Issue of Debentures - Revision Notes

CBSE Class XII – Accountancy
Revision Notes
Chapter 8
Accounting For Debentures

Debenture : It is a document issued by a company under its common seal acknowledging the debt and it also contains the terms of repayment of debt and payment of interest at a specified rate.

Section 2 (30) of Companies Act, 2013 defines debenture as “Debenture includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the company’s assets or not.”

Debentures are generally freely transferable by the debenture holder. Debenture holders have no rights to vote in the company’s general meetings of shareholders. The interest paid to them is a charge against profit in the company’s financial statements.


Convertibility point of view : There are two types of debentures :

Convertible debentures, which can be converted into equity shares of the issuing company after a predetermined period of time.

These may be Partly Convertible Debentures (PCD) : A part of these instruments are converted into Equity shares in the future at notice of the issuer. The issuer decides the ratio for conversion. This is normally decided at the time of subscription.

Fully convertible Debentures (FCD) : These are fully convertible into Equity shares at the issuer’s notice. The ratio of conversion is decided by the issuer. Upon conversion the investors enjoy the same status as ordinary shareholders of the company.

Non-convertible Debentures, which are simply regular debentures, cannot be converted into equity shares. These are debentures without the convertibility feature, these usually carry higher interest rates than their convertible counterparts.

On basis of Security, debentures are classified into:

Secured Debentures : These instruments are secured by a charge on the fixed assets of the issuer company. So if issuer fails to pay of either the principal or interest amount, its assets can be sold to repay the liability towards debenture holders.

Unsecured Debentures : These instrument are unsecured in the sense that if the issuer defaults on payment of the interest or principal amount, the investor is treated like other unsecured creditors of the company.

From Redemption point of view

Redeemable Debentures : Redeemable debentures are those which are redeemed or paid off after the termination of fixed term. The amount paid off includes the principal amount and the current year’s interest. The company always has the option of either to redeem a specific number of debentures each year or redeem all the debentures at specified date.

Irredeemable or Perpetual Debentures : Irredeemable debentures are those debentures which do not have any fixed date of redemption. They are redeemed either in the event of winding up or at a very remote period of time. Irredeemable or perpetual debenture holders can never force the company to redeem their debentures.

Distinguish Between a Share and Debenture





Shareholders are the owners of company

Debenture holders are the lenders of company

Form of return




Not secured

Secured by a charge on assets

Voting right

Equity shareholders have the voting right

No voting right in normal course of business


More risk as compared to Debentures

Risk Free due to secured Debentures

Issue of Debentures:

Debentures can be issued in following ways:

  1. for cash
  2. for consideration other than cash
  3. As collateral security

Terms of Issue

Debentures can be issued in following ways:

  1. Issue of Debentures at Par
  2. Issue of Debenture at Premium
  3. Issue of Debentures at Discount.

Debenture Payable in Installments

  1. First instalment paid along with application is called as application money.
  2. Second instalment paid on allotment is called as allotment money.
  3. Subsequent instalments paid are called as call money calls can be more than one and called First call, second call or as the case may be.

Issue of Debentures for Cash

(a) When Debentures amount received in lump sum with the application

On receipt of application money

Bank A/c     Dr.
To Debenture Application
and Allotment A/c

With the application money

On acceptance of  application money

Debenture Application and Allotment A/c    Dr.
To X% Debentures A/c
To Bank A/c

With Amount of application
money on allotted debentures, and Excess amount refunded.

(B) When Debentures amount received in installments.

In this case accounting entries will be same as at the time of issue of shares in instalments with small change in the name of term like-the share capital word replaced with the X% Debentures A/c, and Share word replaced with Debentures e.g. Equity share capital into 8% Debentures, Equity share application into Debentures Application and follows on.

AT Par : means debentures are issued at face value.

Issue of Debentures for Consideration other than Cash

When Debentures are issued for purchased of asset

When Debentures Issued for purchases Asset at par

Sundry Asset A/c Dr.
To Vendor

With the purchases consideration

Vendor Dr.
To Debenture Account


When Debentures
are issued for purchases of asset at premium

Sundry Assets A/c Dr.
To Vendor

With the purchases Consideration
No. of debentures par value
No. of debentures x premium

Vendor Dr.
To Debenture A/c
To Security Premium
Reserve A/c

When business is

When Purchase consideration is equal to net value of assets
Sundry Assets A/c Dr.
To Sundry Liabilities A/c
To Vendor
When Purchases consideration more than net value of assets

Goodwill Account    Dr.

To Sundry Liabilities A/c

To Vendor

Value of asset
Value of liabilities
Purchases consideration

Excess of Purchase Value (B/F)

Value of Liabilities

Purchases Consideration


When Purchase Consideration is less than net value of asset

Sundry Assets Account   Dr.

To Sundry Liabilities A/c

To Capital Reserve

To Vendor

Value of Asset

Value of liabilities

Difference (B/F

Purchases Consideration

Collateral Security : Collateral security means security provided to lender in addition to the principal security. It is a subsidiary or secondary security. Whenever a company takes loan from bank or from any financial institution it may issue its debentures as secondary security which is in addition to the principal security. Such an issue of debentures is known as ‘issue of debentures as collateral security’. The lender will have a right over such debentures only when company fails to pay the loan amount and the principal security is exhausted. In case the need to exercise the right does not arise debentures will be returned back to the company. No interest is paid on the debentures issued as collateral security because company pays interest on loan.

In the accounting books of the company issue of debentures as collateral security can be credited in two ways :

  1. First method : No Journal entry to be made in the books of accounts of the company for debentures issued as collateral security. A note of this fact is given in this case.
  2. Second method : Entry to be made in the books of accounts of the company.

A journal entry is made on the issue of debentures as a collateral security, Debentures Suspense Account is debited because no cash is received for such issue.

Following journal entry will be made





Debit (Rs.)

Credit (Rs.)


Debenture Suspense A/c    Dr.
To % Debentures A/c
(Being the issue of Debentures of Rs.... each issued as collateral security)


Interest on Debentures is calculated at a fixed rate on its face value and is usually payable half yearly & is paid even company is suffering from loss because it is charge on profit.

Income Tax is deducted from interest before payment to debenture holders. It is called T.D.S. (Tax deducted at source).



When interest is Due



Debentures Interest A/c   Dr.

(Gross Interest)


To Debentures holder A/c

(Net Interest)


To Income Tax Payable A/c

(Income Tax Deducted)


When Interest is paid



Debentures Holder A/c      Dr.

(With Interest)


To Bank A/c



On payment of Income Tax to Government



Income Tax Payable A/c    Dr.

(Amount of Income)


On Transfer of Interest on Debenture to statement of profit and Loss A/c

(Tax deducted at source)


Statement of Profit and Loss    Dr.



To Debenture Interest A/c

(Amount of Interest)