Big picture
A debenture is a written acknowledgement of a debt. When a company issues debentures, it borrows money from the public and promises to pay interest at a fixed rate and repay the amount on a set date. Debentureholders are therefore creditors of the company, not owners.
The journal entries look much like those for shares (application, allotment, calls), but three things are special: the price at issue and the price at redemption can both differ from face value; any loss on issue must be recorded at the start and written off; and interest is a charge that must be paid whether or not the company makes a profit.
Learning goals
Explain the meaning and types of debentures, and how they differ from shares.
Journalise the issue of debentures at par, at a premium and at a discount.
Record the six combinations of issue price and redemption terms, including loss on issue and premium on redemption.
Record debentures issued to vendors and as collateral security.
Calculate and record interest on debentures.
Write off discount or loss on issue of debentures.
Present debentures and related items in the balance sheet.
Core ideas
1. Meaning and types of debentures
Basis | Types |
|---|---|
Security | Secured (backed by a charge on assets) and unsecured (no charge) |
Tenure | Redeemable (repaid on a fixed date) and irredeemable (repaid only on winding up) |
Convertibility | Convertible (fully or partly converted into shares) and non-convertible |
Coupon rate | Specific coupon rate (fixed interest) and zero coupon (no interest; issued at a deep discount and redeemed at face value) |
Registration | Registered (holder's name in the company's register, transferable by a transfer deed) and bearer (transferable by delivery) |
Shares and debentures compared
Point | Shares | Debentures |
|---|---|---|
Status of holder | Owner | Creditor |
Return | Dividend, paid only out of profit, rate not fixed for equity | Interest at a fixed rate, payable even in a loss year |
Voting rights | Equity shareholders vote | No voting rights |
Repayment | Not repaid during the company's life (except buy-back or redeemable preference shares) | Repaid at maturity |
Security | Unsecured | Usually secured |
Issue at a discount | Not allowed (except sweat equity) | Allowed |
2. Issue of debentures for cash
Debentures can be issued:
at par: at face value (₹100 for a ₹100 debenture);
at a premium: above face value; the premium is credited to Securities Premium Account;
at a discount: below face value; the discount is debited to Discount on Issue of Debentures Account.
Application and allotment entries follow the same pattern as shares: Bank A/c Dr, To Debenture Application and Allotment A/c; then Debenture Application and Allotment A/c Dr, To Debentures A/c (and Securities Premium A/c if any). Over-subscription is handled by rejecting applications or allotting pro-rata, as with shares.
3. Terms of redemption: the six cases
A debenture may be redeemed at par or at a premium. A premium payable on redemption is a liability the company knows about from day one, so it is recorded at issue, credited to Premium on Redemption of Debentures Account, with the matching debit to Loss on Issue of Debentures Account.
The table shows one ₹100 debenture in each case.
Case | Bank Dr | Loss or discount Dr | Debentures Cr | Securities Premium Cr | Premium on Redemption Cr |
|---|---|---|---|---|---|
1. Issued at par, redeemable at par | 100 | – | 100 | – | – |
2. Issued at 5% discount, redeemable at par | 95 | 5 (Discount on Issue) | 100 | – | – |
3. Issued at 10% premium, redeemable at par | 110 | – | 100 | 10 | – |
4. Issued at par, redeemable at 5% premium | 100 | 5 (Loss on Issue) | 100 | – | 5 |
5. Issued at 5% discount, redeemable at 5% premium | 95 | 10 (Loss on Issue) | 100 | – | 5 |
6. Issued at 10% premium, redeemable at 5% premium | 110 | 5 (Loss on Issue) | 100 | 10 | 5 |
Note. Loss on issue = discount allowed at issue + premium payable on redemption. In case 6 there is no discount, but the 5% premium on redemption is still a loss on issue; it is not set off against the 10% securities premium in the entry.
Example (case 5). A company issues 2,000, 9% debentures of ₹100 each at a 5% discount, redeemable at a 5% premium.
Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
Bank A/c Dr (2,000 × 95) | 1,90,000 | |
Loss on Issue of Debentures A/c Dr (2,000 × 10) | 20,000 | |
To 9% Debentures A/c (2,000 × 100) | 2,00,000 | |
To Premium on Redemption of Debentures A/c (2,000 × 5) | 10,000 |
4. Debentures issued for consideration other than cash
A company may pay a vendor for assets by issuing debentures.
Example. Assets worth ₹5,40,000 are bought and paid for by issuing 10% debentures of ₹100 each at a premium of 8%. Issue price = ₹108; debentures issued = 5,40,000 ÷ 108 = 5,000.
