Accounting for Investment in shares and Mutual funds

Hi Vinay! Here's a clear explanation for your queries about accounting for investments in shares and mutual funds:

1. Investment in Shares - Initial Recording

• Cost to be recorded:
  The investment in shares should be recorded at cost which includes the purchase price + directly attributable expenses like brokerage, stamp duty, and any other transaction costs necessary to acquire the shares.

• What to include?

  • Include: Brokerage, Stamp Duty, Securities Transaction Tax (STT) if it is part of the acquisition cost, exchange fees (if applicable).

  • Exclude: GST on brokerage (GST is usually not part of cost; it's an input tax credit or expense), unless GST is non-creditable.

• Reference:
  AS 13 (Accounting for Investments) states that transaction costs related to the acquisition are included in the cost of investment.

2. Investment in Mutual Funds - Cost Basis for Gain/Loss

• Method to calculate cost:

  • For mutual funds, the Weighted Average Cost (WAC) method is generally used to calculate the cost of units sold and hence gain/loss.

  • This means the cost of units sold is the weighted average price of all units held.

• Why WAC?

  • Because mutual fund units can be bought at different times/prices, WAC gives a fair allocation of cost.

  • Using actual cost of individual units sold can be complicated and is generally not followed unless specifically allowed.

• Reference:
  AS 13 does not mandate a specific cost formula but implies consistency in valuation method.

Summary: