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Investment Accounting

Investment accounting involves analyzing and managing financial accounts related to investments. It includes both record keeping of investment portfolios as well as strategic management of financial investments. Investment accounting must be done carefully and according to regulations to avoid penalties, as mistakes or fraud can lead to fines or jail time. People with large investment portfolios often hire certified investment accountants to ensure accurate and legal work, while those with small portfolios may choose to manage their own accounts if they understand the guidelines. There are three main methods of investment accounting: the cost method, equity method, and fair value method, with the cost and equity methods being most widely used.

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15 views

Investment Accounting

Investment accounting involves analyzing and managing financial accounts related to investments. It includes both record keeping of investment portfolios as well as strategic management of financial investments. Investment accounting must be done carefully and according to regulations to avoid penalties, as mistakes or fraud can lead to fines or jail time. People with large investment portfolios often hire certified investment accountants to ensure accurate and legal work, while those with small portfolios may choose to manage their own accounts if they understand the guidelines. There are three main methods of investment accounting: the cost method, equity method, and fair value method, with the cost and equity methods being most widely used.

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sunil.ct
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Investment accounting: Investment accounting is the analysis and management of

financial accounts that are involved in investments. Some people choose to do their own
investment accounting, but people and companies with large investment portfolios often
hire certified investment accountants to ensure that all work is correct and legal.
Investment accounting involves both the record keeping for portfolios as well as the
strategic management of financial investments.
Investment accounting must be done carefully to maintain accuracy and ensure legality.
We may have extremely specific regulations as to how investments must be maintained,
reported, and managed. Failure to accurately report earnings and other vital tax
information can lead to serious penalties in some place, including large monetary fines
and even extensive jail time. Unfortunately, courts are not always able to judge the
difference between an honest mistake and a deliberate fraud, so it is vitally important to
ensure that all investment accounting is handled with the utmost attention to detail.

People with small portfolios, may choose to manage accounts alone, but it is important
to carefully read and understand all legal and procedural guidelines if planning to do self-
accounting.

Investment accounting is often handled by licensed or certified investment accountants.


These professionals have a wide range of skills that differs from that of some regular
accountants, as it may be difficult at first to grasp the scope of investment accounting. In
addition to keeping records exact and up to date, it is important to try to understand the
investing market in order to make the best financial investment plan.

Methods of Investment Accounting:

Cost method: Cost Method is applicable when the investor is not able to exercise
significant influence over the investee and generally is evidenced by lack of ability to
take policy decisions, temporary investment, holds non-voting preferred stock or
ownership in voting stock is quite low.
Upon acquisition, the investment is recorded at Cost. Unlike Equity Method, the
investment account under this method is not adjusted for investor's share of investee's
income. Dividend is recorded as income. The cost method of accounting for stock
investments records the acquisition costs in an asset account, “Equity Investments.” As
with debt investments, acquisition costs include commissions and fees paid to acquire the
stock. As dividends are received, dividend income is recorded.

Equity method: Equity Method is applicable if an investment enables the


investor/parent to influence the operating or financial decisions of the
investee/subsidiary. In other words, the parent company exercises significant influence
over the subsidiary and holds more of the voting stock in it. Furthermore, the equity
method of accounting meets the objectives of accrual accounting than does the cost
method. The cost method is generally followed for investments in noncontrolled
corporations and unconsolidated subsidiaries.

In other words, the equity method of accounting for stock investments is used when the
investor is able to significantly influence the operating and financial policies or decisions
of the company it has invested in. Given this influence, the investor adjusts the value of
its equity investment for dividends received from, and the earnings (or losses) of, the
corporation whose stock has been purchased. The dividends received are accounted for as
a reduction of the investment value because dividends are a partial return of the investor's
investment.

Both methods are widely used but each has advantages and disadvantages

Cost Method Equity Method

Financial analysis complicated because Facilitates financial analysis such as return


amounts needed must be tracked on on investment for subsidiaries.
working papers rather than through the
general ledger.

Less bookkeeping is involved Parent company financial statements are


more useful for internal management
purposes

No self-checking feature Self-checking feature useful when


consolidated financial statements are
prepared

There is a third method of investment accounting which is known as fair value method
and it is not a very popular method.

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