Investment Accounting As 13

Financial Accounting Nimesh Sir
INVESTMENT ACCOUNTING (AS-13)

Investment means parking or investing the money for better returns, it is done by
government, shareholders, individuals, etc…
Investment account deals with individual investment only. That is investment made
by INDIVIDUAL person.
Investments are done based on RISK & RETURN.
Investments, which give, FIXED RETURN/INCOME like DEBENTURES &
BONDS on which investors get income as a fixed rate of return.
There are investments on which FLUCTUATING returns are received like
SHARES on which shareholders receive DIVIDEND, which is not fixed.
Interest on dividend is always calculated on FACE VALUE of the security.
INVESTMENT
FIXED INCOME FLUCTUATING INCOME

Bonds and debentures Shares
Interest and income Dividend and income
Face value Rs.100 Face value Rs.10
Low risk High Risk
Concept of Ex-interest and Cum-interest
The concept of EX-INTEREST and CUM-INTEREST is applicable in care of

security or investment having Rate of Return i.e. Debentures and Bonds.
This concept is based on fixed income that is interest on investments. Debentures
holder get fixed interest on income, irrespective whether company earns profit or
not. Because of the fixed interest whenever the debenture is purchased or sold the
interest amount for the period of debenture holder can be demand from 3 rd party.
Generally, company pays interest half yearly and whenever debenture is, purchase
1
or sold in between the period of interest, investor can ask for the interest amount
from the last date of interest received until the period of holding.
 When such interest amount is ask or charged separately from cost price
it is called as EX-INTEREST
 On the other hand, interest ask or charged along with the cost price, that
is; inclusive of interest amount is called as CUM-INTEREST.
 As per AS-13, the cost price and the interest amount has to be recorded
separately.
 CASE STUDY:
In this case, Mr. A will get interest for the month of June. When Mr. A sale
investment on 30thNov. to Mr. B, then Mr. A can ask for interest amount for
the period of holding, that is; from 1st July to 30thNov, when such interest is
ask separately from cost price it is called “EX-INTEREST”, in other hand
when cost price is included such interest is called as “CUM-INTEREST”.
In other words, MR. B will receive interest from company for 6 months of
which the interest of 5 months is already paid to Mr. A.
Any profit or loss on sale of investment is calculated by WEIGHTED AVERAGE
COST method.
At the end of the year, investment will be recorded on the cost or market value
whichever is less.
As per AS-13, valuation is mandatory to record at the end of the year. Balance in
interest column will be transformed to P&L Account.
ACCOUNTING ENTRIES:
 Investment purchase:
Investment a/c Dr.
To bank a/c
(Being investment purchase)
2
 Investment sold:
Bank a/c Dr.
To investment a/c
(Being investment sold) – At this point there will be Profit or Loss on sale
 Interest received from company:

Bank a/c Dr.
To interest a/c
(Being interest received)
INVESTMENT IN SHARES
Share is the smallest part of the entire share capital of the company. There are
different types of shares like EQUITY SHARES, PREFERENCE SHARES,
SWEAT EQUITY SHARES and ESOP. Investment accounting deals with
investment in EQUITY SHARES. Equity shares have a face value of
generally Rs. 10 but dividends on such shares are not fixed. Equity share
holders are the risk takers and they are real owners of the company. They are
eligible for BONUS SHARES and RIGHT SHARES.
BONUS SHARES: It is also known as CAPITALISATION OF RESERVES.

This is issued by the company to its equity shareholders at free of cost. The
cost of bonus share is NILL. The company on proportionate basis issues it.
RIGHT SHARES: These are the shares issued by the company to its
EXISTING EQUITY SHARE HOLDERS. On proportionate basis at a price
which is below MARKET PRICE of the shares. Share holder have a right to
renounce, that is; transfer their right shares to another equity share holder
called as RIGHTS OF RENOUNCEMENT.
3
Example: Mr. A has 1000 Eq. shares

Company gives him right shares in the ratio of 2:1 @ 115
Mr. A is eligible to get:
5000 right shares
He buys 3000 shares from balance 2000 shares were
Company @115 sold to Mr. B @ Rs. 5 per
Share (@ Rs. 120)
 Profit of Rs. 5 per share received by Mr. A will be recorded and transferred to
P&L a/c.
 Dividend is paid by company during the year for last year so….
 Dividend received on the shares held during last year will be treated as
income.
 Dividend received on the shares purchased during the year will be
treated as cost and transferred to the cost column
 Bonus and dividend shares are not eligible for dividend because they
are issued during the year.
LAST MINUTE REVISION (LMR):-

1. Investment accounting is governed by AS-13.
2. Interest or dividend is calculated on face value.
3. Any balance of interest on year ended is transferred to P&L a/c.
4. Any profit or loss on the sale of investment is calculated by WEIGHTED
AVERAGE COST method.
5. Short term investment costs on market value whichever is less.
6. Long term investment – Historical cost.
7. Fixed income - Securities – debentures and bonds.
8. Variable income/Fluctuating income – Shares.
9. Bonus shares –free of cost (capitalization of reserves).
10.Right Shares – to existing shares holders. Any profit on renouncement of
right shares will be transferred to P&L a/c and not in investment account.
11.On 31st . march any loss on valuation is mandatory to record.
12.At the end of the year balance in dividend will be transferred to P&L a/c.

Investment Accounting As 13

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Financial Accounting Nimesh Sir

INVESTMENT ACCOUNTING (AS-13)

FIXED INCOME FLUCTUATING INCOME

The concept of EX-INTEREST and CUM-INTEREST is applicable in care of

 Interest received from company:

BONUS SHARES: It is also known as CAPITALISATION OF RESERVES.

Example: Mr. A has 1000 Eq. shares

LAST MINUTE REVISION (LMR):-

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