Accounting · Company Accounts

Redemption of Preference Shares: Journal Entries, CRR and Section 55 Rules

Updated 1 October 2026

Redemption of preference shares means repaying redeemable preference shareholders. Shares must be fully paid and can be redeemed only out of profits available for dividend or the proceeds of a fresh issue. Pass entries for redemption, premium and Capital Redemption Reserve (CRR) for any profit-funded shortfall, then pay the shareholders.

Understand Redemption of Preference Shares

A redeemable preference share is repaid by the company after a fixed period, or earlier at its option, as per its terms of issue. Repaying it reduces the company's capital. So the law (Section 55 of the Companies Act, 2013) protects creditors by controlling where the money comes from.

The main conditions are simple. Only fully paid shares can be redeemed. Redemption must be out of profits available for dividend (free reserves, and the Statement of P&L balance) or out of the proceeds of a fresh issue of shares made for this purpose. These are the only permitted sources of redemption.

Section 55 also limits the period. A company cannot issue preference shares that are redeemable after 20 years from the date of issue. The exception is preference shares issued for infrastructure projects. These may be issued for more than 20 years (up to 30 years), subject to redeeming at least 10% annually from the 21st year onwards, as per the terms of issue. The terms of redemption must be set when the shares are issued.

If the company redeems out of profits, the capital it repays must be replaced by a reserve so the company's capital base does not shrink. This reserve is the Capital Redemption Reserve (CRR). It equals the nominal value of shares redeemed minus the nominal value of the fresh issue made for the redemption. If redemption is wholly out of a fresh issue, no CRR is needed.

If shares are redeemed at a premium, the premium payable must be provided out of profits or out of the Securities Premium account, before the redemption. It is not met out of the fresh issue proceeds, and it does not enter the CRR calculation. The CRR can later be used only to issue fully paid bonus shares.

In exam terms: work out how much must come from fresh issue and how much from reserves, post the entries in the right order, and show CRR and the remaining reserves in the working notes.

Key rules to remember

CRR required: CRR = Nominal value of shares redeemed − Nominal value of fresh shares issued for redemption; If the fresh issue is equal to or more than the nominal value redeemed, no CRR is created. Use the nominal value of the fresh issue, not the amount received including premium.
Redemption out of profits only: CRR = Nominal value of preference shares redeemed; Applies when no fresh issue is made.
Premium on redemption: Premium payable = Nominal value redeemed × Premium %; Provide it out of profits or Securities Premium before redemption, not out of the fresh issue proceeds. It is not included in the CRR amount.
Amount paid to shareholders: Payment = Nominal value redeemed + Premium on redemption; Pay the full amount through the bank account.
Basic conditions (Section 55): Fully paid shares only; source = profits available for dividend or fresh issue; Both conditions must be met. Partly paid shares must first be made fully paid.

How to solve Redemption of Preference Shares questions

Use this order for any question. It keeps the entries and the CRR consistent.

1Read the facts. Note the shares to redeem, premium, fresh issue details and the reserves available.
2Check that the shares are fully paid. If calls are unpaid, record the call money first.
3Record the fresh issue (if any) in the books: bank debit, share capital credit, securities premium credit if applicable.
4If there is a premium on redemption, provide for it first. Debit Securities Premium and/or a free reserve or the Statement of P&L, credit Premium on Redemption of Preference Shares account.
5Calculate the CRR using the formula. It is the nominal value redeemed minus the nominal value of the fresh issue.
6Pass the entry to transfer reserves to CRR. Debit a free reserve or the Statement of P&L, credit Capital Redemption Reserve. Securities Premium is not used for CRR.
7Pass the redemption entry. Debit Preference Share Capital and Premium on Redemption (if any), credit Preference Shareholders account.
8Pay the shareholders: debit Preference Shareholders, credit Bank. Check the bank balance is sufficient.
9Show the working note for the CRR and the closing reserves.

Quickest way: Three-block working format

When to use it: Use this for any journal-entry question with limited time.

Block 1: Write nominal value to redeem, premium, and fresh issue value on one line.
Block 2: Compute CRR in one line. If it is zero or negative, write 'No CRR'.
Block 3: Write entries in this order: fresh issue, premium provision (if any), transfer to CRR, redemption, payment.
Always write the narration. It earns marks even if a figure is wrong.
Check bank: opening balance + fresh issue − payment should not be negative.

