Accounting for transactions of purchase and Sale of investments with ex and cum interest prices

(a) Purchase of Investment:

When investment is purchased, its face value is recorded on the debit side of Investment Account and the actual cost (including brokerage, stamp duty, etc.) is recorded in the principal column. But if the same is purchased under cum-interest/dividend basis, the accrued interest must be recorded in ‘Interest’ column and will be deducted from the purchase price as the real cost is to be recorded in ‘Principal’ column.

But, if the investment is purchased under ex-interest/dividend basis, the quoted price together with brokerage and stamp duty will be recorded in the ‘Principal’ column. The accrued interest is, however, entered on the Interest/Income column.

(b) Sale of Investment:

When investment is sold, the same is recorded on the credit side of Investment Account, the face value being recorded in ‘Nominal’ column; the net selling price is entered, however, in the ‘Principal’ column. But if the investment is sold as cum-interest/dividend, the accrued interest will be recorded in ‘Interest/Income’ column and the net selling price (capital portion) on the ‘Principal’ column.

On the contrary, if the same is sold as ex- interest/dividend, the accrued interest/dividend is received by the seller in addition to quoted sale price. The accrued interest/dividend is entered on the ‘Interest/Income’ column and the quoted sale price in the ‘Capital’ column.

(c) Profit or Loss on Sale of Investment:

The difference between the capital cost of securities and the consideration received towards capital at the time of sale reveals the profit or loss on sale of investment. The profit or loss may be ascertained either for each individual sale or may be ascertained for all selling transactions at the end of the year as a whole. And if the entire investments are sold, the difference between these two ‘Principal’ columns represents profit or loss, as the case may be.

But if a part of investments is sold, the balance of investments on hand should be ascertained first. Therefore, the balance is either valued at cost if the investment is treated as fixed asset, or the balance is valued at cost or market price, whichever is less if the investment is treated as current asset.

Naturally, the value of investments at hand is entered on the credit side of the Investment Account in ‘Principal’ column and the difference represents the profit or loss on sale of investment. The profit or loss on such sale is transferred to Profit and Loss Account if the investment is treated as a current asset or the profit or loss on such sale is treated separately if the investment is treated as a fixed asset.

(d) Balancing Investment Account:

The Balance of Investment account is ascertained at the end of the accounting period. The balance of ‘Nominal’ column reveals the face value of the investment in hand and after recording the closing balance of investment in ‘Principal’ column the profit or loss is to be ascertained (which has been explained earlier). And the difference between the two ‘Interest/Income’ columns represents income/interest from Investment Account which is, ultimately, transferred to Profit and Loss Account.

But, in the true sense of the term, Accounting Treatment depends on the date of purchase and sale of investment.

It may, again, be of two types:

1. Purchase and Sale of Investment just at the date of payment of interest; and
2. Purchase and Sale of Investment before the date of payment of interest.
3. When Purchase and Sale of Investment are made just at the date of payment of interest:

Under the circumstances, there will be no problem as to the cost of investment, because the quoted price does not include the amount of interest. The quoted price represents the cost of investment.

1. Purchase and Sale of Investment before the date of payment of interest:

Under the circumstances, question arises before us whether the quoted price of investment is inclusive of interest/dividend or exclusive of interest/dividend. In short, we are to face the problem of Cum-Interest and Ex-Interest.

Cum-Interest or Cum-Dividend:

Where the right to receive interest or dividend from the issuer of security passes from the seller to the buyer, the transaction is known as ‘Cum-Interest’ or ‘Cum-Dividend’ purchase or sale. In other words, when the accrued interest or dividend from the last interest or dividend date up to the date of transaction is included in the quoted price, the capital cost of investment purchased or sold is ascertained by deducting the accrued interest/dividend from the quoted prices. And the difference between the quoted price and the actual cost may be represented as ‘Cum-Interest’ or ‘Cum-Dividend’.

Ex-Interest or Ex-Dividend:

When the seller retains the right to receive the interest/dividend, the transaction is called ‘Ex-Interest’ or ‘Ex-dividend’ purchase or sale. In other words, when the price quoted is exclusive of accrued interest/dividend, the price so quoted is treated as the capital cost of investment, i.e., the buyer has to pay accrued interest due from the last interest date to the date of transaction to the seller along with the cost price of investment.

For Cum-Interest Purchase and Sales:

To Sum up:

When investments are purchased at Cum-Interest it means quoted price is inclusive of accrued interest. So, we are to ascertain the amount of interest and the same must be deducted from the quoted price in order to find out the cost. Investment will be debited with actual cost (to be posted in Principal column) and accrued interest will be debited with the amount of interest (to be posted in Interest column) and Bank Account will be credited for the total (i.e., quoted price).

Same principle is to be followed also in case of sale of investment which includes Cum- Interest, i.e., from the quoted selling price, the amount of interest will be deducted in order to ascertain the cost/principal for this purpose, Bank Account will be debited with total amount or quoted price and Investment Account will be credited at cost and Interest Account will be credited with the amount of interest.

Ex-Interest Purchases and Sales:

When investments are purchased at Ex-Interest, it means quoted price is exclusive of accrued interest. In that case, the Investment Account will be debited with quoted prices, Interest Account will be debited with accrued interest and Bank Account will be credited with total amount (i.e., quoted price plus interest).

Entries in Case of Ex-Interest Purchase:

But when investment are sold at Ex-interest, quoted price is exclusive of interest. In other words, Investment Account will be credited with quoted price and Interest Account will be credited with Accrued Interest and Bank Account will be credited with total i.e., quoted price plus interest.

Entries in the Case of Ex-Interest Sale:

Profit or Loss on sale of investment should be transferred to Profit and Loss Account. The entries for this purpose we have shown earlier.