Before doing Accounting treatment of investment we should understand the meaning of following accounting terms which will use when will do accounting treatment.
☼ What is Investment ?
Investment are those assets of businessman by which he earn dividend , interest , rent or profit due to increase the value of investment .
Current stock is not called investment because businessman purchases them for selling, in other words, the do business of that stock.
Generally businessman invests money in property and building so, these are the basic investments.
According to Accounting Standard 13 “Investment is the assets held by enterprise for earning income by way of dividends, interest and rent."
☼ Types of Investment
Investment may be short term or long term.
We can also include shares, debentures, and bonds and mutual funds of other company, if we purchase them for the purpose of earning of interest or dividend from them.
☼ Type of Business
1. Commodity business: - These are general type of business which deal in products but invests his extra money in different property, shares and bonds.
2. Financial business: - If any business which deal in the trading of shares, or debentures or any other fixed property. Then his work is to purchase and sale of such product and earn profit from them. This is special case . According to AS -13 , at this time , these products will deem as his stock item not investment .
☼ Com- Interest Investment
When a businessman buys investment include its cost and accrued interest . Then this investment is called com-interest investment .
So it is the duty of accountant to separate both .
Calculation of accrued interest = face value of security purchase X period( months )
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12 X 100
Calculation of cost of investment = ( Quotation price X No. of security purchase ) – Accrued interest as per calculated
☼ Ex- Interest Investment
When businessman buys investment on its cost and gives accrued interest amount extra to the seller .
☼ Nominal Value
Nominal Value is face value of security . This is so important in investment accounting . Because interest is calculated on nominal value of security .
