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How is an unrealized loss on an available-for-sale (AFS) security recorded in the financial statements?

For investments that are classified as available-for-sale (AFS), any unrealized gains or losses are recorded to other comprehensive income (OCI). When the company has an unrealized loss, the debit would be to other comprehensive income (reduces equity) and the credit is to the investment account on the asset section of the balance sheet. There is no income statement impact in this journal entry.

The credit to the investment account will reduce the carrying amount of the investment on the balance sheet. This reduction is sometimes referred to as a valuation allowance on the investment.

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