Long-Term Financial Investments: Assets or Liabilities in Accounting

 Financial investments are an important part of a company's financial health. They represent capital invested in financial instruments with the objective of generating long-term returns. But how are these investments classified in accounting? Are they assets or liabilities? This article explores the nature of long-term financial investments, their accounting classification and the accounts used to record them.

Long-Term Financial Investments: Definition and Characteristics

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Long-term financial investments are financial assets held for a period exceeding one year. These investments are made with the expectation of earning profits through different mechanisms, such as:

• Increase in the value of the invested capital: In the case of shares or units in investment funds, the value of these instruments is expected to increase over time.
• Perception of dividends or yields: Stocks and some bonds grant dividends or interest to investors periodically.
• Selling at a higher price than the purchase price: In the case of instruments such as bonds or notesés, they are expected to be sold at a higher price than the purchase price at their maturity date.

Long-term financial investments differ from short-term financial investments in their time horizon. Short-term investments are expected to convert to cash in less than one year, while long-term investments have a longer investment horizon.

Long-Term Financial Investments: ¿Assets or Liabilities?

In accounting, long-term financial investments are classified as assets. Assets represent economic resources owned by the company that are expected to generate future profits. In this sense, long-term financial investments meet this definition, as they represent resources invested with the expectation of generating a return to the company in the future.

Liabilities, on the other hand, are financial obligations that the company has with third parties. Long-term financial investments do not represent an obligation of the company, but rather a resource at the company's disposal.

Accounting Accounts for Long-Term Financial Investments

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The Spanish General Accounting Plan (PGC) establishes different accounts for recording long-term financial investments, depending on the type of financial instrument invested. The main accounts used are:

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• Account 250: Long-term financial investments in equity instruments. This account is used to record investments in shares, units in investment funds and other instruments that represent rights to the equity of other companies.
• Account 260: Long-term financial investments in debt instruments. This account is used to record investments in bonds, notes and other instruments that represent debts owed by third parties.
• Account 280: Investments in group companies and entities. This account is used to record investments in subsidiaries or associated companies that are part of the business group.

The choice of the appropriate accounting account will depend on the type of financial instrument in which the investment has been made.

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Examples of Long-Term Financial Investments

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The following are some examples of long-term financial investments and the corresponding accounting account:

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• Investment in shares of a listed company: Account 250: Long-term financial investments in equity instruments.
• Purchase of 10-year government-issued bonds: Account 260: Long-term financial investments in debt instruments.
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• Acquisition of units in an investment fund: Account 250: Long-term financial investments in equity instruments.
• Investment in a subsidiary company: Account 280: Investments in group companies and entities.

These are just a few examples, and the full list of financial instruments that can be considered long-term investments is extensive.

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Conclusión

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Long-term financial investments play an important role in a company's financial strategy. These investments make it possible to generate long-term returns, diversify assets and achieve the company's financial objectives.

From the accounting point of view, long-term financial investments are classified as assets, since they represent economic resources owned by the company with the potential to generate future profits. The Spanish National Chart of Accounts establishes different accounts to record these investments, depending on the type of financial instrument used.

Understanding the accounting classification of long-term financial investments is essential for proper financial management and the preparation of reliable accounting statements.