PRINCIPLE OF FINANCIAL

ACCOUNTING

(Entries of Investment Account)

Submitted To: Submitted By:

Miss Kajal Shubhkarmanpreet
B.com LLB
202/17
 TABLE OF CONTENT

Page

Acknowledgement 03
Meaning of Investment Account 04
Types of Investment 04
Transaction relating to Investment 05
Accounting Treatment of Investment Account 06
Cum-Interest or Cum-Dividend 08
Ex-Interest or Ex-Dividend 08
Ex-Interest Purchases and Sales 09
 ACKNOWLEDGEMENT

I would like to like to express my special thank and gratitude to my teacher and as well as my
institute who gave me golden opportunity to do this wonderful project on the topic ‘Minor’s
Agreement’, which also helped me in doing a lot of research work and I came to know about
lots of new things I am really thankful to them.

Secondly I would like to thank my parents and friends who supported me a lot in completing
this project within the limited time frame.

Shubhkarmanpreet kaur.
 INTRODUCTION

Meaning of Investment Account:

Investment means to spend money outside the business in order to earn some income which is
non-trading in nature. A bank account in which money is saved long-term to accrue interest.
Usually, money is invested in Government Bonds, Securities, Shares and Debentures of
companies etc.

Investment account is a monetary account, which you can use for such transactions with
financial assets, the taxation of income earned on which (interest, sales proceeds, insurance
benefit, etc), you would like to postpone.

A person can hold investment accounts in several banks.

Investments are made in two ways:

(a) As Trade Investments:

The investments which are made permanently for a regular income outside the business is
known as Trade Investment. These are treated as fixed assets. That is why if this type of
investments is sold at a profit, profit on such sale of investment is transferred to Capital
Reserve Account and not to Profit and Loss Account.

(b) As Marketable Securities:

Sometimes a business wants to invest its idle cash purely on a temporary basis (of course, if
the rate of earning is higher than cost of capital).
 This type of investment is known as Marketable Securities and is treated as Current Assets.
That is why profit or sale of such investments is transferred to Profit and Loss Account and
not to Capital Reserve.

Again, Marketable Securities are of two types:

A. Fixed Interest Bearing Securities,

B. Variable Interest Bearing Securities.

A. Fixed Interest Bearing Securities:

Fixed interest bearing securities mean where the rate of return is fixed, say 10%, 12% or 15%.
The returns or income of such securities usually falls due on certain specific dates, as 30th
June or 31st Dec. This is particularly appropriate in case of Govt. Bonds and Securities. For
example, if we purchase 1,000, 10% Govt. Bonds @ Rs. 100 (interest is payable on 30th
September or 31st March), we will have an income of Rs. 10,000; Rs. 5,000 falls due on 30th
September and Rs. 5,000 on 31st March.

Each investment is headed with the name of the security and, at the same time, if the rate of
interest or dividend and the date at which it is payable aw fixed such rates and dates are also
to be mentioned.

B. Variable Interest Bearing Securities:

Variable Interest bearing securities means where the rate of return is not fixed, i.e., variable. It
is applicable in case of shares. The rate of dividend on shares is not at all fixed,’ rather, it is
fluctuating. In one year the return may be 10% whereas, in the next year, it may be 15%.
Usually, shares are purchased as investment through brokers who charge a small rate of
commission on both purchase and on sales.

Transactions Relating to Investment Account:

Purchase and Sale of Investments:

It has been explained in an earlier paragraph that investments are made in various securities,
e.g., Government, Semi-government, Corporation or Trust Securities, such as Shares, Bonds,
Debentures, etc. in long or short-term. The long-term investment is normally made for earning
interest or dividend whereas the short-term investment is meant for making profit by selling
the same when market price becomes favorable.
The aforesaid investments are maintained in the General Ledger (since they are real accounts)
when they are few in number. But when they are substantial, a separate ‘Investment Ledger’
is to be opened for each individual class of securities in addition to interest or dividend.

The Investment Account is maintained in a columnar form with three amount columns on
each side—viz., Nominal, Interest/Income and Principal/Capital. The face value or nominal
value of securities purchased or sold is recorded, however, in the ‘Nominal’ column. The
accrued Interest/Dividend on purchase or sale of securities including the Interest/Dividend so
received is recorded, however, in the ‘Interest/Income’ column. The third column,
‘Capital/Principal’, reveals the true cost or true sales consideration.

Brokerage and Other Expenses:

Generally, investment transactions are made through brokers. They charge a certain small
commission against their services which is known as ‘Brokerage’. But the stamp duty at the
prescribed rates is also to be paid in executing the transaction.

Since the brokerage and stamp duty are capital in nature, these are to be added with the cost
price of the investments, i.e., brokerage will be added at the time of purchasing the securities
and the same will be deducted from the sale price of the investment at the time of sale. As a
result, only the net price is to be recorded in the ‘capital’ column of the Investment Account.

Accounting Treatment of Investment Account:

(a) Purchase of Investment:

When investment is purchased, its face value is recorded on the debit side of Investment
Account and the actual cost (including brokerage, stamp duty, etc.) is recorded in the principal
column. But if the same is purchased under cum-interest/dividend basis, the accrued interest
must be recorded in ‘Interest’ column and will be deducted from the purchase price as the real
cost is to be recorded in ‘Principal’ column.

But, if the investment is purchased under ex-interest/dividend basis, the quoted price—
together with brokerage and stamp duty—will be recorded in the ‘Principal’ column. The
accrued interest is, however, entered on the Interest/Income column.

