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AS-13 Investment Accounting Overview

Investment accounting deals with individual investments and is governed by AS-13. There are two types of investments - those with fixed returns like bonds and debentures that pay interest, and those with fluctuating returns like shares that pay dividends. When securities like debentures are bought or sold between interest payment dates, interest is accounted for separately as ex-interest or cum-interest. Profits or losses on sale of investments are calculated using the weighted average cost method. At the end of the year, investments are recorded at cost or market value, whichever is lower.

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75 views4 pages

AS-13 Investment Accounting Overview

Investment accounting deals with individual investments and is governed by AS-13. There are two types of investments - those with fixed returns like bonds and debentures that pay interest, and those with fluctuating returns like shares that pay dividends. When securities like debentures are bought or sold between interest payment dates, interest is accounted for separately as ex-interest or cum-interest. Profits or losses on sale of investments are calculated using the weighted average cost method. At the end of the year, investments are recorded at cost or market value, whichever is lower.

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ALANKRIT TRIPATHI
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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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
Financial Accounting Nimesh Sir

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
Financial Accounting Nimesh Sir

 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
Financial Accounting Nimesh Sir

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).
[Link] 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.
[Link] 31st . march any loss on valuation is mandatory to record.
[Link] the end of the year balance in dividend will be transferred to P&L a/c.

Common questions

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At year-end, balances in the interest or dividend columns are transferred to the Profit & Loss account. This process involves shifting these balances from temporary accounts to a permanent accounting record, affecting the overall income statement and reflecting the actual income earned from investments over the period .

The 'Weighted Average Cost' method calculates profit or loss on the sale of investments by averaging the cost price of the units held. When units are sold, the sale price is compared to this average cost, and the difference determines the profit or loss. This method smooths out price fluctuations over time, providing a consistent basis for financial evaluation .

The face value of shares is crucial because dividends and interest are calculated based on it. For fixed-income securities like debentures and bonds, investors receive a described rate of return based on face value, which can make these investments attractive for those seeking predictable income. On the other hand, dividends on equity shares, calculated from face value, can be variable and uncertain, influencing investors to assess the risk-return trade-off carefully when investing .

Separating the cost price from the interest amount in debenture transactions ensures clarity in financial reporting and aligns with AS-13 requirements. This separation helps in accurately determining the income earned solely from the investment and distinguishing it from the gained interest, which can affect the cash flow and financial position assessments .

'Ex-interest' refers to the scenario where the interest is demanded separately from the selling price of the security, and 'Cum-interest' means the interest is included in the selling price. This concept is applicable to securities with fixed income such as debentures and bonds. For example, if Mr. A sells debentures to Mr. B on November 30th, Mr. A can demand interest from July 1st to November 30th separately, making it an 'Ex-interest' sale. However, if the interest for the period is included in the selling price, it is 'Cum-interest' .

Equity shareholders are considered the real owners of a company because they hold a residual claim on the company's assets and income, entitling them to dividends, voting rights, and a share in profits. They benefit from potential capital gains and have the right to participate in company decisions, unlike preference shareholders who primarily receive fixed dividends but possess limited control over corporate policies .

Bonus shares, also known as capitalization of reserves, are issued to equity shareholders without cost and represent a conversion of reserves into share capital. Right shares, however, are issued to existing equity shareholders at a price below the market price, and shareholders have the right to renounce or transfer these shares to another shareholder. Unlike right shares, bonus shares do not involve any outlay from shareholders .

Unmet valuation losses at year-end must be recorded according to AS-13, as they impact the financial statements and provide a more accurate reflection of the company's financial position. Recording these losses ensures transparency and accountability, helping stakeholders make informed decisions .

When purchasing investments, the accounting entry is 'Investment a/c Dr. To bank a/c' for the purchase. When selling investments, the entry is 'Bank a/c Dr. To investment a/c', with any resulting profit or loss calculated using the Weighted Average Cost method recorded at this point. The profit or loss is then transferred to the Profit & Loss account .

According to AS-13, short-term investments are valued at cost or market value, whichever is lower, while long-term investments are valued at historical cost. This distinction helps ensure that investment values reflect current market conditions for short-term holdings while maintaining stability in the valuation of long-term investments .

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