How do you Record Investments in Accounting by ChoksiTax

1. How do you Record Investments in Accounting? In a majority of the cases, when the term investments are used, people tend to think about “stock investments”, i.e., bonds, stocks, and mutual funds. Though this thinking is not entirely wrong, investments in accounting go much beyond stocks. What is An Investment? Investments are the assets owned, which reap income in the form of dividends, rentals, interest, and other benefits. They are solely done with the benefit of creating income on assets, thus maximizing the value of the asset. The income which is reaped from these investments goes to the concerned investor. Example: A monetary asset (building) that is purchased by an investor has the sole motive of providing income (capital gain) in the future. Today’s capital investment will increase its value for tomorrow. When the capital investment is utilized by putting money, time, and effort into it, it enhances its future value. There is no concrete definition of investment since the same differs from transaction to transaction. In a nutshell, any transaction made to generate future income is an investment. In this article, we will discuss transactions that are viewed as financial investments

2. Types of Investment Methods: Investment methods are best classified into 3 categories. Equity Investments Hybrid Investments Debt Investments •Loans •Company Onwership in the form of shares •Convertable securities,stocks, bonds, etc. 1.Debt Investments: There are 2 categories of debt investments. Public Debt Investments: Public debt investments are investments like debentures, bonds, etc. which be able to be traded in the open markets. Each classification of these public accounting for investments is done under varied heads as per defined accounting guidelines. Private Debt Investments: Private debt investments are investments done to gain the debt of private companies for generating future income and which cannot be traded in the open markets. These investments are done with the motto of creating an asset in the B/S. 2.Equity Investments: Equity investments are the money that is invested in buying shares of a company from the stock market. Equity investments are further classified into varied categories like: Investment in shares Investment in mutual funds Investment in real estate funds

3. 3.Hybrid Investment: A blend of both the above types of investments (debt & equity) is called hybrid investments. These investments are done to minimize the risks involved in the transaction of securities. Stocks and convertible bonds are a few examples. How to Record Investments in Accounting: When you purchase a company’s stock, it enhances your investment, whereas decreasing your cash. So, to record this entry on a balance sheet, you need to debit your investment account with the purchase price of the stock and credit your cash account with the same amount. 1.Accounting for Debt Securities: When accounting of debt securities (investment in bonds) is to be done, the acquisition costs (market price of the bond + broker fees) are recorded as “Debt Investments” in the asset account. When interest on these bonds is received at the end of each year, the entry to record it will be as below.

4. During a sale transaction of the bond, any loss or gain will be calculated as per the difference between book value and the amount at which the bond is sold.

5. 2.Equity Investments: This investment is accounted for by using the cost method. The loss or gain is decided by the sales transaction of the investment. The entry will be as shown in the below image. When a dividend is received on these equity investments, it increases cash and dividend revenue.

6. 3.Hybrid Investment: Hybrid securities do meet the need of many investors, but sometimes these securities are complex and hence it becomes a tough call to bifurcate the same. Will they cover the debt investment or the equity investment? This question confuses many investors, who tend to make accounting mistakes. These risky investments not only confuse retail investors but also institutional investors who are ignorant while purchasing hybrid security. So, the accounting of this security solely depends on the type of hybrid investment made by the investor. Tip:Choksi Tax Services are accounting experts who specialize in providing Accounting For Investments for individuals as well as corporates. Their qualified professional team helps in giving appropriate advice on investments and taxation. Accuracy and transparency in work are some of their positives. So, don’t scratch your head when you are confused, about accounting investments and their placements in balancesheets. Go ahead, and approach this firm for resolving your doubts since this single-stop destination will resolve all your accounting and taxation issues.