Mark-to-market is an approach that people may use to measure the fair value (Also see Introduction to Fair Value Accounting) of accounts which may vary as time passes. Assets and liabilities are two good examples. The objective of mark-to-market accounting is to give a practical evaluation of the financial condition of a company according to the current market situation. Hence, implementing mark-to-market accounting correctly is crucial for every business. If you are not familiar with accounting, you may seek help from an accounting firm in Johor Bahru.
The mark-to-market involves the process of making adjustments on the values of assets to show their values based on current market situations. Business owners may determine the market value according to the amount of money that the company would get if it sells the assets at that time. When a financial year has come to an end, they need to make sure that the balance sheet shows the current market value of some specific accounts. Business owners should maintain other accounts at their historical costs, which are the original costs that the company has spent on purchasing them.
As an instance, some companies may need to adjust their asset accounts if their borrowers default on the loans or their clients did not pay for invoices for the goods sold on credit in the year. When they identify these amounts as bad debt, they should mark down their assets to the fair value by using contra asset accounts.
For companies that offer discounts to their clients so that they can collect their accounts receivable quickly, they will need to mark their accounts receivable to a lower value by using a contra asset account. When this happens, they should debit the full sales amount to their accounts receivable and credit the same amount to their sales revenue (Also see Accounting – Rules for Debits and Credits). Next, they need to predict the percentage of clients who will pay early and take the discount before debiting the sales discount account and crediting the allowance for sales discount. The former is a contra revenue account while the latter is a contra asset account.
Business owners may face some problems when the measurements which are based on the market are unable to show the true value of the assets accurately. Such a situation can happen when a business has to calculate the selling prices of the assets or liabilities under unfavourable conditions or during volatile times, for example, when it experiences a financial crisis. As an instance, if the investors are scared, or if the liquidity of the assets is low, the bank’s asset can have a much lower current selling price when compared to their actual value.