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Hi tutor, I have a question about transaction cost of financial instrument.
(1): Financial asset, Transaction cost is added.
(2): Financial equity, liability: Transaction costs are deducted.
I hope to receive your explanation. Thanks tutor !
Correct! The only time you need to be careful is when you have a financial asset at fair value through profit or loss. In this instance the costs are expensed through profit or loss.
Thanks and well done.
But, I am confused why transaction costs are deducted on financial equity & liability ? I don’t know the core of its.
Think back to debits and credits. We are paying the transaction fee regardless of whether it is related to a financial asset or financial liability, so it will always be a CR Bank entry. The key is what we are doing with the debit entry:
Financial asset – DR Financial asset and debits increase assets, hence it being added
Financial liability – DR Financial liability and credits decrease liabilities, hence it being deducted.
Hope that helps clear it up.