INTACC 1 REVIEWER
contractors on terms net 60 day. The firms
ACCOUNTS RECEIVABLE FINANCING
s a method of selling receivables in order to
obtain cash for company operations.
Accounts receivable financing can be a
complicated process, but the basic idea is
that companies can trade cash flows later
for cash flows now, which is very useful for
companies that need cash right away. It
can also be expensive because factors
assume the risk of collecting the
receivables, they are very choosy about
which companies they work with and the
creditworthiness of the companies'
customers.
Pledging or assignment of Account
Receivable
 the borrower simply pledges or assigns
accounts receivable as a security for a
loan obtained from either a commercial
bank or a finance company. The
amount of the Loan is stated at a
percent of the face of the receivable
pledge.
 If the receivable are pledge as a
collateral for the loan and the lender
has no control over the quality of the
account receivable being pledged, the
loanable value is set a relative low
percent generally ranging downward
from a maximum of around 75%
EAR =
(AVE. RECEIVABLE % OF FV OF AR X
OVER PRIME RATE + AVE. PRIME RATE )
+ 1% X AVE. MONTHLY SALES X 12
MONTHS)/ % OF FV OF AR AVE. AR X 1
/360/360
 However, if the lender could select and
assess the credit worthiness of each
individual accounts being pledge, the
loan value might reach as high as 85 or
90% of the face amount.
COST OF FINANCING
it is relatively high cost owing to the interest
rate charged on loan which is 2% to 5%
higher than the bank’s prime rate and the
processing or handling fee of about 1 to 2%
on pledge accounts.
Pledging of Receivable Illustration problem:
The KG sells plumbing supplies to building
average monthly sales are 200,000, thus its
average accounts receivable is 400,000,
based on the two months credit period. The
company pledges all receivable to a local
BANK WHICH IN TURN ADVANCES UP TO
70% of the face value of the receivable at
3% over prime rate and with a 1%
processing fee on all receivable pledged.
The KG follows a practice of borrowing the
maximum amount possible. The current
prime rate is 12%
Solution
The Effective cost of this loan is as follows:
EAR = (400,000x70%x3%+12%) + 1% x
200,000X12 mos.)/70%x400,000 x
1/360/360
= 42,000+24,000/280,000x1/360/360
= 23.57
If the lender would provide billing and
collection services, the value of these
services would be considered as a
reduction of the cost of credit
FACTORING ACCOUNTS RECEIVABLE
involves the outright sale of the firm AR to
the finance company. The customer may be
instructed to remit the proceeds directly to
the purchaser of the account. The factoring
firm generally does not have the recourse
against the seller of the AR.
In practice, the finance company may do
part or all of the credit analysis directly to
insure the quality of the accounts. The
factoring or finance company forwards
funds immediately to the seller when the
account are accepted.
Note:
 he factoring company not only absorbs
the risk of non-collection but also
advances the funds to the seller a
month or so earlier than the seller
would normally received them.
COST OF FACTORING
For assuming the risk, the factoring firm
generally charges a fee or commission
ranging from 1 to 5% of the invoices
accepted. In addition, it charges interest on
funds advanced to the seller of the
accounts.
Example, intention of management regarding
if 200,000 a month processed at a 1% conversion of these securities
commission and 15% annual borrowing  should be a relatively small figure on
rate is charged. The total effective cost is the balance sheet of most nonfinancial
as follows: companies.
 Analysts use this information for
interest for one month (15/12) 1.25% liquidity ratio analysis.
commission 1.00%  Creditors are interested in the
total monthly fee 2.25 % marketable securities figure in order to
Multiplied by: 12 months 12 understand what assets are liquid, in
annual rate 27% case the company has solvency issues.

Variation: Should the firm wishes to INVESTMENT

received immediate payment of its factored is an asset intended to
accounts produce income or capital gains. anything
an investor believes will produce income.
• If 200,000 in receivable is factored which
carry 30 day credit terms, a 1% factor fee, Examples:
6% reserve, an interest at 1% per month on stocks, bonds, mutual funds, interest-
advances, then the proceed the firm can bearing accounts, land, derivatives, real
received is as follows: estate.

