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Inventory converted to investments!

Sourav Modi (Learner!) (306 Points)

25 December 2011

Suppose a company deals in the trading of land and which is shown under inventories. Now the company wants to convert some portion of the land as investment rather than inventory. So what should be the accounting treatment/entry for such type of transaction?

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11 Replies

(Guest)

Investment Dr

To Stock-in-trade

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Vineet Kumar Sharma (Chartered Accountant) (316 Points)
Replied 25 December 2011

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

Sourav Modi (Learner!) (306 Points)
Replied 25 December 2011

@ 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

Sourav Modi (Learner!) (306 Points)
Replied 25 December 2011

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

Vineet Kumar Sharma (Chartered Accountant) (316 Points)
Replied 26 December 2011

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.

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Sourav Modi (Learner!) (306 Points)
Replied 26 December 2011

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.

ANUP GUPTA (KEEP SMILING fcaanupgupta@gmail.com) (303 Points)
Replied 26 December 2011

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!

Sourav Modi (Learner!) (306 Points)
Replied 26 December 2011

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.

Vineet Kumar Sharma (Chartered Accountant) (316 Points)
Replied 28 December 2011

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.

Vineet Kumar Sharma (Chartered Accountant) (316 Points)
Replied 28 December 2011

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

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Sourav Modi (Learner!) (306 Points)
Replied 28 December 2011

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!