B.

COM 5TH SEM ADVANCE FINANCIAL ACCOUNTING 1

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Unit – 4: Investment Accounts

Meaning of Investment and its types
The term ‘Investment’ refers to funds invested in various securities consisting
of government and semi government loans, debentures of local authorities such
as port trusts, municipal corporations and the like and debentures and shares of
companies. Accounting Standard 13 issued by the Institute of Chartered
Accountants of India defines investment as, “Investments are assets held by an
enterprise for earning income by way of dividends, interests and rentals, for
capital appreciation, or for other benefits to the investing enterprise. Assets held
as stock-in-trade are non-investments”. Securities may be fixed interest
securities and variable yield securities. Fixed interest securities are those
securities which carry a fixed rate of interest while the securities (such as shares
of companies) on which dividend may fluctuate from year to year are called
variable yield securities.
Investments may be a fixed asset or current asset. If the investments are held
permanently for a long period time, they will be regarded as fixed assets and
known as ‘trade investments’. But where the object of the business is to buy
and sell securities or these are held as a temporary investment of surplus liquid
resources for not more than one year, then they will be regarded as current
assets or marketable securities.
Investments Accounts
(a) As Trade Investments: The investments which are made permanently for
a regular income outside the business is known as Trade Investment. These are
treated as fixed assets. That is why if this type of investments are sold at a
profit, profit on such sale of investment is transferred to Capital Reserve
Account and not to Profit and Loss Account.
(b) As Marketable Securities: Sometimes a business wants to invest its idle
cash purely on a temporary basis (of course, if the rate of earning is higher than
cost of capital). This type of investment is known as Marketable Securities and
is treated as Current Assets. That is why profit or sale of such investments is
transferred to Profit and Loss Account and not to Capital Reserve.
Investment Accounts:
The accounts of investments are kept in the same way as the accounts of any
other asset. A separate investment account should be opened for each kind of
security and on the head of the account particulars regarding the nature of the
security, dates when interest or dividend is due, the date of redemption etc.
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should be stated. When the number of investments carried is large, a separate

