What are Investment Accounts?
As per Accounting Standard 13 the
term investment refers to funds invested to earn some income. A business or
firm may invest its money in various securities consisting of Govt. and semi
Govt. loans, shares and debentures of companies, trust and municipalities etc.
The accounts of investment are kept in the same way as the accounts of any
other assets are maintained. A separate investment account should be maintained
for recording transitions related to each kind of security and on the hand of
the account mention the particulars like nature, dates when interest or
dividends is due, the date of redemption etc.
What is Cum-Interest and Cum-Dividend Purchase and Sale?
The quotation price is said to be
cum-interest/dividend where it includes the dividend/interest not yet
declared/received and the right of receiving dividend/interest being passed to
the purchaser.
What is Ex-Interest and Ex-Dividend Purchase and Sale?
The price is
said to be ex-dividend/interest if it does not include the dividend not yet
declared/received and the seller becomes entitled to receive it on its
declaration.
What is Brokerage, Commission Expenses?
When The
securities are bought or sold through stock broker then a commission at a fixed percentage on the
nominal value of securities bought or sold to be charged by the latter
is known as brokerage or commission expenses.
Journal Entries:
(A)
When investments are purchased / sold at
interest date:
(1)
In case of Purchase-
Investment A/c (actual) Dr.
To Bank
A/c
(2)
In case of Sale-
Bank A/c (actual) Dr.
To Investment A/c
(B)
When investment is purchased/sold not at
interest date:
(1)
In case of Cum-Interest Purchase-
Invest A/c (Actual Cost) Dr.
Interest A/c (Actual interest) Dr.
To Bank A/c
(2)
In case of Cum-Interest Sale-
Bank A/c Dr.
To Invest A/c (Actual Cost)
To Interest A/c (Actual interest)
(3)
In case of Ex-Interest Purchase-
Invest A/c (Quotation price+Brokerage) Dr.
Interest A/c (Accrued interest) Dr.
To Bank A/c
(4)
In case of Ex-Interest Sales-
Bank A/c Dr.
To Invest A/c (Quotation price-brokerage)
To Interest A/c (Accrued interest)
(C)
For Profit/Loss on Sale:
(1)
In case of Profit-
Investment A/c Dr.
To P & L A/C
(2)
In case of Loss-
P & L A/C Dr.
To Investment A/C
(D)
For Interest/Dividend Received:
Bank A/C Dr.
To Interest/Dividend A/C
(E)
Transfer of Dividend/Interest to P & L A/C
Interest/Dividend A/C Dr.
To P & L A/C
(F)
For Depreciation on valuation of Closing Stock
at market price:
P & L A/C Dr.
To Investment A/C
Illustration:
Following are the transactions of Aang Ltd.
during the year 2017-18
• Started business with cash 100,000.
• Purchased 1st June: 1000
12% Bonds of A ltd of Rs. 10 at 15 ex-interest. Interest payable annually on
31st December
• 1st October: 2000 12%
Bonds of Rs. 10 at 20 cum-interests. Interest payable annually on 31st December.
Show the Investment A/C in the books of Aang Ltd.
Solution:
Working Notes :
a A) 1st
June: (Ex-interest transaction)
• Nominal
Value (NV) = 1000 *10 = 10,000
• Price
(ex interest) = 15
• Cost Value
(CV) = Price = 15*1000 = 15,000
• Interest
= for five months on the NV = 12% of 10,000 = 500
• Money payable = Price + Interest = 15,000 +
500 = 15,500
b) 1st October (cum-interest transaction)
• NV = 2000
*10 = 20,000
• Price
(ex interest) = 20 *2000 = 40,000
• Interest
= for nine months on the NV = 12% of 20,000 for nine months = 1800
• CV =
Price –Interest till date= 40,000 – 1800 = 38,200
• Money
payable = Price = 40,000
c) 31st December (date of interest)
• Interest on 30,000 for 12 months
• Interest =
12% of 30,000 = 3600
d) 31st March (date of closing the
books)
• NV = 3000
*10 = 30,000
• Interest
= for three months on the NV = 12% of 30,000 for three months = 900
• CV = The balancing figure = 53,200
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