Back to: Accounting 101
Welcome!
Today, let’s look at accounting for investments. Many businesses make investments, whether in stocks, bonds, or other companies, and it’s important to track these properly.
Introduction:
Investments are assets a business purchases with the expectation that they will generate income or increase in value. The way investments are accounted for can depend on the type of investment.
Types of Investments:
Short-Term Investments: Investments that a business plans to sell within one year, like stocks or bonds.
Long-Term Investments: Investments that the business plans to hold for more than one year, such as real estate or other companies.
How to Account for Investments:
Businesses record investments on the balance sheet at their purchase cost. If the value of the investment increases, the business may need to adjust its financial statements to reflect this.
Gains or Losses on Investments:
When investments increase or decrease in value, businesses must record any gains or losses in their financial statements.
Investments are assets that a business holds with the expectation of generating income or capital appreciation. Examples of investments include shares, bonds, and property. When a business acquires an investment, it must record the transaction in its accounting records. For instance, if a company purchases 1,000 shares in another company for ₦500,000, the transaction would be recorded as a debit to the investment account and a credit to the cash account. The investment account would be classified as a non-current asset on the balance sheet.
The accounting treatment for investments depends on the type of investment and the business’s intent. For example, if a business holds an investment for trading purposes, it would be classified as a current asset and valued at fair value. Any gains or losses would be recognised in the profit and loss account. On the other hand, if a business holds an investment for long-term purposes, it would be classified as a non-current asset and valued at cost. Any gains or losses would only be recognised when the investment is sold.
The disclosure of investments is also an important aspect of accounting. Companies are required to disclose their investments in their financial statements, including the type of investment, the cost, and the fair value. This information helps stakeholders, such as investors and creditors, to assess the company’s investment strategy and risk profile. In Nigeria, the Financial Reporting Council (FRC) requires companies to follow the International Financial Reporting Standards (IFRS), which provide guidance on the accounting and disclosure of investments.
Conclusion:
Accounting for investments ensures that businesses track their assets accurately and make informed decisions about future investments.
Evaluation:
How would a business account for a long-term investment in real estate?
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