Hemali Shanghvi (Owner) (136 Points)
19 October 2010Hi,
I have a client who has considerable transactions in Futures trading of shares in a year. Every month he gets a ledger from his broker about the changes in the Margin amount, which is hard to understand :(. How do we account for these transactions and the margin money?
I want to know all the possible entries that need to be passed in futures trading.
Rahul Gupta
(Chartered Accountant)
(644 Points)
Replied 10 December 2010
As per the accounting rules, we have to pass each and every entry for every transaction of trading in shares. We can do so by using the A/c i.e. Stock-in-Hand. E.g for every purchase of shares, this a/c will be debited and for every sale of share this a/c will be credited. The balance of these debit and credit will be our Loss / Profit on trading. As these transactions do not effect our Bank A/c because all those credits and debits are made through Demat A/c so instead of using the Bank a/c in these transaction we will use the Demat A/c in Accounting Entries.
For example:
Transfer of money from Bank to Demat A/c
Demat A/c Dr.
To Bank A/c
Purchase of shares
Stock-in-Hand A/c Dr. ( Toal Purchase Price including Taxes)
To Demat A/c
Sale of Shares
Demat A/c Dr. (Sale Price with net consideration to taxes)
P&L A/c Dr. (Loss with shares if any)
To Stock-in-Hand A/c (With cost of purchase as debited earlier)
To P & L A/c (Profit on Shares)
Money withdrawn from Demat A/c
Bank A/c Dr.
To Demat A/c
All the above transactions can be taken from the bill issued by the Broking company generated on the same day of trading of shares. Taxes will not be considered as a seperate cost. It will be treated as the part of purchase or sale price.
However the above method is too hard and time consuming as it includes a lot of headache and burden on accountant. As in case of any difference will lead to impossibility of finding the discrepancies.
ALTERNATIVELY WE CAN ALSO PASS THE FOLLOWING JOURNAL ENTRIES
This method based on Monthly Basis of Ledger issued by the broking company. In this method, we have nothing to do with the bills as we are not passing the individual entries for each and every share. We will pass the comprehensive entries with the total amount of monthly purchase and sale of shares.
For E.g. the ledger shows the total debit for the month is Rs. 1625400/- including Rs. 500/- as the charges charged by the Broking Company which is not our cost for purchase of shares, the balance exluding Rs. 500/- represents the total purchase price. On the other hand, the credit side of the ledger shows the total of Rs. 1865400/- during the month which represents the total sale price. The amount of Rs. 1865400/- also includes the amount of Rs. 1000/- for credit of dividends received which is tax free and hence that was not the part of our sale price.
Then we can pass the following Journal Entries:
Stock-in-hand A/c Dr. Rs. 1624900
Demat Charges A/c Dr. Rs. 500
To Demat A/c Rs. 1625400
For Credit Side we pass:
Demat A/c Dr. 1865400
To Stock-in-hand A/c 1624900 (With monthly debit as done in last entry)
To Dividend Recieved A/c 1000
To P&L A/c 239500
Thus in such a manner we have to pass these 2 entries for every month. Moreover to support these amounts you have to keep the each and every bill of the day which shows the detailed trading of shares from which the ledger was prepared. And we have to take the amounts on monthly basis from the ledger issued by the broking company.
As the above illustration also explains the treatment of Demat Charges as well the credits of Dividend Recieved. It shows the Profit. Moreover we can adjust the other cost/income in the same way. The balancing figure will be the profit / loss for the month arising due to the trading of the shares.
Hope you will be satisfied with this treatment.
CAclubindia
