Inventory converted to investments!

Investment Dr

 To Stock-in-trade

Instead of using the account of Investment, it is much better to use an Account of Freehold Land or Immovable Property, depending upon case. Hence,

Freehold Land / Immovable Property     ...Dr.

                 To Stock A/c

@ Dipesh....since we never make an entry for stock in trade, we will have to credit 'inventory transferred to investments' which will again be transferred to Pl but there it will look like as an income which is not so. Thats why this treatment doesnt seem appropriate

 

@ vineet...........As per your treatment, it will be shown as fixed asset not investment.

Investment A/c          ...Dr. 

     To Purchases A/c

 

That will adjust with your Purchases A/c. Real Estate Developers used to pass this entry while converting its SIT in Investmet/ FA.

If the stock that is being converted had been purchased some time in the previous year, wont it be wrong accounting to undervalue the actual purchases made during the year. Can you site any reference to any guidance note or any accounting standards for making this entry.

As per As 13 investment intended to be held for more than 1 year from the date when such investment is made is to be shown at cost. And In your case entry would be Investment a/c dr. and stock in trade a/c credit In this way u will increase your investment in Bal. Sheet and reduce your stock in trade shown in bal. sheet ...........,...................,. Further it will not affect PL because u r not making entry . . . . . . . . . Stock dr. To trading & PL A/C. I hope it will clarify ur problem .. . . . . . . . . . . . . . . . . Please feel free to make any comment!

When we do accounting in an accounting software, I guess we never make any entry for stock-in-trade. For example in Tally, the opening and closing stock is directly routed through Stock Report. And  any change/s made in inventory have to be routed through PL. The best possible treatment in my sight would be Investment Dr. and 'Inventory trffd to investment' Cr............................and then 'Inventory trffd. to investment' A/c trffd to PL. But again it will be reflected as income which is not the fact in actual. And that is the dilemma.

 

SM

By using "Inventory tfd to investment A/c" & trf it to P&L A/c shows correct income.

For eg:- 1. When Land is purchased in earlier years: Let there is no sale & purchase at the trf time, then P&L will show the following position:-

**Debit side of P&L A/c

Opening Stock     10Lacs

Purchasese          Nil

 

**Credit side of P&L A/c

Sales                   Nil

Inventory tfd to investment A/c     10Lacs

Closing Stock      Nil

& Your Gross Profit will be Nil.

This will shows that your "Inventory tfd to investment A/c" is adjusted with "Opening Stock".

Entry in tally will be:-

Investment A/c            ....Dr.    (Cost)

        To Inventory tfd to investment A/c

               **** Invetory - Land 

(Note: Open the Master "Inventory tfd to investment A/c" affecting Inventory, & then, post the entry in Journal Voucher)

 

2. When Land is purchased in current year: I have discused it earlier.

You are also required to disclosed this fact in Notes on Accounts.

Wouldnt it be prudent to show 'inventory trffd to investment' a/c as a deduction from the opening stock rather than in the credit side of the same coz if its shown in the credit side it would be reflected as an income which is not so in actual.

By the way, I appreciate your effort in going to into deep in this matter and penning down the things in detail. Thnx!