Financial Accounting - Investment Account


Anyone can buy and sell securities from a stock exchange with the purpose to increase his/her (monetary) assets. Sale and purchase of the securities is done through banks. The stockbrokers help people in trading by paying the amount of commission, stamp duty, and brokerage on it, which are the essential parts of security trading.

At the time of selling of these securities, charges should be deducted from the sale, as proceeds to get the actual sale price. Most of the time, market price is different from the face value of securities, which depends upon different regulating factors. If market value of the securities is equal to face value, it is called as at par; if market value is less than face value, it is called as on discount; and if market value is higher than face value, it is said to be on premium.

Meaning of Investment

Investment means either buying or creating an asset with the future expectation of capital appreciation, dividends (profit), rents, interest earnings, or some combination of these returns. However, normally, investment inherent with some form of risk, such as investment in equities, property, and even fixed interest securities, among other things, are the subject to inflation risk.

Further, among all these, securities are held as long term investment to earn income. It is said to be fixed assets, but where objective of an organization is to sell and buy securities in short term fund to utilize its surplus fund, would come under the category of current assets.

There may be two types of securities −

  • Fixed Interest Securities − Holders of fixed interest securities get fixed rate of interest.

  • Variable Yield Securities − Under this category, return on investment may differ from year to year.

Investment Account

Investment account is an account opened for the purpose of the investment. Further, if the number of investment is large, a separate account for each investment should be opened.

Accounting entry on the purchase of any investments are given as hereunder −

On purchase of investment

Investment A/cDr

To Cash/Bank A/c

(Being Investment made)

Note − Investment account is inclusive of purchase expenses like stamp duty, Commission, and brokerage.

On Sale of investments

Cash/Bank A/cDr

To Investment A/c

(Being Investment made)

Note − Investment account will be credited with net realized value of investment.

Interest and dividend account

Cash/Bank/Investment A/cDr

To Dividend/Interest A/c

(Being Interest/dividend received on investments)

Note − Investments account will be credited in case, interest/dividend accrue and cash/bank account will be debited (in case) with net realized value of investment.

Investment Transactions

We normally have the following two types of investments transactions −

  • Cum Dividend or Cum Interest Quotations and
  • Ex-Dividend or Ex-Interest Quotations

Let’s discuss these two types of investment transactions in detail.

Cum Dividend or Cum Interest Quotations

Interest and dividend on the fixed investments accrued on regular interval, but payment of those are made only on fixed dates. Dividends are always paid to the persons, who are shareholder at the time of payouts. Suppose a shareholder sold his shares after keeping those shares in his hand up to ten months, then dividends on those shares will be paid to the buyer or we can say, to new shareholder.

So, a seller at the time of selling shares normally charge value of the accrued dividends up to the date of sale, and this is called ‘CUM DIVIDEND” or “CUM INTEREST”. Since, the sale price is inclusive of the value of a share and interest or dividend, therefore at the time of entry in the books of accounts, normal price of share should be booked in the investment account and the value of dividend or interest should be debited to dividend or interest account.

At the time of receiving dividend or interest, dividend or interests account will be credited, debiting cash or bank account. On the other hand, in the books of seller, normal price of the share should be credited to Investment account and the price of accrued dividend or interest should be credited to the dividend or interest account as the case may be.

Accounting Entries − It can be understand through the following table.

In the Books of Buyer

On purchase of investment

Investment A/cDr

Dividend or Interest A/c

To Cash/Bank A/c

(Being Investment made)

On receipt of dividend or interest

Cash/Bank A/cDr

To Dividend or Interest A/c

(Being dividend or interest received)

for Accrued Interest

Accrued Interest A/cDr

To Interest A/c

(Being interest accrued)

In the Books of Seller

On Sale of investments

Cash/Bank A/cDr

To Investment A/c

To Dividend or Interest A/c

(Being Investment Sold )

On receipt of dividend or Interest

Cash/Bank A/cDr

To Dividend or Interest A/c

(Being dividend or interest received)

Ex-Dividend or Ex-Interest Quotations

The buyer of shares when he is quoted ex-dividend is not entitled to receive the payment. It is the interval between the record date and the payment date during which the stock trades without its dividend. Therefore, the person who owns the security on the ex-dividend date will be awarded the payment, regardless of who currently holds the stock.

Difference between Cum-dividend and Ex-Dividend

Major differences between them are given as hereunder −

  • Cum interest or dividend prices are inclusive of the interest or dividend accrued at the date of purchase, whereas in case of the ex-dividend, prices are excluding value of the dividend or interest.

  • The purchase price is higher than normal purchase price in case of Cum-dividend, whereas purchase price is the real price in case of ex-dividend.

  • Nothing is payable additional in case of Cum-Interest, whereas separate amount of the dividend or interest has to be paid in case of the ex-dividend or ex-interest.

Balancing the Investment Account

Difference of debit and credit side of the investment account is Profit or Loss in case where all the investments are sold.

In case where part of the investments are sold and the balance investments stand unsold, it should be carried forward to the next accounting period and remaining balance of the two sides (debit and credit) will represent profit or loss on the sale of investment.

In case where investments are the fixed assets, then the profit or loss will be of capital revenue or capital loss and should be treated accordingly.

Equity Share Accounts

Main features of investment account regarding the equity shares are given as hereunder −

  • Bonus Shares − Bonus shares are issued by the profitable companies to the existing shareholders of the company without any additional amount. Purpose of the bonus share is to capitalize reserves of the company. Only number of the shares will be added in face value column, and principle or capital column will remain unchanged.

  • Right Shares − Right shares are first offered to the existing shareholders of the company as a matter of the right, hence called as right shares. As per Companies Act, right shares can be issued after two years of the establishment of a company or after one year of first issue.

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