Accounting · Company Accounts

Issue and Redemption of Debentures: Journal Entries for CA Foundation

Updated 1 October 2026

Issue and redemption of debentures records a company's borrowing and its repayment. On issue, credit Debentures at face value, credit Securities Premium for any premium and debit Discount or Loss on Issue for any discount. On redemption, debit Debentures, pay the holders, and transfer profits to Debenture Redemption Reserve where the rules require it.

Understand Issue and Redemption of Debentures

A debenture is a written acknowledgement of a company's debt. The holder is a lender, not an owner. The company promises to pay fixed interest and to repay the money on a stated date.

This is the main difference from shares. Shareholders are owners, get dividend only out of profits, and usually have voting rights. Debenture holders are creditors, get interest even if the company makes a loss, and have no voting rights. Debenture interest is a charge against profit. Dividend is an appropriation of profit.

Debentures can be issued at par (face value), at a premium (more than face value) or at a discount (less than face value). Premium is a capital profit and goes to Securities Premium. Discount is a loss. It is a deferred item, written off over the life of the debentures. It may be adjusted against Securities Premium (if available) under Section 52, otherwise it is written off against the Statement of P&L. Sometimes the company agrees to redeem at a premium even if it issued at par. That premium payable is also a loss, and you provide for it at the time of issue.

Debentures can also be issued for a consideration other than cash, for example to a supplier of machinery. You first record the purchase of the asset and the liability to the vendor. Then you settle the vendor by issuing debentures. If debentures are issued only as collateral security for a loan, no real entry is made. Only a memo note or a disclosure is needed.

Redemption means repaying the debenture holders. It can be done in a lump sum on maturity, in instalments (for example, a fixed number of debentures every year), or by purchasing the company's own debentures in the open market. Where the rules require it, the company builds a Debenture Redemption Reserve (DRR) out of profits, so that funds are not distributed as dividend before debt is repaid.

Key rules to remember

Issue at par: Combined entry (all money collected in one go): Bank A/c Dr; To Debentures A/c. Two-step form (application and allotment separate): (1) Bank A/c Dr; To Debenture Application and Allotment A/c. (2) Debenture Application and Allotment A/c Dr; To Debentures A/c; Use the combined entry when the question collects the whole amount together. Use the two-step form when the question separates application and allotment. In both cases Debentures are credited at face value.
Issue at premium: Debenture Application and Allotment A/c Dr; To Debentures A/c (face value); To Securities Premium A/c (premium); Premium is a capital profit. Never credit it to the Statement of Profit and Loss.
Issue at discount: Debenture Application and Allotment A/c Dr (cash received); Discount on Issue of Debentures A/c Dr (discount); To Debentures A/c (face value); Debentures are always credited at face value. Discount is a loss to be written off, not an asset to be left forever.
Issue at discount, redeemable at premium: Loss on Issue of Debentures = Discount on issue + Premium payable on redemption; Credit Premium Payable on Redemption A/c for the premium. Debit the total loss to Loss on Issue of Debentures A/c.
Issue for consideration other than cash: Asset A/c Dr; To Vendor A/c. Then Vendor A/c Dr; To Debentures A/c; To Securities Premium A/c (or Discount on Issue Dr); Debentures issued to the vendor are valued at issue price. Face value is credited to Debentures.
Redemption at par: Debentures A/c Dr; To Debentureholders A/c. Then Debentureholders A/c Dr; To Bank A/c; On redemption at a premium, also clear the Premium Payable on Redemption A/c.
DRR creation and release: Surplus in Statement of P&L Dr; To Debenture Redemption Reserve A/c. After redemption: DRR A/c Dr; To General Reserve A/c; The DRR percentage and the investment requirement are fixed by the rules in force. Use the percentage the question gives.
Purchase in open market and cancellation: Own Debentures A/c Dr (cost); To Bank A/c. On cancellation: Debentures A/c Dr (face value); To Own Debentures A/c (cost); To Profit on Cancellation of Debentures A/c (difference); Profit on cancellation is a capital profit and goes to Capital Reserve, either directly or through a Profit on Cancellation account. If cost is more than face value, the loss on cancellation is charged to the Statement of Profit and Loss. Cost excludes accrued interest on a cum-interest price.

