Chapter – 4 Investment Accounts Chapter outcomes: 1.Meaning of investment; 2.Types of investment; 3.Investment transactions; 4.Cum-Interest (Dividend) price; 5.Ex-interest (Dividend) price; 6.Distinction between cum-interest and ex-interest ; 7.Practical exercises;

Meaning of investment Any kind of transferable certificate of ownership or indebtedness is called a ‘security’. Investment is the amount of money invested in various securities. Investment may be made in the securities of government, semi- government and corporate sectors. Examples, Central bank of Oman gold bond; Bonds and debentures issued by the local authority; Shares and debentures issued by joint stock companies; Bonds issued by the government

Types of investments The business may invest either in current asset or fixed asset. If the investments are made permanently to increase the earning capacity of the business, then they are considered as fixed assets. Usually the investments in fixed assets are held for a longer period. If the investments are made temporarily, then they are considered as current assets. Investments are made in various types of securities. Based on the periodicity of income of the securities, the securities are classified into two types: 1.Fixed income securities; 2.Variable income securities

Investment transactions Investment transactions refer to the purchase and sale of various securities. Bankers and brokers held in the process of investment transactions and they charge a nominal amount as commission or brokerage for their services. Investment may be bought and sold at either nominal value or market value. Nominal value refers to the face value of the security. Market value is the price at which it is worth in the market. The market price is influenced by various factors such as nature of income, regularity of income, rate of income, safety, political scene, demand, future prospects, etc. The market value of invests may be more or less than the nominal value

At the time of investment transactions, if the value of investments is equal to nominal value, then it is said to be traded “AT PAR”. If the value of the investments is more than the nominal value, then it is said to be traded “AT PREMIUM”. If the value of the investments is less than the nominal value, then it is said to be traded “AT DISCOUNT”. The income from fixed income bearing securities is received periodically on fixed dates. If any security is purchased on a day other than the date of declaration of interest by the company or the government, then the interest to be received should be settled between buyer or seller carefully because the company or the government pays interest or income on the security.

Cum-interest (dividend) price An investment transaction is said to be carried out at cum- interest price, when securities are purchased on any date other than the date of declaration of interest and it is agreed that the buyer holds the right to receive the interest income for the full period. Thus, the seller charges the price which includes the normal price of the securities plus the interest for the period for which he was holding the securities.

Ex-interest (dividend) price An investment transaction is said to be carried out at ex-interest price, when securities are purchased on any date other than the date of declaration of interest and the seller holds the right to receive the interest income for the full period. Thus, the seller charges the price which is less than the the normal price, i.e., the real price of the securities minus the interest for the period for which he was not holding the securities from the date of sale to the date of declaration of next interest.

Distinction between cum-interest and ex-interest Following are the points of distinction between the cum-interest price and ex-interest price of the investment transactions; 1.Price paid: The price paid by the buyer in case of cum-interest transaction is more than the real price of the securities; whereas the price paid by the buyer in case of ex-interest is less than the real price of the securities; 2.Calculation of real price – in case of cum-interest transactions, the real price of the security is arrived at by deducting the interest or dividend for the expired period from the actual price paid or cum- interest price. Whereas in the case of ex-interest transaction, the real price of the security is arrived at by adding the interest or dividend of the future period Receipt of full interest or dividend: In case of cum-interest price, the interest for the full period is received by the buyer, whereas in case of ex-interest, the interest for the full period is received by the seller

Accounting entries In the books of the buyer: 1.For the purchase of securities at cum-interest Price: Investment/Securities Account Dr. XXXX Interest/Dividend Account Dr. XXXX Bank/Cash Account Cr. XXXX (Being the purchase of securities at cum-interest price) 2.Purchase of securities at ex-interest price: Investment/Securities Account Dr. XXXX Interest/Dividend Account Cr. XXXX Bank/Cash Account Cr. XXXX (Being the purchase of securities at ex-interest price)

Accounting entries In the books of the buyer: 3. For interest or dividend received: Bank Account Dr. XXXX Interest or dividend Cr. XXXX (Being the interest received) 4. For interest accrued: Accrued interest Account Dr. XXXX Interest account Cr. XXXX (Being the interest accrued) 5. For closing the interest or dividend account: Interest or dividend account Dr. XXXX Profit and loss account Cr. XXXX (Being the interest or dividend transferred to P&L account)

Accounting entries In the books of the seller: 1. For the sale of securities at cum-interest or exs-interest: Bank Account Dr. XXXX Investment/securities Cr. XXXX Interest or dividend Cr. XXXX (Being the sale of securities) 4. For interest or dividend received: Bank Account Dr. XXXX Interest account or dividend account Cr. XXXX (Being the interest or dividend received) 5. For closing the interest or dividend account: Interest or dividend account Dr. XXXX Profit and loss account Cr. XXXX (Being the interest or dividend transferred to P&L account)