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By Ms. Ansari Mehrunnisa Department of Accountancy Tolani College of Commerce
Chapter: Investment Accounting
Points to Remember: 1: Meaning & Objectives of Investments 2: Types/ Classification of Investments 3: Important Terms 4: Accounting Procedure
1: Meaning & Objectives of Investments: In simple words, Investments can be defined as: “Surplus money used for making more money.” According to AS-13 AS-13 : “ Investments are assets held for earning income by way of interest, dividends, rent , capital appreciation or for other benefits to the investing enterprise.” While making investments, the following 3 factors must be considered: 1. Security 2. Liquidity 3. Profitability
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By Ms. Ansari Mehrunnisa Department of Accountancy Tolani College of Commerce
There are various options available for making investments like:
Bank Deposits (Fixed & Recurring)
Post- Office Savings Schemes
Provident Fund
Precious Metals (Gold & Silver)
Real Estate
Public Deposits
Livestock
Business
Mutual Funds
Shares
Debentures
Bonds
People normally invest with the following 2 objectives in their minds: 1. Income or Returns 2. Capital Appreciation
2: Types/ Classification of Investments: I.
On the basis of period: Long Term Investments Short Term Investments (Marketable Securities)
II.
On the basis of nature of returns: Securities bearing Fixed Rate of Return Securities bearing Variable Rate of Return
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By Ms. Ansari Mehrunnisa Department of Accountancy Tolani College of Commerce
3: Important Terms: o
Purchase Price/Cost of Investment
o
Sale Price
o
Additional Expenses: Brokerage/Commission, Stamp Duty, Share Transfer Expenses
o
Profit or Loss on Sale
o
Interest /Dividend
o
Carrying Amount of Investment
o
Ex-Interest & Cum-Interest Price
Ex-Interest & Cum-Interest Price When an investment is purchased or sold before the date of payment of interest, a question may arise: “The price includes the interest upto the date of purchase/sale or not?” In such cases, the price/quotation can be either Cum-Interest or ExInterest. “Cum” means with and “Ex” means without. The terms CumInterest and Ex-Interest are related to fixed income securities. CumInterest means including the amount of interest and Ex-Interest means excluding the amount of interest. Cum-Interest price covers the cost of investment and interest accrued upto the date of purchase or sale. When the interest becomes due, it is the right of the buyer. Ex-Interest price covers only the cost of investment and the buyer is liable to pay additional amount as interest accrued upto the date of purchase of investment.
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By Ms. Ansari Mehrunnisa Department of Accountancy Tolani College of Commerce
4: Accounting Procedure: Accounting for investments includes:
Working Notes
Ledger i.e. Investment A/C &
Extract of Final Accounts
Rules to Remember 1: Purchase and sale transactions are recorded in the books of the investor at market price. 2: Additional expenses like commission/brokerage, stamp duty etc. are also calculated on the basis of market price. 3: Additional expenses at the time of purchase are added to the cost of investment purchased and deducted from the sale proceeds at the time of sale. 4: Interest and dividend are always calculated on the basis of face value. Interest may be paid annually, half- yearly, quarterly or monthly. Calculations should be done accordingly. 5: At the time of sale, we need to calculate profit or loss. For this, we need to compare sale price with cost of the investment.
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By Ms. Ansari Mehrunnisa Department of Accountancy Tolani College of Commerce
Sale price is easily available. We need to calculate cost (book value) of the investment sold. For this calculation, we need to use “Weighted Average Cost Method”.
Weighted Average Cost = Balance Cost/Balance No. of Shares, Debentures or Bonds
6: Bonus Shares and Right Shares: Bonus Shares -
Free equity shares to the existing equity shareholders No entry in the books of the investor. Right SharesShares first offered to the existing shareholders at a discounted price. Entry in the books of the investor depends on whether these shares are:
