Different terms used- cum dividend or interest and ex- dividend or interest

Investment Transactions

We normally have the following two types of investments transactions:

• Cum Dividend or Cum Interest Quotations and
• Ex-Dividend or Ex-Interest Quotations

Cum Dividend or Cum Interest Quotations

Interest and dividend on the fixed investments accrued on regular interval, but payment of those are made only on fixed dates. Dividends are always paid to the persons, who are shareholder at the time of payouts. Suppose a shareholder sold his shares after keeping those shares in his hand up to ten months, then dividends on those shares will be paid to the buyer or we can say, to new shareholder.

So, a seller at the time of selling shares normally charge value of the accrued dividends up to the date of sale, and this is called ‘CUM DIVIDEND” or “CUM INTEREST”. Since, the sale price is inclusive of the value of a share and interest or dividend, therefore at the time of entry in the books of accounts, normal price of share should be booked in the investment account and the value of dividend or interest should be debited to dividend or interest account.

At the time of receiving dividend or interest, dividend or interests account will be credited, debiting cash or bank account. On the other hand, in the books of seller, normal price of the share should be credited to Investment account and the price of accrued dividend or interest should be credited to the dividend or interest account as the case may be.

Accounting Entries: It can be understand through the following table.

In the Books of Seller

x-Dividend or Ex-Interest Quotations

The buyer of shares when he is quoted ex-dividend is not entitled to receive the payment. It is the interval between the record date and the payment date during which the stock trades without its dividend. Therefore, the person who owns the security on the ex-dividend date will be awarded the payment, regardless of who currently holds the stock.

Difference between Cum-dividend and Ex-Dividend

Major differences between them are given as:

• Cum interest or dividend prices are inclusive of the interest or dividend accrued at the date of purchase, whereas in case of the ex-dividend, prices are excluding value of the dividend or interest.
• The purchase price is higher than normal purchase price in case of Cum-dividend, whereas purchase price is the real price in case of ex-dividend.
• Nothing is payable additional in case of Cum-Interest, whereas separate amount of the dividend or interest has to be paid in case of the ex-dividend or ex-interest.

Balancing the Investment Account

Difference of debit and credit side of the investment account is Profit or Loss in case where all the investments are sold.

In case where part of the investments are sold and the balance investments stand unsold, it should be carried forward to the next accounting period and remaining balance of the two sides (debit and credit) will represent profit or loss on the sale of investment.

In case where investments are the fixed assets, then the profit or loss will be of capital revenue or capital loss and should be treated accordingly.

Equity Share Accounts

• Bonus Shares: 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. Only number of the shares will be added in face value column, and principle or capital column will remain unchanged.
• Right Shares: Right shares are first offered to the existing shareholders of the company as a matter of the right, hence called as right shares. As per Companies Act, right shares can be issued after two years of the establishment of a company or after one year of first issue.