Lesson - Investment Accounts
Investments are assets held by an enterprise for earning income by way of
dividends,interest and rentals, for capital appreciation, or for other benefits to the
investing enterprise.
Investment Accounting is done as per AS-13 which deals with all kind of investments
except:
(i) interest, dividends and rentals earned on investments
(ii) operating or financial leases
(iii) investment of retirement benefit plans and life insurance enterprises
(iv) mutual funds
(v) assets held as Stock-in-trade are not ‘Investments’.
Classification of Investments
Current investment is an investment that is by its nature readily realizable and is intended
to be held for not more than one year from the date on which such investment is made.
• The carrying amount for current investments is the lower of cost and fair value.
• Fair value is the amount for which an asset could be exchanged between a
knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s length
transaction. Under appropriate circumstances, market value or net realizable value
provides an evidence of fair value.
• Market value is the amount obtainable from the sale of an investment in an open
market, net of expenses necessarily to be incurred on or before disposal.
• Any reduction to fair value and any reversals of such reductions are included in the
statement of profit and loss account.
Long-term investment is an investment other than a current investment.
• Long term investments are usually carried at cost.
• If there is a permanent decline in the value of a long term investment; the carrying
amount is reduced to recognize the decline.
• The reduction in carrying amount is charged to the statement of profit and loss
• The reduction in carrying amount is reversed when there is a rise in the value of the
investment, or if the reasons for the reduction no longer exist.
Investment Acquisitions
• The cost of an investment includes acquisition charges such as brokerage, fees and
duties.
• If the investment is acquired, or partly acquired, by the issue of shares or other
securities,the acquisition cost is fair value of securities or asset issued
• If an investment is acquired in exchange, or part exchange, for another asset, the
acquisition cost of the investment is determined by reference to the fair value of the
asset given up. It may be appropriate to consider the fair value of the investment
acquired if it is more clearly evident.
, A separate Investment Account should be made for each scrip purchased. The scrips
purchased may be broadly divided into two categories
i) Fixed income Bearing Securities:
ii) Variable Income Bearing Securities
i) Fixed income Bearing Securities:
The investment in Government securities or debentures comes under this category. In
this type of scrip, the interest accrued from the date of last payment to the date of
transaction can be easily calculated.
In case the transaction is on ‘Ex-interest’ basis i.e., the amount of interest accrued to the
date of transaction has to be paid in addition to the price of security.
The following entries are made in the books of Purchaser:
Investment Account Dr. (With the price settled on ex- interest basis)*
Interest accrued Account Dr. (Accrued interest till the date of transaction)**
To Bank A/c (With total amount paid)
* This amount will appear in Capital Column of ‘Investment A/c’.
** This amount will appear in Income Column of ‘Investment A/c’.
In case the transaction is on cum-interest basis, a part of purchase price is related to the
interest accrued from the date of the last interest paid to the date of transaction.
And hence in this case the cost of investment has to be calculated by subtracting the
amount of accrued interest from the Purchase Price.
The following entries are made in the books of Purchaser:
Investment Account Dr. (With the price settled on cum- interest less Interest Accrued)*
Interest accrued Account Dr. (Accrued interest till the date of transaction)**
To Bank A/c (With total amount paid)
This amount will appear in Capital Column of ‘Investment A/c’.
This amount will appear in Income Column of ‘Investment A/c’.
When the interest amount is actually received, it is entered in the Income Column credit
side.
The net effect of these entries will be that the amount credited to the income will be only
the interest arising between the date of purchase and the one on which it next falls due.
Note:
(a) Interest amount is always calculated with respect to nominal value.
(b) In case the quotation is not qualified, the same will be treated as ex-interest quotation.
Investments are assets held by an enterprise for earning income by way of
dividends,interest and rentals, for capital appreciation, or for other benefits to the
investing enterprise.
Investment Accounting is done as per AS-13 which deals with all kind of investments
except:
(i) interest, dividends and rentals earned on investments
(ii) operating or financial leases
(iii) investment of retirement benefit plans and life insurance enterprises
(iv) mutual funds
(v) assets held as Stock-in-trade are not ‘Investments’.
Classification of Investments
Current investment is an investment that is by its nature readily realizable and is intended
to be held for not more than one year from the date on which such investment is made.
• The carrying amount for current investments is the lower of cost and fair value.
• Fair value is the amount for which an asset could be exchanged between a
knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s length
transaction. Under appropriate circumstances, market value or net realizable value
provides an evidence of fair value.
• Market value is the amount obtainable from the sale of an investment in an open
market, net of expenses necessarily to be incurred on or before disposal.
• Any reduction to fair value and any reversals of such reductions are included in the
statement of profit and loss account.
Long-term investment is an investment other than a current investment.
• Long term investments are usually carried at cost.
• If there is a permanent decline in the value of a long term investment; the carrying
amount is reduced to recognize the decline.
• The reduction in carrying amount is charged to the statement of profit and loss
• The reduction in carrying amount is reversed when there is a rise in the value of the
investment, or if the reasons for the reduction no longer exist.
Investment Acquisitions
• The cost of an investment includes acquisition charges such as brokerage, fees and
duties.
• If the investment is acquired, or partly acquired, by the issue of shares or other
securities,the acquisition cost is fair value of securities or asset issued
• If an investment is acquired in exchange, or part exchange, for another asset, the
acquisition cost of the investment is determined by reference to the fair value of the
asset given up. It may be appropriate to consider the fair value of the investment
acquired if it is more clearly evident.
, A separate Investment Account should be made for each scrip purchased. The scrips
purchased may be broadly divided into two categories
i) Fixed income Bearing Securities:
ii) Variable Income Bearing Securities
i) Fixed income Bearing Securities:
The investment in Government securities or debentures comes under this category. In
this type of scrip, the interest accrued from the date of last payment to the date of
transaction can be easily calculated.
In case the transaction is on ‘Ex-interest’ basis i.e., the amount of interest accrued to the
date of transaction has to be paid in addition to the price of security.
The following entries are made in the books of Purchaser:
Investment Account Dr. (With the price settled on ex- interest basis)*
Interest accrued Account Dr. (Accrued interest till the date of transaction)**
To Bank A/c (With total amount paid)
* This amount will appear in Capital Column of ‘Investment A/c’.
** This amount will appear in Income Column of ‘Investment A/c’.
In case the transaction is on cum-interest basis, a part of purchase price is related to the
interest accrued from the date of the last interest paid to the date of transaction.
And hence in this case the cost of investment has to be calculated by subtracting the
amount of accrued interest from the Purchase Price.
The following entries are made in the books of Purchaser:
Investment Account Dr. (With the price settled on cum- interest less Interest Accrued)*
Interest accrued Account Dr. (Accrued interest till the date of transaction)**
To Bank A/c (With total amount paid)
This amount will appear in Capital Column of ‘Investment A/c’.
This amount will appear in Income Column of ‘Investment A/c’.
When the interest amount is actually received, it is entered in the Income Column credit
side.
The net effect of these entries will be that the amount credited to the income will be only
the interest arising between the date of purchase and the one on which it next falls due.
Note:
(a) Interest amount is always calculated with respect to nominal value.
(b) In case the quotation is not qualified, the same will be treated as ex-interest quotation.
