Investment Account: Meaning, Transactions and Accounting Treatment
Meaning of Investment Account:
Investment means to spend money outside the business in order to earn some income which are non-trading in nature.
Usually, money is invested in Government Bonds, Securities, Shares and Debentures of companies etc.
Purchase and Sale of Investments:
It has been explained in an earlier paragraph that investments are made in various securities, e.g., Government, Semi-government, Corporation or Trust Securities, such as Shares, Bonds, Debentures, etc. in long or short-term. The long-term investment is normally made for earning interest or dividend whereas the short-term investment is meant for making profit by selling the same when market price becomes favourable.
The aforesaid investments are maintained in the General Ledger (since they are real accounts) when they are few in number. But when they are substantial, a separate ‘Investment Ledger’ is to be opened for each individual class of securities in addition to interest or dividend.
The Investment Account is maintained in a columnar form with three amount columns on each side—viz., Nominal, Interest/Income and Principal/Capital.
The face value or nominal value of securities purchased or sold is recorded, however, in the ‘Nominal’ column. The accrued Interest/Dividend on purchase or sale of securities including the Interest/Dividend so received is recorded, however, in the ‘Interest/Income’ column. The third column, ‘Capital/Principal’, reveals the true cost or true sales consideration.
Brokerage and Other Expenses:
Generally, investment transactions are made through brokers. They charge a certain small commission against their services which is known as ‘Brokerage’. But the stamp duty at the prescribed rates is also to be paid in executing the transaction.
Since the brokerage and stamp duty are capital in nature, these are to be added with the cost price of the investments, i.e., brokerage will be added at the time of purchasing the securities and the same will be deducted from the sale price of the investment at the time of sale. As a result, only the net price is to be recorded in the ‘capital’ column of the Investment Account.
Investment means to spend money outside the business in order to earn some income which are non-trading in nature.
Usually, money is invested in Government Bonds, Securities, Shares and Debentures of companies etc.
Purchase and Sale of Investments:
It has been explained in an earlier paragraph that investments are made in various securities, e.g., Government, Semi-government, Corporation or Trust Securities, such as Shares, Bonds, Debentures, etc. in long or short-term. The long-term investment is normally made for earning interest or dividend whereas the short-term investment is meant for making profit by selling the same when market price becomes favourable.
The aforesaid investments are maintained in the General Ledger (since they are real accounts) when they are few in number. But when they are substantial, a separate ‘Investment Ledger’ is to be opened for each individual class of securities in addition to interest or dividend.
The Investment Account is maintained in a columnar form with three amount columns on each side—viz., Nominal, Interest/Income and Principal/Capital.
The face value or nominal value of securities purchased or sold is recorded, however, in the ‘Nominal’ column. The accrued Interest/Dividend on purchase or sale of securities including the Interest/Dividend so received is recorded, however, in the ‘Interest/Income’ column. The third column, ‘Capital/Principal’, reveals the true cost or true sales consideration.
Brokerage and Other Expenses:
Generally, investment transactions are made through brokers. They charge a certain small commission against their services which is known as ‘Brokerage’. But the stamp duty at the prescribed rates is also to be paid in executing the transaction.
Since the brokerage and stamp duty are capital in nature, these are to be added with the cost price of the investments, i.e., brokerage will be added at the time of purchasing the securities and the same will be deducted from the sale price of the investment at the time of sale. As a result, only the net price is to be recorded in the ‘capital’ column of the Investment Account.
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