Investment Accounting

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 : 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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 Investment Accounting
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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 Investment Accounting
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 Ex-

Interest. Cum means with and Ex means without. The terms Cum-
Interest and Ex-Interest are related to fixed income securities. Cum-
Interest 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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 Investment Accounting
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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 Investment Accounting
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 Shares-

Shares first offered to the existing shareholders at a

discounted price.

Entry in the books of the investor depends on whether these

shares are:

Subscribed or
Renounced

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