investment Ledger is employed for recording all investment accounts.
Features of Investment accounts:
1. It is a real account.
2. Investment account is divided into three columns. First column show
nominal value of investment, second column show interest and dividend and
third column shows cost of investment or sale proceeds of investment.
Purpose of maintaining an investment ledger is as follows:
1. It helps in keeping a record of each investment separately.
2. It helps to ascertain the value of securities at the end of the account period.
3. It is helpful in collection of interest and dividend as and when they become
due.
4. It is helpful in ascertaining the amount of accrued income at the end of the
accounting period.
5. It facilitates the determination of the profit or loss on sale of any security.
Preparation of Investments Account
Concerns holding a large number of investments may find it more convenient
to use a separate ledger called an Investment Ledger, for keeping the accounts
of all their investments. Such a ledger is kept on the columnar system and is
ruled differently from an ordinary ledger. As the issuing authority of a security
pays interest to the holder at a certain rate calculated on its face value, it is
desirable that the face value (also known as the nominal value) as well as the
interest or dividend received should appear side by side with the capital
invested in it. Therefore, the investment Ledger is provided with three columns
on either side headed ‘Nominal Value’,’ Interest or Dividend’ and ‘Capital or
Principal’. The name of each investment is written at the tip of the account
followed by the rate of interest or dividend and the dates on when it is payable;
when an investment is purchased “cum-dividend”, ‘ex-dividend” its cost is
analyzed into the nominal price and the dividend or interest accrued and as
entry is made on the credit side of the Cash Book, from where it is posted to the
respective columns on the debit side of the particular Investment Account in the
Investment Ledger. When the whole or part of the investment is sold, the price
received, similarly split up into the nominal price and the dividend or interest
accrued, is entered on the debit side of the Cash Book, from where it is posted
to the respective columns on the credit side of the particular Investment
Account in the Investment Ledger. Expenses by way of brokerage, stamps etc.,
will be debited to the capital account. When dividend or interest accrued on an
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investment is received, it is first entered on the debit side of the Cash Book and
then posted to the credit side of the particular Investment Account in the
‘Dividend or Interest’ column in the investment Ledger. At the close of the
financial year, the dividend or interest accrued on different investments, but not
received, is brought into account by crediting the ‘Dividend or Interest’
columns of the different Investment accounts in the Investment Ledger and
bringing down such balances as an asset after the accounts have been balanced.
The first column is of Nominal Value and in it on the credit side is entered the
nominal value of investments on hand and the totals on both sides will then
agree.
The second column is of Interest or Dividend and it will always show a credit
balance representing interest or dividend on investments for the period and it
will be carried to Profit and Loss Account.
The third column is for Capital or Principal. In this column against the closing
balance will be entered the value of securities is hand and the difference of the
two sides will show profit or loss on the sale of investments during the period.
Value of securities in hand is the lower of cost and fair values as per Para 14 of
AS – 13.
Balancing the Investment Account
When the whole of an investment has been sold, the difference between the two
sides of an Investment Account will be profit or loss on the sale. Where only
part of an investment has been sold during the year, the cost of the remaining
investment will be brought down as a balance in the Investment Account and
the difference between its two sides will be profit or loss on the investments
sold. When the investment is a fixed asset, any profit or loss made on the sale
thereof will be of a capital nature and should be treated accordingly.
Treatment of Bonus shares, Rights Shares and Brokerage in investment
account
Bonus Shares: When successful companies issue bonus shares to capitalize
their reserves, the shareholders are not required to pay any amount for such
shares. The number of shares will be entered in the number column and nothing
will be added in the amount of principal or capital column. When bonus shares
are sold, the profit on such shares is calculated by deducting average cost of
shares sold from sale price of bonus shares. Valuation of investment in shares
should be made at market value or average cost price of shares, whichever is
lower.
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Right shares: If shares are first offered to the existing shareholders as a matter
of their right, such shares are called right shares. Such shares may be purchased
by the shareholder or the right may be renunciated in favour of a third party for
a consideration. If the shares are purchased, the number of shares & amount
paid will be entered in the number & principal columns actively. If the shares
are not subscribed for but are sold in the market, the amount received will be
entered only in the profit and loss account.
Brokers and Brokerage: Brokers are primarily Commission agents and act as
an intermediary between buyer & seller of securities. They do not purchase &
sell securities on their behalf. They bring together buyers & seller and help
them making a deal. They charges commission from both parties. Such
commission is called brokerage. Brokerage is added with cost of investments
and deducted with sale proceeds of investments.
Concept of Jobbers and Brokers and their difference
Jobbers:Jobbers are security merchants dealing in shares, debentures as
independent operators. They buy & sell securities on their own behalf and try to
earn through price changes. They directly deal with brokers who make
transactions on the behalf of public. They generally quote two price, one – for
purchase and other for sell. The difference between the two prices constitutes
his remuneration. This system enables specialisation in the dealings and each
jobber specialises is certain group of securities. It also ensures smooth and
prompt execution of transactions. The double quotation of a jobber assures fair-
trading to investors.
Brokers: Brokers are primarily Commission agents and act as an intermediary
between buyer & seller of securities. They do not purchase & sell securities on
their behalf. They bring together buyers& seller and help them making a deal.
They charges commission from both parties. They are experts in estimating
prices and advise their clients in getting gain. They get orders from public and
execute the orders through jobbers.
Difference between Jobber and Broker
Basis Jobber Broker
Meaning Jobber is a dealer who Broker is an agent who deals in
deals in buying and selling buying and selling of securities
of securities. on behalf of his client.

Specialisation Jobber is a specialist Broker is a general mercantile

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Basis Jobber Broker

mercantile agent. agent.
Nature of trading A jobber carries out A broker carries out trading
trading activities only with activities with the jobber on
the broker. behalf of his investors.

Restrictions on A jobber is prohibited A broker Acts as a link between

dealings from buying or selling the jobber and the investors. He
securities directly in the trades i.e. buyers and sells
stock exchange. Also he securities on behalf of its
cannot directly deal with investors.
the investors.
Agent Jobber is an independent Broker is merely an agent to
dealer or a merchant buy or sell on behalf of his
willing to buy and sell clients.
securities.
Form of A jobber gets A broker gets consideration of
consideration consideration in the form commission or brokerage.
of profit.
Price Quotations Jobbers quote two prices Broker has to negotiate terms
to the broker, one for and conditions of sale or
buying and one for selling. purchase and safeguard his
Sale quotation is higher client’s interest.
than the purchase
quotations.
Contango and Backwardation: Contango and backwardation are two
technical terms used in the futures market. These terms are used to describe the
position of futures price in comparison with the spot price
Contango: Futures markets, by definition, are predicated on the future price of
a commodity. Analyzing where the future price of a commodity is heading is
what futures trading is all about. Because futures contracts are available for
different months throughout the year, the price of the contracts changes from
month to month. In a normal market, futures price would be greater than the
spot price due to the effect of cost of carry. This situation is generally referred
to as a ‘Contango’ market. The market is also in contango when the price of the
front month is higher than the spot market, and also when late delivery months
are higher than near delivery months.
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Backwardation is just the opposite of Contango. In some special situations, the

