Investment Accounting

Investment Accounting
Definition:
Investment  is an asset held for earning income by way of
rental income, dividend, interest, royalties & capital
appreciations but not for sale in ordinary course of business.
Exception: shares as stocks are treated as investment(current
investment) not inventory as per AS13.
Investments classified into:
 Fixed income bearing securities- ex: Debn , Govt bonds
etc. Can calculate income exactly
 Variable income bearing securities- ex: eq sh . connot
estimate.
Deb/ bonds:
 Inv in debn a/c Dr
To bank a/c
 Int will be received on FV not Market val
 Int will be received as mentioned in prospectus . can be
yearly or half yearly.
 On int date , the person in whose name the debn is
receives the int irrespective of ‘period of holding’.
 Cum int price is including int
 Ex int price is without int
 But in both these cases full price Is paid
 When debn is purchased, the total price consists of FV of
debn + int accrued (i.e., int from last int date till date of
purchase). Int is always calculated on NV  investment
in debn a/c Dr
Int accrued a/c Dr
To Cash a/c
 Int recd being a nominal a/c must be closed. So it is trf
to p/l a/c
Bank a/c Dr Interest a/c Dr
To interest a/c To P/l a/c
 At the end of the year:

o Current investment – must be valued at cost or
NRV whichever is lower. If NRV < cost then loss
must be recorded as: P/l a/c Dr
To invst a/c
o Long term invst- cost or NRV which ever is lower. If
NRV< cost then loss must be recorded as:
P/l a/c Dr
To Accumulated impairment loss
Sale of invst
 Calculate p/l on sale of invst
 P/l = Sales proceeds of debn / investment xxx
(excluding int )
(-) Avg cost (total cost /total debn )X no. debn sold (xxx)
As per AS 13 ( Only avg cost . DO NOT USE FIFO OR LIFO)
 If Profit or loss on sale of debn / investment is:

o +ve: 2 methods can be used for recording JE (2nd is
followed by ICAI) –
 Cash a/c Dr 100
To Invst a/c 80
To P/l a/c 20
 Cash a/c Dr 100
To Invst 100
Investment a/c Dr 20
To P/l a/c 20
o -ve: 2 methods can be used for recording JE (2nd is

foll by ICAI)-
 Cash a/c Dr 70
P/l a/c Dr 10
To investment a/c 80
 Cash a/c Dr 70
To Investment a/c 70
P/l a/c Dr 10
To Investment a/c 10
 Brokerage exp is directly attributable to acquisition of
invst , hence it is part of the cost ( i.e. invst a/c = ex int
val+ brokerage) . so brokerage is calculated on val of
debn Bought / sold (i.e., brokerage is calculated on ex int
val of debn .
 Cost or amt column = ex int price +/- Brokerage ( NOT
FULL AMT PAID/RECEIVED )
 When year end and int due dates are different, int must
be accrued for the remaining months from last int date
till year end. In prev yr the entity must have recorded
the foll entry for accrued int:
Int accrued a/c Dr

To int income a/c
In the next FY the entry must reversed for the same
amt:
Int income a/c Dr
To Int accrued a/c
Later when int is received we record it as usual:
Cash a/c Dr
To int income a/c
 Convertible debn when converted to eq sh :
Investment in eq sh a/c Dr
To Investment in debn a/c
Bonus shares – No need to record JE as cost is nil but update
the a/c with NV of bonus shares( Dr side as ‘To Bonus sh a/c’
and update the NV ).
Right Shares –
Offered by – company
Who can buy- the person to Mr. A (whom it was offered) or
anyone who buys the right from Mr. A.
In case of right shares 3 things can happen:
 Mr. A bought the right shares invst in eq sh a/c Dr
To Cash a/c
 Rights are trf to Mr. B:
o In A’s books – Cash a/c Dr
To P/l a/c
o In B’s books – payment to the co. and payment to
Mr. A is included in cost i.e., Invst in eq sh a/c Dr
To Cash a/c
 Partly sold rights and remaining is exercised –
Same JEs as above for the respective share.
Dividend Incomes
There are mainly 3 types of dividend:
 Pre-acquisition div
 Post-acquisition div
 Interim div
Pre-acquisition div-
 Dividend related to before acquisition date (i.e. this year
purchased share but div received for py year)
 It is directly reduced from investment.
 It does not include bonus and right share received this
year
 Cash a/c Dr
To investment a/c
Post-acquisition div-
 Dividend related to after acquisition date (i.e., sh bought
in py year and div is also related to py year)
 It is trf directly to P/l a/c
 Cash a/c Dr
To p/l a/c
Interim div-
 Div is related to Cy. So both bonus and right shares are
also included.
 So its fully post acquisition div
 So cash ac Dr
To p/l a/c
 But it is shown in investment a/c in Cr side of div column
Reclassification of investment:
 When investments are classified from current
investments to long term investments , it is measured at
cost or fmv whichever is lower.
 When investments are classified from LI to CI it is
measured at cost or carrying amt whichever is lower.
 Carrying cost = cost – impairment loss

Investment Accounting

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Investment Accounting

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Investment Accounting

 At the end of the year:

 If Profit or loss on sale of debn / investment is:

o -ve: 2 methods can be used for recording JE (2nd is

Int accrued a/c Dr

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