How to solve Issue and Redemption of Debentures questions

Use this order for any issue or redemption question. It keeps your entries complete and gives you step marks even if one figure goes wrong.

1Read the question and note the number of debentures, face value, issue price, redemption price and whether payment is in cash or kind.
2Work out the face value, the cash received, the premium or discount on issue and any premium payable on redemption. Write these in rough first.
3For issue, check how the money is collected. If all of it comes in one go, pass one entry: Bank A/c Dr; To Debentures A/c (with Securities Premium, Discount or Premium Payable on Redemption as needed). If application and allotment are separate, pass the bank entry first and then the allotment entry crediting Debentures at face value.
4If the issue is for an asset, pass the purchase entry first and then the entry settling the vendor in debentures.
5For redemption, identify the method: lump sum, instalments or open market. Debit Debentures at face value in every case.
6Check the profit position and the DRR requirement. Transfer the required amount from profits to DRR and show any investment the question asks for.
7After redemption, release the DRR to General Reserve if the question says so. Write off any remaining Loss on Issue of Debentures as instructed.
8Add a short narration to each entry and check that total debits equal total credits.

Quickest way: Three-line check before you write each entry

When to use it: Use this when time is short and the question has several entries. It helps you avoid the usual errors in the credit side.

Write the Debentures credit first, always at face value. This fixes the biggest part of the entry.
Balance the entry with cash or the vendor on the debit side. Then put the premium on the credit side or the discount on the debit side.
Check for a redemption premium. If there is one, add it to the loss and credit Premium Payable on Redemption.
For redemption, remember the order: Debentures to Debentureholders, then Debentureholders to Bank.
For open market purchases, compute cost, face value and difference in rough before passing any entry. Never guess the profit.

Common mistakes in Issue and Redemption of Debentures

Crediting Debentures at issue price instead of face value.
Students copy the share-capital habit of working with the amount received.
Fix: Debentures are always credited at face value. The premium, discount or redemption premium sits in a separate account.
Forgetting to record the premium payable on redemption at the time of issue.
The premium is paid years later, so it seems like a future item.
Fix: Read the issue terms. If the debentures are redeemable at a premium, credit Premium Payable on Redemption and debit the loss on issue when you issue them.
Treating the premium on issue as income in the Statement of Profit and Loss.
Students think any extra money received is profit.
Fix: Premium on issue of debentures is a capital profit. Credit it to Securities Premium.
Skipping the Debentureholders account on redemption.
Students go directly from Debentures to Bank to save time.
Fix: Show both entries unless the question says otherwise. The two-step format is the safer way to earn step marks.
Taking the cum-interest price as the cost of debentures bought in the market.
Students ignore the word cum-interest or ex-interest.
Fix: If the price is cum-interest, it includes accrued interest. Split it, and charge the interest part to Debenture Interest, not to the cost of the debentures.
Applying a fixed DRR percentage without reading the question.
Students memorise one rate and use it for every company.
Fix: Use the rate and conditions the question states. If it says the company is not required to create DRR, do not create one.

Worked examples

Example 1

A company issued 5,000 10% debentures of ₹100 each at a discount of 4%, redeemable at a premium of 5%. All money was received in cash. Pass the journal entries for the issue.