Face amount of the Note:

receivable factored
Less: Fee (1% x 200,000)
Reserve (6% x 200,000)
Interest (1% x200,000)
Netproceeds
200,000 The safety of the principal is of concern in
2,000 any investment, although some investors
12,000 are more risk tolerant than others and are
2,000 thus more willing to lose some of their
184,000 principal in return for the chance of
generating a higher profit.

Effective Annual Financing Cost 2 PRIMARY FACTORS THAT

2,000+2,000/184,000 x1/30/360 DISTINGUISH TYPES OF INVESTMENTS
=26.09% FROM ONE ANOTHER AND HELP
DETERMINE APPROPRIATE
MARKETABLE SECURITIES INVESTMENTS FOR A GIVEN INVESTOR
are securities or debts that are to be sold or  investor's ability to tolerate risk
redeemed within a year.  incremental return associated with
increasing amounts of risk
Examples of Marketable Securities:
1. Government Bonds SHORT-TERM INVESTMENTS
2. Common Stock are easily converted into cash within 5
3. Certificates of deposit years.

Notes:
 Current Assets
If these securities and/or debt are
anticipated to be converted
into cash within one year, they are
listed at their current market
value.
 Non Current Assets
If they are not trading securities
 Held to maturity and available for sale,
securities can either be listed as long
term or short term, depending on the
maturity dates of the securities and the
 CURRENT
when the investments are acquired
with the simple intent of generating
profits by reselling the investment in
the very near future,
 NONCURRENT
when investments are acquired for
long-term purposes, or perhaps to
establish some form of control over
another entity.
Note:
 initially recorded at cost (including 2. Unrealized Loss on Investment
brokerage fees)
 value may fluctuate (fluctuation value is
to be reported in the income statement)

This approach is often called

“mark-to-market” or fair value accounting.
3. Unrealized Gain on Investment
 subsequent to initial acquisition
 to be reported at fair value

FAIR VALUE
is defined as the price that would be
received from the sale of an asset in an
orderly transaction between market
participants.

