Financial Accounting - Investment Account

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 −
Investment A/cDr
On purchase of investment
To Cash/Bank A/c
(Being Investment made)
Note − Investment account is inclusive

of purchase expenses like stamp duty,
Commission, and brokerage.
Cash/Bank A/cDr
To Investment A/c
On Sale of investments (Being Investment made)
Note − Investment account will be

credited with net realized value of
investment.
Cash/Bank/Investment A/cDr
To Dividend/Interest A/c
(Being Interest/dividend received on

investments)
Interest and dividend account
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
Investment A/cDr
Dividend or Interest A/c

On purchase of investment
To Cash/Bank A/c
(Being Investment made)
Cash/Bank A/cDr
On receipt of dividend or interest To Dividend or Interest A/c
(Being dividend or interest received)
Accrued Interest A/cDr
for Accrued Interest 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 )
Cash/Bank A/cDr
On receipt of dividend or Interest 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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Financial Accounting - Investment Account

There may be two types of securities −

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

Note − Investment account is inclusive

On Sale of investments (Being Investment made)

Note − Investment account will be

(Being Interest/dividend received on

 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

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

In the Books of Buyer

Dividend or Interest A/c

(Being Investment made)

On receipt of dividend or interest To Dividend or Interest A/c

(Being dividend or interest received)

Accrued Interest A/cDr

for Accrued Interest To Interest A/c

(Being interest accrued)

In the Books of Seller

On Sale of investments Cash/Bank A/cDr

To Dividend or Interest A/c

(Being Investment Sold )

On receipt of dividend or Interest To Dividend or Interest A/c

(Being dividend or interest received)

Ex-Dividend or Ex-Interest Quotations

Difference between Cum-dividend and Ex-Dividend

 Nothing is payable additional in case of Cum-Interest, whereas separate amount of the

Balancing the Investment Account

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