Show the solution

Face value = 5,000 × ₹100 = ₹5,00,000.
Discount on issue = 4% of ₹5,00,000 = ₹20,000. Cash received = ₹5,00,000 − ₹20,000 = ₹4,80,000.
Premium payable on redemption = 5% of ₹5,00,000 = ₹25,000.
Loss on issue of debentures = ₹20,000 + ₹25,000 = ₹45,000.
Entry 1: Bank A/c Dr ₹4,80,000; To Debenture Application and Allotment A/c ₹4,80,000 (being application money received).
Entry 2: Debenture Application and Allotment A/c Dr ₹4,80,000; Loss on Issue of Debentures A/c Dr ₹45,000; To 10% Debentures A/c ₹5,00,000; To Premium Payable on Redemption A/c ₹25,000 (being debentures allotted).
Check: debits ₹4,80,000 + ₹45,000 = ₹5,25,000. Credits ₹5,00,000 + ₹25,000 = ₹5,25,000. The entry balances.

Answer: Debentures are credited at ₹5,00,000 and Premium Payable on Redemption at ₹25,000. Loss on Issue of Debentures is debited at ₹45,000, to be written off over the life of the debentures.

Example 2

A company has 1,000 12% debentures of ₹100 each outstanding. It purchased 300 of them in the open market at ₹96 each (ex-interest) and cancelled them immediately. Pass the journal entries.

Show the solution

Cost of debentures purchased = 300 × ₹96 = ₹28,800.
Face value of debentures cancelled = 300 × ₹100 = ₹30,000.
Profit on cancellation = ₹30,000 − ₹28,800 = ₹1,200. This is a capital profit.
Entry 1: Own Debentures A/c Dr ₹28,800; To Bank A/c ₹28,800 (being 300 own debentures purchased at ₹96).
Entry 2: 12% Debentures A/c Dr ₹30,000; To Own Debentures A/c ₹28,800; To Profit on Cancellation of Debentures A/c ₹1,200 (being debentures cancelled).
Entry 3: Profit on Cancellation of Debentures A/c Dr ₹1,200; To Capital Reserve A/c ₹1,200 (being the profit on cancellation transferred to Capital Reserve).
The ex-interest price means no accrued interest is included, so no interest entry is needed here.
Had the cost been more than face value, the difference would be a loss on cancellation, charged to the Statement of Profit and Loss.

Answer: Debentures of ₹30,000 are cancelled at a cost of ₹28,800. The profit of ₹1,200 is credited to Capital Reserve through the Profit on Cancellation account. Debentures outstanding after cancellation are ₹70,000.

Exam tips

Always credit Debentures at face value, whatever the issue price. Examiners check this line first.
Read the redemption terms before passing the issue entry. A redemption premium changes the loss on issue.
Show the Debentureholders account on redemption when the question has marks for it. It is a safe presentation.
For open market purchases, write cost, face value and profit or loss in rough before passing any entry.
For DRR, use the percentage and conditions given in the question. Do not import a rate from memory.

Practice questions from Company Accounts

Issue and Redemption of Debentures: frequently asked questions

What is the difference between shares and debentures?

Shares are ownership capital. Shareholders get dividend from profits and usually have voting rights. Debentures are borrowed money. Holders are creditors, receive fixed interest even if the company has a loss, and have no voting rights.

Is discount on issue of debentures a capital loss?

It is a loss incurred in raising borrowed capital, so it is not an ordinary running expense and is treated as a deferred item. It is not a capital loss in the sense of a loss on selling a capital asset. It is written off over the life of the debentures, and it may be adjusted against Securities Premium (if available) under Section 52, otherwise against the Statement of Profit and Loss.

What is Debenture Redemption Reserve?

It is a reserve created out of profits to build funds for repaying debentures. It prevents profits from being fully paid out as dividend before the debt is cleared. The percentage and who must create it depend on the rules in force, so follow the question.

How do I treat the profit on cancellation of own debentures?

If the face value of the cancelled debentures is more than the cost, the difference is a capital profit. It goes to Capital Reserve, either directly or through a Profit on Cancellation account. If the cost is more, the difference is a loss and is charged to the Statement of Profit and Loss.

What is the difference between redemption in lump sum and in instalments?

In lump sum redemption, all debentures are repaid on one date, usually at maturity. In instalments, a fixed number or amount is repaid every year. The entries are the same, but the debentures outstanding fall each year.