Example:
Assume that Webster Company’s
management was seeing a pickup in their Shares of Webster 5,000
business activity and believed that a similar Multiplied by: 10 per share 10
uptick was occurring for its competitors as Total Investment 3/3/20x6 P50,000
well. One of its competitors, Merriam
Corporation, was a public company, and its Shares of Webster 5,000
stock was trading at 10 per share. Webster Multiplied by: 1 per share 1
had excess cash earning very low rates of Total Loss P5,000
interest and decided to invest in Merriam
with the intent of selling the investment in Total Investment 50,000
the very near future for a quick profit. The Less: Loss on investment 5,000
following entry was needed on March 3, Total Investment 3/3/20x6 P45,000
20X6, the day Webster bought stock of
Merriam Shares of Webster 5,000
Multiplied by: 3 per share 3
Next, assume that financial statements Total Gain P15,000
were being prepared on March 31. Despite
Webster’s plans for a quick profit, the stock Total Investment 50,000
declined to $9 per share by March 31. Add: Gain on investment 15,000
Webster still believes in the future of this Total Investment 4/30/20x6 P60,000
investment and is holding all 5,000 shares.
But, accounting rules require that the RATIONALE FOR FAIR VALUE
investment “be written down” to current
value, with a corresponding charge against FAIR VALUE APPROACH
income. The charge against income is is in stark contrast to the historical
recorded in an account called Unrealized cost.
Loss on Investments
RATIONALE
During April, the stock of Merriam bounced is that the market value for short-
up 3 per share to 12. At the end of April, term investments is readily
another entry is needed if financial determinable, and the periodic
statements are again being prepared fluctuations have a definite
economic impact that should be
1. Purchase of stock reported.
 VALUATION ADJUSTMENT ACCOUNT
ALTERNATIVE APPROACH
 As an alternative to directly adjusting
the Short-Term Investments account,
some companies may maintain a
separate Valuation Adjustment account
that is added to or subtracted from the
Short-Term Investments account.
 to provide additional information that
may be needed for more complex
accounting and tax purposes.
Tax rules generally require comparing the
sales price to the original cost
tax rules sometimes differ from
accounting rules, and the fair value
approach used for accounting is
normally not acceptable for tax
purposes.
DIVIDENDS AND INTERESTS
DIVIDENDS
are income payments made by companies
to shareholders
INTEREST
is income paid by companies or
governments to their bond holders.
The presence or absence of dividends or
interest does not change the basic fair
value approach for the Short-Term
investments account.
DERIVATIVES
There are an endless array of more exotic
investment options. Among these are
commodity futures, interest rate swap
agreements, options related agreements,
and so on.
INVENTORY
is the collection of unsold products waiting
to be sold.
current asset in the balance sheet
may be finished goods or raw materials
5 REASONS COMPANIES MAINTAIN
INVENTORIES
a) To meet an anticipated increase in
demand;
b) To protect against unanticipated
increases in demand;
c) To take advantage of price breaks for
ordering raw materials in bulk;
d) To prevent the idling of a whole factory
if one part of the process breaks down;
and,
e) To keep a steady stream of material
flowing to retailers rather than making
a single shipment of goods to retailers.
f) can be used as collateral to obtain
financing.
ECONOMIC CONTROL
basic requirement for counting an item.
IMPORTANCE OF INVENTORY
 is a key component of calculating cost
of goods sold (COGS) and is a key
driver of profit, total assets, and tax
liability.
Common inventory accounting methods
include
1. first in, first out (FIFO)
2. last in, first out (LIFO)
3. lower of cost or market (LCM).
Note:
 Increases in inventory may signal that a
company is not selling effectively, is
anticipating increased sales in the near
future (such as during the holidays), or
has an inefficient purchasing
department.
 declining inventories may signal that
the company is selling more than it
expected, has a backlog, is
experiencing a blockage in its supply
chain, is expecting lower sales, or is
becoming more efficient in its
purchasing activity.