futures prices may be decided by factors other than cost of carry. In such cases,
futures may trade below the spot. Such situations, where the spot price minus
futures price (basis) is a positive figure, is generally termed as ‘backwardation’
market. It occurs normally in an "inverted futures curve" environment.
Essentially, on the maturity date, the futures price will converge higher to the
spot rate. This means that a commodity is worth more right now than it is in the
future.
Difference between Contango and Backwardation
Basis Contango Backwardation
Definition Contango refers to the It refers to the market situation where
situation where the Future the Future prices are lower than the
prices of stock are higher current spot prices for a particular
than the current spot price commodity.
Future If a commodity market is in If a commodity market is in
Curve contango, the future price Backwardation, the future price curve is
curve is considered to be in considered to be in an“downward-
an “upward-sloping” or sloping” or inverted market
normal market.
Price Future Price is more than Future Price is less than the Spot Price.
Difference the Spot Price.
Most Contango mostly happens in Backwardation commonly happens in Oil
Happen Commodity market market
in Case of
Driving Contango is a supply driven Backwardation is a demand driven
factors market situation. market situation.
Cum-interest and Ex-interest price
The term ‘Cum’ and ‘Ex’ are latin words. ‘Cum’ means with and ‘Ex’ means
without. The term ‘Cum-interest’ and ‘Ex-interest’ relate to debentures and
bonds. Cum-interest can be expanded as inclusive of interest and Exinterest can
be expanded as exclusive of interest. Cum interest is the amount of interest
accrued in the duration between the last interest date and the settlement date or
transaction date. The cum-interest price includes not only the cost but also
includes the interest accrued upto the date of purchase, and when interest
becomes due it would be the right of the buyer to claim interest. Conversely,
the quotation, Ex-interest, covers only the cost of the debentures and the buyer
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is liable to pay additional amount as interest accrued upto the date of purchase
of debentures.
Difference between Cum-interest and Ex-interest Meaning
Basis Cum-interest Ex-interest
Meaning It means the price of debentures It means price of
with interest debentures without
interest.
Right to The buyer gets the right to The seller retains the right
interest received interest paid after the to receive interest accrued
sale. during his holding.
Price The price is higher than what The price is lower than
would have to be paid otherwise. what would have to be
paid otherwise
Accrued In case of cum-interest nothing is In case of ex-interest,
interest payable for interest accrued. accrued interest is payable.
Cum-interest and Ex-interest price
The term ‘Cum’ and ‘Ex’ are latin words. ‘Cum’ means with and ‘Ex’ means
without. The term ‘Cum-dividend’ and ‘Ex-dividend’ relates to shares. Cum-
dividend can be expanded as share price inclusive of dividend and Exdividend
can be expanded as share price exclusive of dividend. Cum dividend is the
amount of dividend accrued in the duration between the dividend declaration
date and the settlement date or transaction date. The cum-dividend price
includes not only the cost of investment but also includes the dividend accrued
upto the date of purchase, and when dividend is declared it would be the right
of the buyer to claim dividend. Conversely, the quotation, Exdividend, covers
only the cost of the investment and the buyer is liable to pay additional amount
as dividend accrued upto the date of purchase of debentures.
Difference between Ex-dividend and cum-dividend
Basis Ex-dividend Cum-interest
Meaning It means price of shares without It means price of shares with
dividend. dividend.
Right to The seller retains the right to The buyer gets the right to
dividend receive any dividend declared dividend received dividend
or paid after sale. declared or paid after the sale.
Price The price is lower than what The price is higher than what
would have to be paid would have to be paid otherwise.
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otherwise.
Accrued In case of cum-Dividend In case of ex-dividend, accrued
Dividend nothing is payable for interest dividend is payable.
Dividend.