investment

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sharda bishwakarma

sharda bishwakarma (Querist)
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27 August 2017 please explain whay right issue credit in investment account. it shoud be debit.

sharda bishwakarma

sharda bishwakarma (Querist)
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28 August 2017 please reply experts

Asha Kanta Sharma online

Asha Kanta Sharma online

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01 August 2024 In accounting for a right issue of shares, the treatment of entries can sometimes be confusing, especially when dealing with the concept of capital inflow and the adjustment of the investment account. Let's break down why the credit entry is made to the investment account in the case of a rights issue:

### **Understanding Rights Issue**

A rights issue is an opportunity given to existing shareholders to purchase additional shares of the company at a specified price, often lower than the market price. This is done to raise additional capital for the company.

### **Accounting for Rights Issue**

When a company issues additional shares through a rights issue, here’s how you account for it:

1. **Initial Investment Account**:
- **Before Rights Issue**: Your investment account reflects the value of shares already held.

2. **During Rights Issue**:
- **Rights Issue**: You’re given the opportunity to buy additional shares at a certain price.

### **Entries for Rights Issue**

Assuming you are an existing shareholder participating in the rights issue, the entries are typically as follows:

1. **When you subscribe to the rights issue (i.e., pay for the additional shares)**:

**Debit**: Investment in Shares (Account) - This reflects the new investment made to purchase additional shares.

**Credit**: Bank Account (or Cash) - This reflects the outflow of funds used to subscribe to the new shares.

2. **When you receive the new shares**:

The issuance of new shares increases your total investment, so the investment account is debited to reflect the new value of shares held.

### **Example:**

Let’s say you hold 1,000 shares of a company, and the company announces a rights issue allowing you to buy 500 additional shares at a price of ₹10 per share.

**Investment in Shares (before rights issue):** 1,000 shares at ₹20 = ₹20,000.

**Rights Issue:**
- **Number of additional shares bought:** 500 shares.
- **Price per share:** ₹10.
- **Total investment for rights issue:** 500 shares * ₹10 = ₹5,000.

**Accounting Entries:**

**1. On Paying for Rights Issue:**
- **Debit**: Investment in Shares ₹5,000 (This reflects the additional investment for new shares).
- **Credit**: Bank Account ₹5,000 (This reflects the cash outflow to pay for the rights issue).

**2. Receiving Additional Shares:**
- Your investment account now reflects the total investment, including the new shares purchased at the rights issue price.

### **Clarification on Credit and Debit:**

- **Debit to Investment Account:** When you purchase additional shares, you increase your investment. Hence, you debit the investment account.
- **Credit to Bank Account:** This reflects the payment made for the rights issue. You credit the bank account because funds are going out.

### **Summary:**

- **Rights Issue Debit:** Increase in the investment amount due to purchase of additional shares.
- **Rights Issue Credit:** Decrease in bank account due to cash outflow for purchasing the shares.

Thus, the credit entry in the investment account would be correct only if the issue price was lower and the investment account needed to be adjusted downward to reflect the reduced cost per share, but usually, during the subscription, the debit reflects the increase in investment.

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