INVENTORY TURNOVER
is the number of times a business sells and
replaces its stock of goods during a given
period.
It considers the cost of goods sold, relative
to its average inventory for a year or in any
a set period of time.
IMPORTANCE OF INVENTORY
TURNOVER IN A BUSINESS
 to know how fast inventory sells, how
effectively it meets the market demand,
and how its sales stack up to other
products in its class category.
 to compare a business with other
businesses in the same industry.
HIGH INVENTORY TURNOVER
goods are sold faster
LOW INVENTORY TUNROVER
weak sales and excess inventories
INVENTORY DAYS RATIO
Inventory x 365 days
cost of sales
INVENTORY TURNOVER RATIO
FORMULA
(Cost of Goods Sold)/(Average Inventory)
AVERAGE INVENTORY FORMULA
(Beginning Inventory + Ending Inventory)
2 amount on hand, and the amount of the
Example:
Republican Manufacturing Co. has a cost of
goods sold of $5M for the current year. The
company’s cost of beginning inventory was
$600,000 and the cost of ending inventory
was $400,000. Given the inventory
balances, what is the average cost of
inventory during the year?
Beginnning inventory 600,000
Ending inventory 400,000
Total 1,000,000
Divided by: 2
Average Inventory P500,000
Cost of Goods Sold 5,000,000
Divided by: Average inventory 500,000
Inventory Turnover Ratio 10
As a result, inventory turnover is rated at 10
times a year
COST OFF GOODS SOLD
is an expense incurred from directly
creating a product, including the raw
materials and labor costs applied to it.
Note:
in a merchandising business, the cost
incurred is usually the actual amount of the
finished product (plus shipping cost if any is
applicable) paid for by a merchandiser from
a manufacturer or supplier.
AVERAGE INVENTORY
is the average cost of a set of goods during
two or more specified time periods.
Note:
does not have to be computed on a yearly
basis but depending on the specific
analysis required to assess the inventory
account.
SUPPLIES
A current asset representing the cost of
supplies on hand at a point in time.
SUPPLIES EXPENSE
reports the amounts of supplies that were
used during the time interval indicated in
the heading of the income statement.
When supplies are purchased, the amount
will be debited to Supplies. At the end of
the accounting period, the balance in the
account Supplies will be adjusted to be the
adjustment will be recorded in Supplies
Expense. (If the amount of supplies on hand
is insignificant, a company may simply
debit Supplies Expense when the supplies
are purchased.)
PROPER ACCOUNTING FOR SUPPLIES
OFFICE SUPPLIES
items used to carry out tasks in a
company's departments outside of
manufacturing or shipping.
ex: paper, printer cartridges, pens, etc.
The cost of office supplies on hand at the
end of an accounting period should be the
balance in a current asset account such as
Supplies or Supplies on Hand.
SHIPPING SUPPLIES
for preparing products that are being
shipped to customers.
ex: cartons, tape, shrink wrap, etc.
The cost of shipping supplies on hand will
be reported as a current asset on the
balance sheet and the shipping supplies
used during the accounting period will be
reported on the income statement as
Shipping Supplies Expense.
MANUFACTURING SUPPLIES
items used in the manufacturing facilities,
but are not a direct material for the
products manufactured.
ex: wide variety of cleaning supplies to
machine lubricants.
The cost of manufacturing supplies on hand
at the end of an accounting period will be
reported in a balance sheet current asset
account such as Inventory of Manufacturing
Supplies.
Note:
When the manufacturing supplies are used
they will become part of the manufacturing
overhead, which is then allocated to the
products manufactured
PREPAID EXPENSES
are future expenses that have been paid in
advance but are not yet used up or have
not yet expired.
Note:
the amount of prepaid expenses that will be
used up within one year are reported on a
company's balance sheet as a current asset.
As the amount expires, the current asset is
reduced and the amount of the reduction is
reported as an expense on the income
statement.
SIX-MONTH INSURANCE PREMIUM
a common prepaid expense that is paid in
advance for insurance coverage on a
company's vehicles.
INSURANCE EXPENSE
is one-sixth of the six-month premium.
The balance in the account Prepaid
Insurance will be the amount that is still
prepaid as of the date of the balance sheet.
2 METHODS OF RECORDING PREPAID
EXPENSES
Either method for recording prepaid
expenses could be used as long as the
asset account balance is equal to the
unexpired or unused cost as of each
balance sheet date.
1. record the entire payment in an asset
account.
ex: assume that on December 1 a company
pays an insurance premium of $2,400 for 6
months of liability insurance coverage:
 On December 1 the company debits
Prepaid Insurance for $2,400 and
credits Cash for $2,400
 On the last day of December and on
the last day of the following 5 months
the company needs to record an
adjusting entry that debits Insurance
Expense for $400 ($2,400 divided by 6
months) and credits Prepaid Insurance
