Competitive Exams Commerce Study Material: 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
Commodity business: These are general type of business which deal in products but invests his extra money in different property, shares and bonds.
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 periodmonths _________________________________________________________ 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.
Journal Entries of transactions relating to investment
When investment is purchased interest date Investment account Debit Quoted price + brokerage X No. Of investment bank account Credit
When interest or dividend is received after purchase Bank Account Debit Investment Account Credit
When investment is sold at interest date Bank Account debit investment account Credit
For transfer of interest or dividend to profit and loss account at the end of year but there is no need to enter this entry in tally 9 because tally 9 automatically transfer to profit and loss account Interest account or dividend account debit Profit and loss account credit
Pass the journal entry of profit on sale of investment in manual or tally 9 both Investment Account Debit Profit and loss account Credit
At end of year show investment at cost price or market price which is less as asset in balance sheet but need no do in tally 9
On 1st jan 2008 S. P. Ltd purchase 1000 15 % debentures of Reliance Ltd. Of Rs. 100 each at the rate of Rs. 96 each. On 1st july 2008, ½ of debentures were sold at Rs. 99 each. Debenture interest is payable half yearly on 30th june and 31st December. Pass voucher entries in tally 9
1 Interest on 30th june 2008 will be received 15% on Rs. 100000 for 6 months interest = Rs. 100000 X 15/100 X 6/12 = Rs. 7500
2 ½ of debentures were sold@Rs.. 99. Therefore sale proceeds will be Rs. 99 X 500 = Rs. 49500
3 Interest on 31st December 2008 will be received@15% on Rs. 50000 for 6 months. Interest = Rs. 50000 X 15/100 X 6/12 = Rs. 3750
4 profit on sale of investment = 49500 − 48000 = Rs. 1500
For recording above transaction in tally 9
1 First of all create S. P. Ltd in tally 9
2 Activate interest calculation in feature F11
3 Create ledger of 15 Debenture in reliance Co. Account under investment account, bank account under bank account, Interest account under indirect income.
4 Pass the voucher entry of purchasing investment in payment voucher, sale of investment in receipt voucher and interest received on investment is in receipt voucher and profit on sale of investment transfer to profit and loss account in journal voucher.
Insurance is the contract in which Mercantilist pays minimum amount of premium to insurance company, and shift his burden of risk of loss on the head of insurance company.
Insurance company incurred the loss of Mercantilist if it is under the policy of insurance.
Generally Mercantilist does the insurance of many risks like fire of shop or office or plant, fire of stock and loss of profit.
If Godown or office caught fire. Suppose fire to Godown and insurance company's special evaluator can easily evaluate the loss of building due to fire. But it is most difficult to calculate loss of stock or loss of profit. Only accounting professionals can solve this problem with scientific rules and regulations of accounting.
Calculation the value of stock lost due to fire
You can make memorandum trading accounting-2nd Way
Memorandum trading account is not part of final account but it is just part of working notes for calculating the net value of stock due to fire.
From both above two methods we must need to calculate gross profit rate. There are following way to calculate gross profit of business. There are following way to calculate gross profit of business i Average of old year gross profit method ii Previous gross profit method G P Rate = Previous year Gross profit/Sale of previous year X 100
Average Clause Average clause means insurance company will pay only insurance in the proportion of actual loss. Before this rule businessman used to take insurance policy below the actual amount of his asset. So, Now under this method his claim will be reduced. Formula of Calculating of Claim of loss of stock = Amount of policy X stock destroyed Stock on the date of fire Suppose, xyz Co. Got the insurance policy of $10000 but his stock value is $20000 and actual loss is $5000. Now we will calculate claim under average clause Claim accept = 5000 X 10000/20000 = $2500
Some time, information of opening stock, purchase and sale is not give by businessmen, so calculating correct value of loss due to fire it is very necessary to make total debtor account, total creditor account and previous year trading account
Procedure of calculating loss of profit
Many commerce students are confused about how to calculate loss of profit. They know that businessman can take loss of profit, due to dislocation of business after fire to concern. It can also take with fire insurance policy. But for getting claim, the businessman want to calculate exact loss of net profit from the date of fire to that day in which business becomes normal
Steps of calculating loss of profit
We will use of only less rate from following rates for calculating correct amount of loss pf profit Net profit + Insured standing charges of last accounting year/Sale for the last accounting year x 100 Or Policy value/sale of 12 months immediately proceeding fire as adjusted for trend.
The Indemnity period or dislocation period which will small, that period will be fixed for calculation of claim.
We will calculate loss of sale on the base of future trend of sale.
Insured standing charges means all expenses which are mentioned in the policy of loss of profit. Businessman wants to get these expenses in the case of mishappening. We can make its list
Rent, rate and taxes not related with profit of business
Interest on debentures and loans.
Salaries of permanent staff
Salaries of permanent staff
Wages of skilled workers
All not described expenses must not more than 5% of described standing expenses.
Explanation with example
From the following information, find out the claim under loss of profit policy:
- 2007 net profit for the year $10000
- 2007-Standing charges insured $6000
- $sales for 2007 $160000
- Date of fire 1.1. 2008
- Period of dislocation 3 months
- Sales from 1.12007 to 31.3. 2007 $54000
- Sales from 1.1. 2008 to 31.3. 2008 $19400
- Indemnity period 6 months
- Policy subject to average clause $11000
- Trend in annual sales 10% increase