade date and settlement date accounting is timing, which also affects financial statements. 

The distinction between trade date and settlement date accounting is an important one, as it affects the company's financial statements. For example, assume ZXC Corporation, which has a fiscal year end-date 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 its fiscal year end-date. 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.

Benefits of Trade Date Accounting

The major benefit of trade date accounting is that it provides the most up-to-date information for financial statements. Meanwhile, settlement date accounting is a more conservative approach. Settlement date accounting is best used for companies with limited liquidity, where trade date accounting means a company can run out of actual physical cash in its account if it’s still waiting on funds or spends unsettled funds. 

Meanwhile, the benefit of settlement date accounting is realized when a deal falls through. A company using trade date accounting would have to reverse the accounting transaction for a failed transaction.