The Trade Lifecycle: Behind the Scenes of the Trading Process

13

Accounting

As in any other business, the finance department of an investment bank, hedge fund or other company involved in trading needs to keep fair and accurate books and records. The finance department will use standard accountancy practices. It is beyond the scope of this book to explain such practices; we will discuss how trades manifest themselves in the accounts during and after their lifetime.

Our discussion will cover the balance sheet, profit and loss statement and other financial reports.

13.1 BALANCE SHEET

The purpose of the balance sheet is to provide the management, current investors, potential investors and regulatory authorities with a “snapshot” of the company’s assets and liabilities at a particular point in time. The items on the balance sheet relate to a given date typically stated on the balance sheet.

The balance sheet is divided into fixed assets, investments, cash and debtor categories. From the sum of these values plus the original capital value of the company, the profit and loss can be deduced. An example is shown in Table 13.1.

We shall now discuss each of the items on the balance sheet

13.1.1 Fixed assets

This would include any property owned by the company, fixtures and fittings, hardware, intangibles such as software, and other fixed items that are not subject to variation except for depreciation over time.

13.1.2 Investments

All live trades would feature in this item. Investments need to be marked-to-market for each financial accounting ...