What is mark-to-market accounting?

Mark-to-market accounting refers to the practice of adjusting the value of assets and liabilities to reflect their current market prices, rather than their historical costs. This approach allows financial statements to provide an updated and accurate picture of a company's financial position, as it considers the fluctuations in market conditions that can impact asset values.

By utilizing current market prices, mark-to-market accounting enhances transparency for investors and stakeholders, facilitating better assessment of an organization's financial health. It is particularly relevant for financial securities and derivatives, where market prices can change significantly within short periods. This method contrasts with the historical cost approach, which records assets based on their original purchase prices, potentially leading to outdated valuations that do not reflect an entity's current economic realities.

Therefore, the correct answer highlights the core principle of mark-to-market accounting by emphasizing the importance of aligning asset values with their prevailing market prices.