(b) Sale of Investment:

When investment is sold, the same is recorded on the credit side of Investment Account, the
face
Value being recorded in ‘Nominal’ column; the net selling price is entered, however, in the
‘Principal’ column. But if the investment is sold as cum-interest/dividend, the accrued interest
will be recorded in ‘Interest/Income’ column and the net selling price (capital portion) on the
‘Principal’ column.

On the contrary, if the same is sold as ex- interest/dividend, the accrued interest/dividend is
received by the seller in addition to quoted sale price. The accrued interest/dividend is entered
on the ‘Interest/Income’ column and the quoted sale price in the ‘Capital’ column.

(c) Profit or Loss on Sale of Investment:

The difference between the capital cost of securities and the consideration received towards
capital at the time of sale reveals the profit or loss on sale of investment. The profit or loss
may be ascertained either for each individual sale or may be ascertained for all selling
transactions at the end of the year—as a whole. And if the entire investments are sold, the
difference between these two ‘Principal’ columns represents profit or loss, as the case may be.

But if a part of investments is sold, the balance of investments on hand should be ascertained
first. Therefore, the balance is either valued at cost if the investment is treated as fixed asset,
or the balance is valued at cost or market price, whichever is less if the investment is treated
as current asset.

Naturally, the value of investments at hand is entered on the credit side of the Investment
Account in ‘Principal’ column and the difference represents the profit or loss on sale of
investment. The profit or loss on such sale is transferred to Profit and Loss Account if the
investment is treated as a current asset or the profit or loss on such sale is treated separately if
the investment is treated as a fixed asset.

(d) Balancing Investment Account:

The Balance of Investment account is ascertained at the end of the accounting period. The
balance of ‘Nominal’ column reveals the face value of the investment in hand and— after
recording the closing balance of investment in ‘Principal’ column—the profit or loss is to be
ascertained (which has been explained earlier). And the difference between the two
‘Interest/Income’ columns represents income/interest from Investment Account which is,
ultimately, transferred to Profit and Loss Account.

But, in the true sense of the term, Accounting Treatment depends on the date of purchase and
sale of investment.
It may, again, be of two types:

A. Purchase and Sale of Investment just at the date of payment of interest; and

B. Purchase and Sale of Investment before the date of payment of interest.

A. When Purchase and Sale of Investment are made just at the date of payment of
interest:

Under the circumstances, there will be no problem as to the cost of investment, because the
quoted price does not include the amount of interest. The quoted price represents the cost of
investment.

B. Purchase and Sale of Investment before the date of payment of interest:

Under the circumstances, question arises before us whether the quoted price of investment is
inclusive of interest/dividend or exclusive of interest/dividend. In short, we are to face the
problem of Cum-Interest and Ex-Interest.

Cum-Interest or Cum-Dividend:

Where the right to receive interest or dividend from the issuer of security passes from the
seller to the buyer, the transaction is known as ‘Cum-Interest’ or ‘Cum-Dividend’ purchase or
sale. In other words, when the accrued interest or dividend from the last interest or dividend
date up to the date of transaction is included in the quoted price, the capital cost of investment
purchased or sold is ascertained by deducting the accrued interest/dividend from the quoted
prices. And the difference between the quoted price and the actual cost may be represented as
‘Cum-Interest’ or ‘Cum-Dividend’.

Ex-Interest or Ex-Dividend:

When the seller retains the right to receive the interest/dividend, the transaction is called ‘Ex-
Interest’ or ‘Ex-dividend’ purchase or sale. In other words, when the price quoted is exclusive
of accrued interest/dividend, the price so quoted is treated as the capital cost of investment,
i.e., the buyer has to pay accrued interest due from the last interest date to the date of
transaction to the seller along with the cost price of investment.

For Cum-Interest Purchase and Sales:

To Sum up: When investments are purchased at Cum-Interest it means quoted price is
Inclusive of accrued interest. So, we are to ascertain the amount of interest and the same must
be deducted from the quoted price in order to find out the cost. Investment will be debited
with actual cost (to be posted in Principal column) and accrued interest will be debited with
the amount of interest (to be posted in Interest column) and Bank Account will be credited for
the total (i.e., quoted price).

Same principle is to be followed also in case of sale of investment which includes Cum-
Interest, i.e., from the quoted selling price, the amount of interest will be deducted in order to
ascertain the cost/principal for this purpose, Bank Account will be debited with total amount
or quoted price and Investment Account will be credited at cost and Interest Account will be
credited with the amount of interest.

Ex-Interest Purchases and Sales:

When investments are purchased at Ex-Interest, it means quoted price is exclusive of accrued
interest. In that case, the Investment Account will be debited with quoted prices, Interest
Account will be debited with accrued interest and Bank Account will be credited with total
amount (i.e., quoted price plus interest).

But when investments are sold at Ex-interest, quoted price is exclusive of interest. In other
words, Investment Account will be credited with quoted price and Interest Account will be
credited with Accrued Interest and Bank Account will be credited with total i.e., quoted price
plus interest.

Profit or Loss on sale of investment should be transferred to Profit and Loss Account.
 BIBLIOGRAPHY

WEBSITES:

http://www.yourarticlelibrary.com/accounting/investment-accounts/meaning-investment-
accounts/investment-account-meaning-transactions-and-accounting-treatment/68747

https://www.seb.ee/eng/savings-and-investments/investments/investment-account

BOOKS:

Narang K.L, Financial Accounting , Kalyani Publishers Ludhiana.