for $400
2. record the entire payment in the expense
account.
ex: Using the information above, the
following entries will occur:
 On December 1 the company debits
Insurance Expense for $2,400 and
credits Cash for $2,400
 On the last day of December the
company records an adjusting entry
that debits the asset account Prepaid
Insurance for $2,000 ($2,400 divided
by 6 months times the 5 months that
 will be prepaid as of December 31) and
credits Insurance Expense for $2,000
 At the end of each of the following 5
months the adjusting entry will debit
Insurance Expense for $400 and will
credit Prepaid Insurance for $400
When do you adjust the amount of
prepaid expenses?
prior to issuing a company's financial
statements. If the company issues financial
statements for each calendar month, you
will need to adjust the balance in Prepaid
Expenses as of the end of each month.
the goal is to have the balance in Prepaid
Expenses be equal to the amount of the
unexpired costs as of the end of
the accounting period.
the adjusting entry for prepaid expenses
will be a credit to Prepaid Expenses and a
debit to the appropriate expense account(s).
NONCURRENT ASSETS
are assets which represent a longer-term
investment and cannot be converted into
cash quickly. They are likely to be held by a
company for more than a year.
ex: land, property, investments in other
companies, machinery and equipment.
 Some noncurrent assets, such as land,
may theoretically have unlimited useful
lives. A noncurrent asset is recorded
as an asset when incurred, rather than
being charged to expense at once.
Depreciation, depletion, or
amortization may be used to gradually
reduce the amount of a noncurrent
asset on the balance sheet.
 In a capital-intensive industry, such as
oil refining, a large part of the asset
base of a business may be comprised
of noncurrent assets. Conversely, a
services business that requires a
minimal amount of fixed assets may
have few or no noncurrent assets.
 Noncurrent assets are aggregated into
several line items on the balance sheet,
and are listed after all current assets,
but before liabilities and equity
CASH SURRENDER VALUE
is the amount of cash that a person can
receive upon the cancellation of an
insurance policy or annuity.
This amount is usually associated with
whole life insurance policies, which have a
built-in savings component.
Note:
 The amount of the valuation increase is
the excess of payments and interest
income over the cost of the life
insurance portion of the package (if
any). This gives the insured an asset
that can either be cashed in later in life,
or used as collateral for a loan.
 accumulates on a tax deferred basis
until the policy is terminated.
LONG-TERM INVESTMENTS
are non-current assets that are not used in
operating activities to generate revenues.
are held for more than one year or
accounting period and are used to create
other income.
ex: Notes receivable, stocks, and bonds
CLASSIFICATION OF INVESTMENTS
SHORT-TERM INVESTMENTS
CURRENT
LONG-TERM INVESTMENTS
NONCURRENT
EXAMPLE:
 Land is a good example of a long-term
investment. Land, in and of itself, is a
long term asset that is typically used in
a company’s operations, but it doesn’t
have to be. For instance a
manufacturer that is looking to expand
its factory might purchase a 300 acres
of land. It uses 100 acres to build out
the factory buildings and parking lots.
 The manufacturer holds onto the other
200 of the land and waits to sell it to
another business looking to get
purchase space in the industry park.
This land is considered an investment
and is not used in the operations of the
company. Thus, it’s classified as a long
term investment and not a long term
asset. The 100 acres that were used to
 build the factory on is classified a long
term asset.
 Traditionally, a classified balance sheet
splits total non-current assets into
long-term investments, plant assets or
fixed assets, and intangible assets.
This way investors can see how much
the company is investing in its
operations compared with other
activities
DEBT SECURITIES
are financial instruments that represent a
right to a determined stream of cash flows
for a definite period of time, such as bonds.
EQUITY SECURITIES
are financial instruments that represent
residual (ownership) interest in a company,
for example, shares of common stock, etc.
DERIVATIVES SECURITIES
are financial instruments which ‘derive’ their
value from other financial instruments, such
as forward contracts, futures contacts,
options, etc
ACCOUNTING CLASSIFICATION OF
DEBT SECURITIES
IAS 32 and IAS 39
the previous IFRS financial instruments
accounting standards, classified debt
securities into held to maturity, available for
sale, and held for tradingcategories.
IFRS 9
the new standard, requires debt securities
to be classified mainly into those carried at
(a) amortized cost, (b) fair value through
profit or loss (FVTPL), and (c) fair value
through other comprehensive income
(FVOCI).
US GAAP
 the classification is dictated by the
legal form of the instruments.
 retains the legacy classification
categories for many debt securities.
IFRS
