Wealth through conventional investment principles

Accounting system

Accounting system – shareholding of members

The club needs to keep track of each member’s contribution.

Proper and accurate accounting (bookkeeping) of the financial affairs of the club is absolutely essential for the success of the club. The accounting has to be 100% accurate and up to date at all times. The club is after all dealing with the money of members and the amounts may become significant within a short space of time. No one will ever entrust any financial institution with his / her money without the absolute assurance that it is properly accounted for and the same therefore goes for the club.

The club can simply the book keeping by the members agreeing to make equal monthly investment amounts into the club. The downside to this is that it complicates matters should members want to withdraw partially / fully and when new members join the club.

A simple way to calculate and to keep track of member’s share in the investment club is to develop an accounting system based on “investment units” (call it your “share price” if you wish). Start off with a valuation of R1.00 for an investment unit.

Assume for this example an investment club with 5 members who agreed to make monthly equal investments of R1 000 each.

 

Position on day 1 of 1 one of the investment club (at launch of the club):

MembersMonthly InvestmentUnit ValueInvestment unitsPortfolio Value
5R1 000R1.005 000R5 000

 

The total amount invested in the club is now R5 000 and each members owns 1000 investment units. The club now invests the full amount in a say three shares. For the purpose of this example we assume that the share prices of the invested companies (“shares”) increased and the total investment grew to R7 500 by day 14 of the first month. The value of one unit is now R7 500 / 5000 = R1.50 and the position on day 14 of month one is summarised below:

MembersUnits/memberTotal unitsUnit valuePortfolio Value
510005 000R1.50R7 500

 

On day 1 of month 2 each member again invests an amount of R1 000. The unit value is now R1.50 and each member now receives R1000 / R1.50 = 666.67 additional investment units i.e. they each buy 666.67 new / additional shares in the investment club. Each member now owns 1000 + 666.67 = 1666.67 units.

The club’s assets now consist of R7 500 invested in shares plus R5 000 cash (un-invested amount) in the club’s account.

 

Position on day 1 of month 2 is now:

MembersUnits/memberTotal unitsUnit valuePortfolio Value
51666.678333.35R1.50R12 500

 

Assume for this example that the investment loses 10% in value by day 14 of month 2. The clubs assets now consist of R6 750 (R 7 500 – 10%) plus R5 000 cash (un-invested amount) in the club’s a count = R 11 750. The value of an investment unit is now 11 750 / 8333.35 = R1.41.

 

The position on day 14 of month 2:

MembersUnits/memberTotal unitsUnit valuePortfolio Value
51666.678333.35R1.41R11 650

 

And so it continues. You now understand the mechanics of the accounting system?

Any member of the club familiar with excel should be able to accurately account and record the shareholding of the club and that of the individual members.

The system is called the “unit valuation system”. It is very flexible and also allows for “unequal” monthly investment amounts, withdrawal of funds by members and new members joining the investment club.