WHAT IS INVESTMENT? 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.”

PURPOSE OF MAINTAINING INVESTMENT ACCOUNTS It helps in keeping a record of each security separately. It helps to ascertain the value of securities at the end of the accounting period. It is helpful in collection of interest and dividend as and when they become due. It is helpful in ascertaining the amount of accrued income at the end of the accounting period. It facilitates the determination of the profit or loss on sale of any security.

CUM DIVIDEND QUOTATIONS On fixed investments interest goes on accruing day by day but it is paid periodically on fixed dates. The transactions of investments do not necessarily take place on those dates and so at the time of the sale of investment, it has to be settled as to who will get the next installment of interest or dividend which is absence of an agreement goes to the purchaser. The share is then said to been sold “cum dividend” or together with dividend, the right of receiving dividend being passed on to the purchaser.

ILLUSTRATION - On 31 st January 2009, X purchased for cash from Y four 6% Rs 100 debentures of the Mehta ltd. At 110.5% cum interest ; interest being payable on 1 st June and 1 st December each year. How will you record the transactions in the books of X and Y if each party had to pay bank commission of 2% paisa per cent on the face value? IN THE BOOKS OF XRS Purchase price of 4 Rs each cum interest Add: bank % on 400 face value Total cost Less: accrued interest for the past 2 months from dec1,2008 to 6% p.a on Rs Value of Investment439

IN THE BOOKS OF YRS Cum interest price of security Less: bank commission paid Total cost Less: accrued interest Capitalised cost of investment437

EX DIVIDEND QUOTATIONS When an investment is purchased “Ex dividend” the price paid is below the normal price, i.e, it is arrived at after deducting from the normal price dividend or interest receivable on the investment from the date of interest or dividend payment to the date of purchase. Therefore, when an investment is purchased Ex dividend, the purchaser has to pay to the seller the accrued interest upto the date of purchase in addition to the price paid for the investment.

IN THE BOOKS OF XRS Purchase price of 4 Rs ex-interest Add: bank commission Total cost of investment443

IN THE BOOKS OF YRS Selling price of ex interest Less: bank commission on Rs Net amount realised on account of sale of investment 441

DIFFERENCE BETWEEN CUM INTEREST AND EX INTEREST In case of cum interest purchase price includes the interest accrued up to the date of purchase whereas this is not included in case of ex interest. In case of cum interest nothing is payable for interest accrued whereas it is payable in case of ex interest. In case of cum interest, purchase price is more than the real price of the security but purchase price is the real price in case of ex interest.

COLUMNAR INVESTMENT ACCOUNTS 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 its 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 as well as the interest or dividend received should appear side by side with the capital invested in it.

ILLUSTRATION- Kolkata investments hold 400, 12% debentures of Rs.100 each in acme ltd. as on 1 st april, 2009 at cost of Rs.50,000. Interest is payable on 30 th june and 31 st december each year. On 1 st june, 2009, 200 debentures are purchased cum interest at Rs. 21,400. On november, 2001, 300 debentures are sold ex-interest at Rs. 28,650. On 30 th november, 2001, 200 debentures are purchased ex interest for Rs. 19,200. On 31 st December, 2001, 300 debentures are sold cum interest for Rs. 32,250. Prepare Investment account valuing closing stocks as on 31 st march,2010, at cost or market price whichever is lower. The debentures were quoted at par on 31 st march, 2010.

DATEPARTICULARSNOMI NAL INTE REST PRINC IPAL DATEPARTICULARSNOMI NAL INTERE ST PRINC IPAL To balance b/d To bank To profit n loss RS 40,000 20,000 - RS 1,200 1,000 5,200 RS 50,000 20,400 19, By bank By profit n loss (loss on sale) By bank By profit n loss (loss on sale) By bank (interest) By balance c/d RS 30,000 20,000 RS 3,600 1,200 1,800 1, RS 28,650 8,850 30,450 2,450 19,200 80,0008,40089,60080,0008,40089,600