INVESTMENT ACCOUNT

Dr. D. Janis Bibiyana

SRM – IST (S&H), Ramapuram,Chennai - 89
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.
 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.
 Accounting entry on investments

 On purchase of investment  On Sale of investments

Investment A/c Dr Cash/Bank A/c Dr

To Cash/Bank A/c
(Being Investment made)
Note − Investment account is inclusive
of purchase expenses like stamp duty,
Commission, and brokerage.
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/c Dr
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

Two types of investments transactions −

 Cum Dividend or Cum Interest Quotations and
 Ex-Dividend or Ex-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.
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.
 Accounting Entries
In the Books of Buyer
Investment A/c Dr
Dividend or Interest A/c Dr
To Cash/Bank A/c
On purchase of investment (Being Investment made)

Cash/Bank A/c Dr
To Dividend or Interest A/c
On receipt of dividend or interest (Being dividend or interest received)

Accrued Interest A/c Dr

To Interest A/c
for Accrued Interest (Being interest accrued)
 In the Books of Seller
Cash/Bank A/c Dr
To Investment A/c
To Dividend or Interest A/c
On Sale of investments (Being Investment Sold )

Cash/Bank A/c Dr
To Dividend or Interest A/c
On receipt of dividend or Interest (Being dividend or interest received)
Difference between Cum-dividend and Ex-Dividend
Major differences between them are −
•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.
 JOURNAL ENTRIES
For purchase of Investment
 1000, 8% government bonds are purchased at Rs. 97 each. The brokerage and stamp duty amount to
Rs. 2 and Re. 1 for each bond respectively
Investment a/c Dr 100000 (1000*97=97000+2000+1000)
To Bank a/c 100000
(Being purchase of 1000 govt. bonds at rs.97 each and brokerage and stamp duty there on)

 Sale of Investment
 800, 8% government bonds are purchased at Rs. 98 each. The brokerage being Re. 1 for each bond.
Bank a/c Dr 77600 (800*98=78400-800)
To Investment 77600
(Being sale of 800 government Bonds at rs. 98 each and the brokerage deducted there on)
 EX-INTEREST & CUM-INTEREST

 For purchase of Investment at CUM – INTEREST price

 For purchase of Investment at EX – INTEREST
 500, 10% debentures of Rs. 100 each are purchased on 1.4.97 price
at Rs. 96 cum interest, the previous interest date being
31.12.96  500, 10% debentures of Rs. 100 each are purchased
on 1.4.97 at Rs. 96 ex- interest, the previous
 Investment a/c Dr 46750
interest date being 31.12.96
 Interest on Investment a/c Dr 1250
 To Bank a/c 48000  Investment a/c Dr 48000
 Interest on Investment a/c Dr 1250
CALCULATION
 To Bank a/c 49250
Total amount payable (500*96) 48000
Less Interest included in the price (48000+1250)
(500*100=50000*10/100*3/12) 1250
-------------
46750
 SALE OF INVESTMENT

* At Cum- Interest Price * At Ex- Interest Price

 Bank Dr 48000 (500*96)  Bank Dr 49250

 To Investment a/c 46750 (48000-  To Investment a/c 48000
1250)  To interest on Investment a/c 1250
 To interest on Investment a/c 1250
(Being sale of 500 debentures at Rs. 96 cum-
interest and interest received there on)
(Being sale of 500 debentures at Rs. 96 cum-interest
and interest received there on)