classification depends on
A. the business model
B. cash flow characteristics of the
instrument.
An investor first determines whether its
business model is to hold the asset to
collect cash flows or to sell it to realize
capital gain.
Second, it assesses whether the cash flows
of the asset are solely payments of principal
and interest (called the SPPI test).
Categories of debt securities under IFRS
include:
AMORTIZED COST
Debt securities are classified at amortized
cost if the company’s business model is to
hold the asset to collect cash flows, and
those cash flows are solely payments of
principal and interest.
FAIR VALUE THROUGH OTHER
COMPREHENSIVE INCOME (FVTOCI)
Debt securities are classified at FVOCI if the
investor’s business model is both to collect
cash flows and sell the asset, and the cash
flows are solely payments of principal and
interest.
FAIR VALUE THROUGH PROFIT OR
LOSS (FVTPL)
Debt securities which do not qualify for
classification at either amortized cost or
FVTOCI are classified at FVTPL.
ACCOUNTING FOR EQUITY SECURITIES
Accounting for equity investments depends
on the extent of ownership:
CONTROLLING INTEREST
where Company A owns more than 50%
equity of Company B, it has control over
Company B and is required to
prepare consolidated financial statements.
SIGNIFICANT INFLUENCE
where Company A owns anywhere between
20% and 50% of equity of Company B, it
has significant influence over Company B
and is required to account for investments
in Company B using the equity method.
NO CONTROLLING INTEREST AND NO
SIGNIFICANT INFLUENCE
if Company A owns less than 20% of
Company B’s equity, neither consolidation
nor equity method is required.
 Previous investment accounting
standards, such as IAS 39 and its US
 GAAP equivalent, allowed equity
instruments to be classified as
A. held for trading
B. designated at fair value through
profit and loss
C. available for sale.
 Under the new accounting standard,
IFRS 9, fair value through profit or loss
(FVTPL) is the go-to category for all
equity securities. It means that equity
securities would typically be carried at
their fair value with any changes
reflected in profit or loss.
 However, under IFRS a company
can irrevocably categorize equity
investments (on instrument-by-
instrument basis) at fair value through
other comprehensive income (FVOCI).
It means that the securities are carried
at fair value, but the changes are
reflected in other comprehensive
income. In case of such categorization,
no reclassification to FVTPL category
is allowed in future for such
investments.
 Similarly, under US GAAP there are
some exceptions to the default fair
value category. For example, if fair
value cannot be determined, an equity
investment is allowed to be carried at
cost less impairment losses
EXAMPLE
You are an Accountant at Flow, Inc., a
futuristic technology-enabled financial
services company. Its cash and cash
equivalents at 1 January 20X9 stood at $2.2
billion. A newly appointed Investment
Manager embarked on an aggressive
investment spree. During the year, the
company entered into the following
transactions:
 1 January 20X9: obtained 60% holding
in Dots, Inc. for $300 million
 1 February 20X9: purchased 18% of
common stock of Air, Inc., a cutting-
edge communication company for
$450 million with intent to hold them
for indefinite period.
 1 March 20X9: invested $55 million in
an equity mutual fund with intent to sell
it in near future.
 30 June 20X9: sold the equity mutual
fund investment made on 1 March
20X9 for $60 million.
 1 July 20X9: invested in plain-vanilla
government bonds with face value of
$350 million due by the end of 5th year
carrying interest rate of 8% at par. The
company intends to hold them to
maturity.
 1 September 20X9: obtained 35%
holding for $320 in Fiber, Inc.
 At the year end, i.e. 31 December 20X9,
investment in Dots, Inc. dropped to
$290 million, investment in Air, Inc.
rose to $500 million while investment in
Fiber, Inc. was valued at $350 million.
The company earned dividends of $2
million from Dots, Inc., nothing from Air,
Inc., nothing from the equity mutual
fund and nothing from Fiber, Inc. Fiber,
Inc. net income for financial year 20X9
amounted to $15 million.
Classify the above investments into
different investment categories and outline
the accounting treatment of related gains or
losses
ANSWERS:
 The 60% holding in Dots, Inc. should
be consolidated in financial statements
of Flow, Inc. because it represents
control.
 The 18% stake in Air, Inc. should be
classified at FVTPL and a gain of $50
million ($500 million - $450 million)
should be reported in income
statement.
 The $55 million investment in equity
mutual fund should be classified at
FVTPL and the realized gain of $5
million ($60 million - $55 million) should
be included in income statement.
 The investment in government
securities should be carried at
amortized cost recognizing interest
income in income statement. It is
because the company’s business
model to ‘hold the asset to collect’
cash flows which meet SPPI test. Any
fair value changes in government
securities are not recognized.

