Issue of Debentures — Notes

A debenture is an instrument of debt issued by a company under its common seal or otherwise (Section 2(30) of the Companies Act, 2013); the holder is a creditor who earns interest at a fixed (coupon) rate on the face value. Debentures carry no voting rights (Section 71). Unlike shares (Section 53), debentures may be issued at a discount.

Issue for cash

• Lump sum: Bank A/c Dr. To Debenture Application and Allotment A/c (all applications); on allotment that account is debited and the Debentures A/c credited.
• Instalments: application, allotment and one or more calls; each is first made due and then received.
• Over-subscription: the excess application money is refunded (Debenture Application A/c Dr. To Bank A/c).

Redemption of debentures (Debenture Redemption Reserve, investment, methods) is chapter 8; here redemption appears only as a term of issue.

• At par: price = face value.
• At a premium: the premium (usually with allotment) is credited to Securities Premium A/c, shown under Reserves and Surplus.
• At a discount: the discount (allowed at allotment) is debited to Discount on Issue of Debentures A/c, a capital loss.
• Check: the Debentures A/c is always credited with the face value in total.

At issue the company also fixes whether it will repay at par or at a premium.

• Redeemable at par: only the issue terms matter (par, premium, discount).
• Redeemable at a premium: Loss on Issue of Debentures A/c Dr. with (discount, if any + premium on redemption); Premium on Redemption of Debentures A/c Cr. with the premium payable.

Identity (every allotment entry): amount receivable + discount or loss = face value + securities premium + premium on redemption.

Premium on Redemption of Debentures is a liability until redemption, shown under other long-term liabilities.

All capital losses (discount or loss on issue of debentures) are written off in the year in which they occur. The sequence is:

1. Securities Premium (permitted by Section 52 of the Companies Act, 2013; premium received on any issue, including one in the same year);
2. Statement of Profit and Loss;
3. lastly Capital Reserve.

Entry: Securities Premium A/c Dr., Statement of Profit and Loss Dr., Capital Reserve A/c Dr. To Discount (or Loss) on Issue of Debentures A/c.

• Promoters (for services in forming the company): Incorporation Costs A/c (or Goodwill A/c) Dr. To Debentures A/c.
• Underwriters (commission): Underwriting Commission A/c Dr. To Underwriters A/c; Underwriters A/c Dr. To Debentures A/c.
• Vendor of assets: Asset A/c Dr. To Vendor's A/c; then Vendor's A/c Dr. (+ Discount/Loss on Issue Dr.) To Debentures A/c (+ Securities Premium A/c, Premium on Redemption A/c).
• Vendor of a business: Business Purchase A/c Dr. To Vendor's A/c; Assets A/cs Dr. (+ Goodwill A/c) To Liabilities A/cs, Business Purchase A/c (+ Capital Reserve A/c); then the allotment.

Number of debentures = amount payable ÷ issue price. Goodwill = price − net assets; capital reserve = net assets − price.

Collateral security is a secondary security given in addition to the primary security for a loan. The lender can enforce the debentures only if the company fails to repay the loan; on repayment they are returned.

• First method: no entry. Below the loan in the note: (secured by the issue of … debentures as collateral security).
• Second method: Debenture Suspense A/c Dr. To Debentures A/c (face value). In the note on long-term borrowings, the debentures are shown less Debenture Suspense, so they add nothing to the total. On repayment of the loan the entry is reversed.
• No interest is paid on collateral debentures; interest is paid on the loan.

Calls in arrears: an instalment due but unpaid is debited to Calls in Arrears A/c. When received: Bank A/c Dr. To Calls in Arrears A/c; interest charged under the terms of issue is credited to Interest on Calls in Arrears A/c.

Calls in advance: money received before a call is made is credited to Calls in Advance A/c (a current liability) and adjusted when the call is made. Interest paid on it is a finance cost.

Interest on debentures = face value × rate × months/12, payable even in a loss year (a charge against profit).

• Interest due: Debenture Interest A/c Dr. (gross) To Debentureholders' A/c (net), To TDS Payable A/c (tax).
• Paid: Debentureholders' A/c Dr. To Bank A/c.
• Tax deposited: TDS Payable A/c Dr. To Bank A/c.
• Year end: Statement of Profit and Loss Dr. To Debenture Interest A/c.

• Long-term borrowings (non-current liabilities): debentures repayable after 12 months; secured debentures and the nature of security stated; collateral debentures less Debenture Suspense; calls in arrears deducted.
• Short-term borrowings (current liabilities): current maturities of long-term borrowings, the debentures repayable within 12 months of the Balance Sheet date.
• Other long-term liabilities: Premium on Redemption of Debentures.
• Other current liabilities: calls in advance, interest accrued, TDS payable.
• Reserves and Surplus: Securities Premium (after any write-off), Capital Reserve.

Kalsubai Hydraulic Jacks Ltd (imagined), notes as at 31 March 2026