Responsibility Accounting Process In Mutual Funds. |
Responsibility process allows the recognition of the subunits as responsibility centers. In Mutual funds, the Transfer agents, Fund accounting and Custody are three separate sub units which work as an individual cost center. The decision rights are assigned to the cost center heads and cascaded down based on the need and to allow the free work flow. Once the decision of processing a mutual fund is taken by the senior management, the work force implements the daily transaction process which involves recording the economic transactions between entities and these transactions are reported on the end of period financial statements. In Mutual funds, the individual shareholder and the Fund are the entities. An individual shareholder receives an end of month statement detailing the opening balances, the transactions within the period and the ending balance in each of the funds the shareholder is invested in. The Bookkeeping process of accounting is used in capturing the transactions of the mutual fund also.
A transaction in a Fund can be a Purchase of Shares (BUY), Redemptions of Shares (SELL), dividend transactions, Exchange transactions and Transfer transactions. In case of a Purchase transaction, the following steps are involved: i) You send money to the broker or set a specific amount to be deducted from your paycheck as part of your 401K Fund. ii) This money is now used to buy the shares of your requested Fund at the given price. iii) A transaction is generated recording this purchase. iv) This transaction is then posted to the account v) Since its a purchase transaction, the share balance to the account in the said Fund increases. In case of Redemption, the following steps are involved: i) You send your request to the broker to sell a specific number of shares or a specific amount to be received. ii) The specific number of shares are now sold and the money is obtained. iii) A transaction is generated recording this redemption. iv) This transaction is then posted to the account v) Since its a redemption transaction, the share balance to the account in the said Fund decreases. Exchange transactions are similar to the Purchase and Redemption transactions. Exchange transaction involves redemption of shares from one fund and a Purchase of shares into another fund for the same shareholder. Transfer transactions are similar to the Purchase and Redemption transactions. Transfer transaction involves a redemption shares from one fund and a Purchase of shares into another shareholder in the same Fund. A dividend transaction is created when the Fund pays a dividend to all the shareholders at month end (or periodically). This dividend amount is paid as cash to the shareholder or is reinvested into the Fund depending on the shareholders preference. When the dividend amount is reinvested, the share balance increases.
The individual transaction entries are called Journal entries. The account share balance is maintained in a separate record called Ledger. Each transaction/Journal entry has an impact on the accounts share balance on the Ledger. If the shareholder has investments in 5 Funds, there will be 5 separate ledgers which will hold the updated share balance from each fund at any given point in time. At any given point in time (either daily, monthly, quarterly, Yearly etc), the sum of all journal entries for a particular shareholder in a fund will be equal to the ledger balance. If the Journal entries are selected for a specific period, then the ledger balance at the beginning of the period + the sum of all the journal entries during the period will be equal to the ledger balance at the end of the period. The below example explains transactions in specific numbers to enumerate how the journal entries are posted, how the balances match at any given point in time etc.
Suppose a shareholder John Doe has Mutual fund investments in two simple money market funds as part of his 401K plan. John's shareholder account number is 12345.
1. Fund Name : Vanguard Money Market Fund number: VIN555 Opening balance (in shares): 1000.000
2. Fund Name : Fidelity Money Market Fund number: FDL999 Opening Share balance: 5000.000
These balances are as at 04/30/2012. Now on May 10th, John submits a request, via his online account, to purchase shares worth $500.00 in Vanguard fund. The price of VIN555 on May 10th is $1.00. Hence John will get 500.000 shares for his $500.00 amount. This transaction is recorded as a journal entry. The Ledger balance after this journal entry will be 1500.000 ( 1000.000 + 500.000). Now on May 22nd, John submits a request, via his online account, to sell shares worth $500.00 in Fidelity fund and $600.00 in Vanguard Fund. The price of FDL999 and VIN555 on May 22nd is $1.00. These transactions are recorded as a journal entry. The Ledger balance after this journal entry for fund FDL999 will be 4500.000 ( 5000.000 - 500.000). The Ledger balance after this journal entry for fund VIN555 will be 900.000 ( 1500.000 - 600.000). These two funds now pay dividends on the last business day of the month. Suppose John opts to reinvest the dividends in the these two funds and the dividend amounts for VIN555 is $10.00 and FDL999 is $20.00 based on the dividend factor and current ledger balances. The price/NAV of both Funds on the last business day is $1.00.
A monthly Statement for the period of : May-01-2012 to May-31-2012 will be generated and mailed to the shareholder. This statement will provide a consolidated view of all the trades processed and account balances.
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