Is investment debit or credit? Individuals and businesses make investments with the hope of earning income in the future. These are regarded as assets to the investors as they provide future economic benefits. Whether an investment is a debit or credit has brought about confusion to many investors. In this article, we see what investment implies, a brief explanation of debit and credit, and whether an investment is a debit or credit entry in the investor’s account.
What is an investment?
Investments generally are assets that an enterprise holds for earning income by way of dividends, interests, and rentals, for capital appreciation as well as other benefits to the enterprise. It is important to note that assets that are held as stock-in-trade are not regarded as investments. In essence, an investment can refer to any mechanism adopted to generate future income.
Investment can imply either buying or creating an asset with the future expectation of capital appreciation, dividends/profits, rents, interest earnings, or some combination of these returns. Investments, however, come with some forms of inherent risks, such as investments in equities, property, fixed-interest securities, bonds, stocks and real estate properties, which are subject to inflation risks or may not generate income. For example, an individual may invest in a company that will later go bankrupt. Alternatively, the investment of time and money may not result in a strong job market in that field.
Furthermore, securities that are held as long-term investments in order to earn income are said to be fixed assets. On the other hand, there the organization’s objective is to sell and buy securities in short-term funds to utilize its surplus funds would be categorized under current assets.
Securities comprise two broad types namely fixed-interest securities and variable-yield securities. The holders of fixed-interest securities get fixed interest rates while under variable yield securities, return on investment (ROI) may vary from year to year.
When an individual or a firm purchases a good as an investment, the intent is not for consumption but rather to make use of it in the future for the creation of wealth. An investment always has to do with the outlay of some resources in the present day such as time, effort, money, or an asset, with the hope of getting a greater payoff in the future than what was initially put in.
For example, an investor may purchase a monetary asset in the present, with the idea that the asset will provide income in the future or will be sold in the future at a higher price for a profit. Another example can be to pursue additional education with the goal of increasing knowledge and improving skills. The upfront investment of time attending classes and the tuition money paid will hopefully bring about increased earnings over the student’s career. This is an intellectual property, also known as an intangible asset.
How debit and credit affect investment in bookkeeping
Debit and credit are the foundation of double-entry bookkeeping. For every transaction that takes place, a debit that is recorded has a corresponding credit entry. So, a single transaction can have an effect on multiple accounts, meaning that at least two accounts must be involved and debits will always equal credits. Say for an individual that makes an investment, both the investment and the cash accounts will be affected, that is, a debit on the investment account and a corresponding credit on the cash account. In essence, the asset increases while cash decreases, although cash is a liquid asset.
In simple terms, a debit records money or assets that go into one’s business while a credit records money or assets that go out of the business. When debiting and crediting accounts, one should understand whether the balance of the account will increase or decrease. Accountants and bookkeepers make use of debits and credits to balance each recorded financial transaction for certain accounts of the company’s statement of financial position and income statement. This allows the business to balance its books with more ease at the end of each period.
Debit and credit entries have effects on different accounts, this may either increase or decrease an account. There are five broad accounts (with their sub-accounts) which are assets, expenses, liabilities, revenue, and equity. Assets and expenses are usually debit entries while liabilities, revenue, and equity are credit entries. In essence, a debit entry increases asset and expense accounts while a credit entry decreases these accounts by the amount entered therein. A credit entry, on the other hand, increases liability, revenue, and equity accounts while a debit entry decreases them.
Is investment debit or credit?
Generally, investment is a debit and not a credit entry. This is because investment is an asset to the investor who can either be an individual or a business. So, if one makes an investment with the hope of generating higher returns in the future, the investment account will be debited while the cash account or bank account will be credited.
As earlier stated, investments are made in different securities such as shares, bonds, debentures, etc. also, investments can be made into the business or in the form of education (with results in intellectual property). An investment can be long-term or short-term. A long-term investment is usually made with the purpose of earning interest or dividends while short-term investment on the other hand is made with the aim of making a profit by selling the property or asset when the market price becomes favorable.
As stated earlier, investments are assets to the investor, therefore, they should be debited. We explained under the debit and credit that there are five major accounts with their sub-accounts. These accounts are assets, expenses, liabilities, revenue, and equity. While asset and expense accounts are increased by a debit entry and decreased by a credit entry, liability, revenue, and equity accounts are increased by a credit entry and decreased by a debit entry.
So, looking at investments as an asset to the investor, it should be a debit entry since it is increased by a debit entry. If a credit entry is made for this investment account, then it implies a decrease in investment. With this, if an individual or a business invests in anything at all, say cryptocurrency, it is equivalent to purchasing a physical asset.
See also: Goodwill Debit or Credit?
Debit and credit journal entries for investment
Investments, once made, are recorded in the general ledger since they are real accounts when they are few in number. When they are substantial on the other hand, a separate ledger is to be opened for each individual class, say securities in addition to interest or dividend.
Simple journal entries for investment are made by debiting the investment account and a corresponding credit entry to the cash or bank account. Remember that these investments are made with the hope of gaining future benefits or income. So, the investment provides future economic benefits to the investor. We earlier defined investments as assets that an enterprise holds with the purpose of generating income. So, just as assets aid production, they equally come with future economic benefits.
A simple journal entry for investment is as follows:
Sam & Sons Co. invested $200,000 in the purchase of a new plant and machinery in order to improve their production. A bank transfer was made from Sam & Sons Co’s account to the supplier of this asset. We will make a journal entry as follows:
Debit and credit journal entries for investment in plant and machinery by Sam & Sons Co.
This investment made in the asset will provide future economic benefits to this company as it is used in the production of goods. This production, in turn, will bring about revenue as the goods are sold.Last Updated on November 4, 2023 by Nansel Nanzip Bongdap