 The 35% holding in Fiber, Inc. should
be accounted for using equity method
since the investment resulted in
significant influence.
 The company has an option to
designate the investments in Air, Inc.
and the equity mutual fund at FVOCI
on initial recognition in which case the
unrealized gains will be reported in
other comprehensive income.
Transactions Relating to Investment
Accounts (With Journal Entries)
Purchase and Sale of Investments:
 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
favourable.
 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 values of
securities purchased or sold are
recorded, however, in ‘Nominal’
column.
 The accrued Interest/Dividend on
purchase or sale of securities including
the Interest/Dividend so received are
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
(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 profits 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.
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
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.

 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. And
the difference between the two
‘Interest/Income’ columns represents
income/interest from Investment
Note:
The closing balance of investment will be
computed on the basis of Cost Price or
Market Price, whichever is lower (as
investment is treated here as a current
asset)
B. Purchase and Sale of Investment before
the date of payment of interest.
INTANGIBLE ASSETS
An intangible asset is a non-physical asset
having a useful life greater than one year.
These assets are generally recognized as
part of an acquisition, where the acquirer is
allowed to assign some portion of the
purchase price to acquired intangible
assets.
Few internally-generated intangible assets
can be recognized on an entity's balance
sheet.
Examples of intangible assets are:
 Marketing-related intangible assets
1. Trademarks
2. Newspaper mastheads
3. Internet domain names
4. Noncompetition agreements
 Customer-related intangible assets
1. Customer lists
2. Order backlog
3. Customer relationships
 Artistic-related intangible assets
1. Performance events
2. Literary works
3. Musical works
4. Pictures
5. Motion pictures and television
programs
 Contract-based intangible assets
1. Licensing agreements
2. Service contracts
3. Lease agreements
4. Franchise agreements
5. Broadcast rights
6. Employment contracts
7. Use rights (such as drilling rights or
water rights)
 Technology-based intangible assets
1. Patented technology
2. Computer software
3. Trade secrets (such as secret
formulas and recipes)
TANGIBLE FIXED ASSETS
are defined as any physical assets owned
by a company that can be quantified with
relative ease and are used to carry out its
business operations. These can include any
kind of physical properties such as a piece
of land that might be owned by a company
along with any structure built upon it.
ex: furniture, machinery, and equipment
housed in it.
Property – includes the land, building,
office furniture, etc
Plant – is the physical space where the
workers work or provide services
Equipment – refers to the machinery,
vehicles and other tools & equipment used
to produce
Inventory – includes all types of
inventory like the finished goods as well as
WIP and raw material inventory
Recording of Tangible Assets
Tangible assets on the balance sheet at
their original cost. You add to this all the
costs involved in getting the asset ready for
its intended use, such as legal fees,
transportation to the current location,
necessary testing and non-recoverable
taxes. You do not record PP&E at its
market value.
HOW ARE TANGIBLE FIXED ASSETS
VALUED?
 Value of Tangible Current Assets:
The potential total cost of tangible current
assets usually includes not only the amount
for which it is purchased, as recorded in the
relevant invoice as part of the inventory
bought, but also includes any additional
costs incurred due to transportation, for its
installation and for insurance purposes as
well.
 Value of Tangible Fixed Assets:
As already discussed, tangible fixed assets
have their value spread over its expected
lifespan instead of being accounted for only
in the year when they might be purchased.
A part of their value is being accounted for
every year in the accounts of a firm, known
as depreciation, which also stands for the
monetary worth reduced after a certain
period of use.