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Learn What is Investment ? and Types of investment

What is Investment ? and Types of investment

What is Investment ? and Types of investment


If you are pursuing CA then you must want to learn about Investment as it one of the important topics of Accounting – CA Inter accounts Group 1. In this article we discuss Investment at a glance. Even the topic is important for others also, as when we think of money or savings, we think of investing the money first in order to get back more money from the existing one. So everyone must know about what is investment, what are the types of investment, and what are Fixed deposit securities/ Variable Income securities before proceeding to investing money. Let’s dive in the topic:


What is Investment?

Investment in accounting means laying out of money or capital in an enterprise with the expectation of profit/ income.Investments are assets held by an enterprise for capital appreciation or for earning income by way of dividends, interest, and rentals or for other benefits to the investing enterprise. Investment does not include the assets which are held as Stock-in-trade. Investment means to spend money outside the business in order to earn some profits which are non-trading in nature.

Investment Account is an account opened for the investment purpose. In case the number of investment is large, a separate account for each investment should be opened.


Types of Investments

Fixed Income Securities:

Holders of these get fixed rate of interest on securities. Usually the returns of such securities fall due on certain specific dates such as 30th September or 31st March. The investment in Government Bonds, Securities and debentures comes under this category.
For example, if Mr. A purchase 5,000, 10% Government Bonds @ Rs. 100 and interest is payable on 30th September or 31st March. Then Mr. A will have an income of Rs. 50,000 and Rs. 25,000 will falls due on 30th September and Rs. 25,000 on 31st March.


Cum-Dividend or Cum-Interest:

It is where the right to receive interest/ dividend transfers from the seller to the buyer then it is known as Cum-Interest or Cum-Dividend.

For example:
A shareholder Mr. Y sold his shares to Mr. Z, after keeping those shares in his hand up to 8 months. Dividends on those shares will be paid to the buyer i.e. to new shareholder Mr. Z. Thus, a seller i.e. Mr. Y at the time of selling shares will charge value of the accrued dividends up to the date of sale, and this is called Cum-dividend or Cum-interest.


Ex-Interest or Ex-Dividend:

When the seller retains the right to receive the interest/dividend then it is called as Ex-Interest orEx-dividend.Here the person who owns the security on the ex-dividend date will receive the payment, regardless of who currently holds the stock.


Cost of Purchase:

Net Sales proceeds:


Amount paid is inclusive of purchase price, brokerage, stamp duties etc.
Interest is to be calculated on face value/ nominal value.
Brokerage is to be calculated on purchase price.
If nothing is specified whether Ex-Interest or Cum-interest then it will be assumed as Ex-interest only.


Variable Income Securities:

Holders of these will get return on investment which may differ from year to year. In this rate of return is not fixed i.e. variable. Investment in shares comes under this category. The rate of dividend on shares is fluctuating.
For example, in first year the return may be 10% and in second year it may be 15%.
Usually, shares are purchased as investment through brokers who charge a small rate of commission on both purchase and on sales.
In case of purchase of shares, brokerage or commissions will be added with the cost price of shares whereas, in case of sale, brokerage and commission will be deducted from sale price.


Right shares:

1. Right shares are first offered to the existing shareholders of the company as a matter of the right.
2. When right shares offered are subscribed for then the cost of the right shares is added to the carrying amount of the original holdings.
3. If original shares are acquired on cum-right basis and right shares are not subscribed for and are sold in the market then to the extent of reduction in market value the amount is reduced from the carrying amount and the balance is credited to the profit and loss account.
4. If original shares are acquired on ex-right basis and right shares are not subscribed for and are sold in the market then sale proceeds is credited to the profit and loss account.


Bonus Shares

In case of bonus shares there will be no cost of acquisition and thus face value must be increased i.e. only number of the shares will be added in face value column, and principle or capital column will remain same.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


Current Investments:

Current Investments are investments which by their nature are readily realizable and are intended to be held for less than a year from the date when such investment is done. The carrying amount for current investments is the lower of cost or fair value.


Long Term Investments:

Long term investments are usually carried at cost. But, when there is a permanent decline in value of long-term investment, carrying amount is reduced for recognizing such decline. This reduction is charged to profit and loss account.


Re-classification of Investments:

When a long term investment is reclassified as current investment then transfer is done at cost or carrying value, whichever is lower.
When current investment is reclassified as long term investment then transfer is done at cost or fair value/ market value, whichever is lower.


Disposal of Investments:

On disposal of investment, the difference between the carrying amount and disposal proceeds (net of expenses) is recognized in profit and loss account.


Disclosures in Financial Statements:

1. The following disclosures are to be made in financial statements as per AS 13 (Accounting for Investments) :
2. The accounting policies to be applied to determine the carrying amount of investments.
3. The amount included in profit and loss statement for:
4. Interests and dividends (Dividends from subsidiary companies are to be shown separately).
a. Rentals on investments (Income from long term investments and current investments are to be shown separately).
b. Amount of income tax deducted at source (TDS) being included under Advance tax paid.
c. Profit and losses on disposal of current investments and changes in carrying amount of such investments.
d. Profit and losses on disposal of long term investments and changes in the carrying amount of such investments.
5. Significant restrictions on the right of ownership, reliability of investments or the remittance of income and proceeds of disposal.
6. The aggregate amount of quoted and unquoted investments, giving the aggregate market value of quoted investments.
7. Other disclosures as specifically required by the relevant statute governing the enterprise.


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March 23, 2020

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