Cost Method of Accounting for Investments

A statement presented in a simple and easy-to-understand manner is the core of cost method of accounting. Unlike the statements of financial accounting method, which have credit and debit factions, the statements of cost accounting methods have just one faction. A general cash statement and cost sheet are the two primary types of cost accounting statements used to account for investments. We shall be taking a look at both formats in due course. It is a common convention to make one statement per investment, however, companies sometimes make one superseding or collective statement.

When it comes to cost accounting statements for investments, there are three major elements included in the statement:

• The first one is the total volume of money that you have invested. It is known as the 'principal amount' of investment.
• The second one is the total expenditure incurred to make the investment. This includes broker fees, taxes, loads, charges, etc. Note that, this element does not include any direct loss incurred in the investment, for example, the loss of market price of stock equity.
• The third element is basically the return which you have received after the lifecycle of the investment gets completed.

There are two more elements which can be optionally included in the statement:

• Current realization cost is the total money which you would receive if you sell off your investment. This kind of element is usually used for investments such as gold, silver and stock equity, denoting the current market value.
• The next one is the return on investment which is a percentage, that indicates the percentage profit derived from the entire investment.

The decision to use a cost sheet or a cash statement, depends upon the situation at hand. For example, if it is a mutual fund with variable returns, then all premium payments on an annual basis and the relevant returns along with (%) return, on investment of that very year are recorded. At the end of the mutual fund's life, the total returns minus the invested 'principal amount' are recorded as a profit. In such a situation, a cost sheet is used. Another example which can be taken is again of the mutual fund with a 'Net Asset Value', that is you don't get returns paid on an annual basis, but at the end of the total term of the fund, you withdraw the fund which is represented by a Net Asset Value or an NAV, which is essentially the total return amount. This type of statement can also be used for market based investments such as gold, silver and stock equity.

Now to illustrate the two types of statements, the two aforementioned examples have been used. Take a look...



You can use the following formulas for the computation of the last 3 elements.

Cash Statement for N.A.V Mutual Fund


Depending upon the situation and case of investment, you can apply any of the two methods and their respective statements. The first one works better for long-term investments, essentially the ones that exceed 12 months. The cash statement, on the other hand, works better for smaller, market-based investments.