What is Mark to Market Accounting?

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For companies and business owners, knowing the current value of your asset is among the crucial information you need to determine the next step you need to take. That is why accounting services are never in short supply in Kearny, NJ and anywhere else. But did you also know that there is a better way to figure out a more accurate representation of your current asset's value under current market conditions? It’s called Mark to Market Accounting, and that’s what we are going to talk about today.

What is Mark to Market Accounting?

This term refers to a method that measures the fair values of assets and liabilities subject to periodic fluctuations. It is done in sync with the current market conditions to provide accurate appraisals of a company's current financial situation. This is also used in financial markets to show the present fair market value of investments. In short, the market value is determined depending on how much a company would acquire for the asset if it was sold at this point in time. During the end of the fiscal year, certain accounts of your company's balance sheet should reflect the current market value.

What Makes It Different?

Compared to historical cost accounting, this method is capable of presenting a more accurate representation of how much value a company's assets have. In historical cost accounting, the original purchase cost of the assets is maintained, and this method does not take into account the fluctuating market values that inevitably affect current ones.

Is This Method Always Foolproof?

When getting accounting services in Kearny, NJ, it’s important to know that while mark to market accounting is an excellent way of getting a more accurate look at your current financial standing, it is not foolproof. When the market is undergoing volatile times where values keep fluctuating, this method may not represent your assets' value correctly, so you should also keep this in mind.

What are the Pros and Cons?

Mark to market accounting prevents companies from overvaluing their true net worth. This can help them avoid making wrong financial decisions because they think their company is in good financial shape when, in reality, their assets are already declining. This is also beneficial for stockholders since it helps them determine whether a company is already in danger of going out of business.

However, mark to market accounting can be detrimental to your business in times when the economy is crashing. One example is the Great Depression, wherein many banks become bankrupt after devaluing their assets.

How Does This Affect You?

Mark to market accounting can help you in managing your own finances to make sure your financial security is how you want it to be. To do so, get in touch with Nicholas J. Coco, CPA, and he will gladly help you with anything you need. From tax services to accounting services in Kearny, NJ, you can count on him to provide professional service you can trust. Book an appointment with him to find out more about what he can do for you.