Entry | Debit | Credit |
|---|---|---|
Purchase of assets | Sundry Assets A/c 5,40,000 | Vendor A/c 5,40,000 |
Debentures issued | Vendor A/c 5,40,000 | 10% Debentures A/c 5,00,000 and Securities Premium A/c 40,000 |
If the purchase price differs from the net assets taken over, the difference is goodwill (price higher) or capital reserve (price lower), as in any business purchase.
5. Debentures issued as collateral security
Collateral security is a secondary security given in addition to the main security for a loan. If the company repays the loan, the debentures are returned; if it defaults, the lender may sell them. No money is received for them.
Example. A company takes a bank loan of ₹5,00,000 and issues 6,000, 9% debentures of ₹100 each as collateral security.
Method 1: no entry. The debentures are mentioned in the note on the loan: "Bank loan ₹5,00,000 (secured by the issue of 6,000, 9% debentures of ₹100 each as collateral security)."
Method 2: Debenture Suspense Account.
Debenture Suspense A/c Dr ₹6,00,000, To 9% Debentures A/c ₹6,00,000.
In the balance sheet note, the debentures are shown under Long-term Borrowings and the Debenture Suspense Account is deducted from them, so the net effect is nil. When the loan is repaid, the entry is reversed.
No interest is paid on debentures issued as collateral security; interest is paid only on the loan.
6. Interest on debentures
Interest is always calculated on the face (nominal) value, whatever the issue price.
Example. 10,000, 9% debentures of ₹100 each issued at a 5% discount. Annual interest = 10,00,000 × 9% = ₹90,000, not 9% of ₹9,50,000. If interest is paid half-yearly, each payment is ₹45,000.
Entry | Debit | Credit |
|---|---|---|
Interest due | Debenture Interest A/c | Debentureholders A/c |
Interest paid | Debentureholders A/c | Bank A/c |
Transfer at year end | Statement of Profit and Loss | Debenture Interest A/c |
Interest is a finance cost: it is charged against profit, not an appropriation of profit, and it is payable even in a loss year.
7. Writing off discount or loss on issue
Under the current CBSE scope, discount or loss on issue of debentures is written off in the year the debentures are allotted:
first out of Securities Premium (if a balance exists);
the remainder to the Statement of Profit and Loss as a finance cost.
Example. Loss on issue of debentures is ₹45,000 and the Securities Premium balance is ₹30,000.
Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
Securities Premium A/c Dr | 30,000 | |
Statement of Profit and Loss Dr | 15,000 | |
To Loss on Issue of Debentures A/c | 45,000 |
8. Balance sheet presentation
Item | Where it appears |
|---|---|
Debentures (repayable after 12 months) | Non-current Liabilities → Long-term Borrowings |
Debentures repayable within 12 months | Current Liabilities → Short-term Borrowings (current maturities of long-term debt) |
Premium on Redemption of Debentures | Non-current Liabilities → Other Long-term Liabilities |
Securities Premium | Shareholders' Funds → Reserves and Surplus |
Interest accrued but not paid | Current Liabilities → Other Current Liabilities |
Debentures issued as collateral (Method 2) | Long-term Borrowings, with Debenture Suspense deducted |
Because discount or loss on issue is written off in the year of issue, it does not appear on the balance sheet at the year end.
A reliable problem-solving routine
Note the face value, issue price and redemption price per debenture.
Work out discount or premium at issue and premium on redemption; loss on issue = discount + premium on redemption.
Journalise application and allotment, or the vendor or collateral entries.
Calculate interest on face value for the correct period.
Write off discount or loss from Securities Premium first, then the Statement of Profit and Loss.
Place each item correctly in the balance sheet notes.
Connections that matter
Share capital uses the same application and allotment steps; contrast the owner–creditor difference.
Financial statement analysis uses debentures in the debt-equity ratio and interest in the interest coverage ratio.
Cash flow statement shows issue of debentures and interest paid under financing activities.
Common mistakes
Calculating interest on the issue price. Interest is always on the face value.
Forgetting premium on redemption at the time of issue. It is recorded at issue as part of the loss on issue.
Netting the issue premium against the redemption premium in case 6.
Paying interest on debentures issued as collateral security.
Treating debenture interest as an appropriation of profit. It is a finance cost.
Writing off loss on issue from the Statement of Profit and Loss when Securities Premium is available. Use Securities Premium first.
Revision checklist
I can explain the types of debentures and how they differ from shares.
I can journalise all six combinations of issue and redemption terms.
I can record debentures issued to vendors and as collateral security by both methods.
I can calculate and journalise debenture interest.
I can write off discount or loss on issue in the correct order.
I can show debenture items in the balance sheet.