Common mistakes in Redemption of Preference Shares

Including the premium on the fresh issue when computing CRR
Students use the total money received from the fresh issue rather than the shares' face value.
Fix: Use only the nominal value of the fresh shares in the CRR formula.
Adding the premium on redemption to the CRR
The premium and the capital are paid together, so they get mixed up.
Fix: CRR depends only on nominal value. Premium payable on redemption is provided out of profits or Securities Premium, not out of the fresh issue proceeds, and it does not enter the CRR calculation.
Redeeming partly paid shares
The problem gives called-up and paid-up figures that are not noticed.
Fix: Section 55 allows only fully paid shares. Show the call money first, then the redemption.
Creating CRR when redemption is fully out of a fresh issue
Students apply the CRR step automatically.
Fix: If the fresh issue is at least the nominal value redeemed, there is no CRR.
Using Securities Premium to create CRR
All reserves are treated as equally usable for every purpose.
Fix: Create CRR only from profits available for dividend, such as free reserves and the Statement of P&L balance. Securities Premium is not used for CRR. It can be used only for the premium payable on redemption, and that provision is passed before the redemption entry.
Confusing CRR with Debenture Redemption Reserve (DRR)
Both are created on redemption and sound alike.
Fix: CRR relates to redeeming preference shares out of profits. DRR relates to debentures. CRR is created from profits; a fresh issue reduces the CRR needed.

Worked examples

Example 1

A company has 2,000 9% redeemable preference shares of ₹100 each, fully paid. It redeems them at par. For this it issues 1,200 equity shares of ₹100 each at par, fully paid. General Reserve is ₹1,50,000. The company has sufficient bank balance (at least ₹80,000 in addition to the fresh issue proceeds). Pass the journal entries.

Show the solution

Nominal value redeemed = 2,000 × ₹100 = ₹2,00,000.
Fresh issue = 1,200 × ₹100 = ₹1,20,000.
CRR = ₹2,00,000 − ₹1,20,000 = ₹80,000. General Reserve ₹1,50,000 is enough.
Bank check: payment ₹2,00,000 = fresh issue ₹1,20,000 + ₹80,000 from existing bank balance, which the problem states is available.
Entry 1: Bank A/c Dr ₹1,20,000; to Equity Share Capital ₹1,20,000 (issue of shares).
Entry 2: General Reserve A/c Dr ₹80,000; to Capital Redemption Reserve ₹80,000.
Entry 3: 9% Preference Share Capital A/c Dr ₹2,00,000; to Preference Shareholders A/c ₹2,00,000.
Entry 4: Preference Shareholders A/c Dr ₹2,00,000; to Bank A/c ₹2,00,000.

Answer: CRR = ₹80,000. Total paid to preference shareholders = ₹2,00,000. General Reserve left = ₹70,000.

Example 2

A company redeems 1,000 10% preference shares of ₹100 each, fully paid, at a premium of 10%. It issues 600 equity shares of ₹100 each at par. Securities Premium is ₹8,000 and General Reserve is ₹90,000. The company has sufficient bank balance (at least ₹50,000 in addition to the fresh issue proceeds). Pass the entries, using Securities Premium for the premium as far as possible.

Show the solution

Nominal value redeemed = 1,000 × ₹100 = ₹1,00,000.
Premium on redemption = 10% × ₹1,00,000 = ₹10,000.
Fresh issue = 600 × ₹100 = ₹60,000.
CRR = ₹1,00,000 − ₹60,000 = ₹40,000.
Bank check: payment ₹1,10,000 = fresh issue ₹60,000 + ₹50,000 from existing bank balance, which the problem states is available.
Entry 1: Bank A/c Dr ₹60,000; to Equity Share Capital ₹60,000.
Entry 2 (premium provision, before redemption): Securities Premium A/c Dr ₹8,000; General Reserve A/c Dr ₹2,000; to Premium on Redemption of Preference Shares A/c ₹10,000.
Entry 3: General Reserve A/c Dr ₹40,000; to Capital Redemption Reserve ₹40,000.
Entry 4: Preference Share Capital A/c Dr ₹1,00,000; Premium on Redemption of Preference Shares A/c Dr ₹10,000; to Preference Shareholders A/c ₹1,10,000.
Entry 5: Preference Shareholders A/c Dr ₹1,10,000; to Bank A/c ₹1,10,000.
Check reserve: General Reserve used = ₹2,000 + ₹40,000 = ₹42,000, which is less than ₹90,000.

Answer: CRR = ₹40,000. Total paid = ₹1,10,000. Premium of ₹10,000 is met ₹8,000 from Securities Premium and ₹2,000 from General Reserve, provided before redemption.

Exam tips

Always write a working note for CRR. Marks are often given for the working even if the final entry is wrong.
Check whether the shares are fully paid before anything else. A hidden call-in-arrear is a common trap.
Write the premium on redemption as a separate line in the entry. Do not merge it into the capital.
Read the source of funds carefully. 'Out of profits', 'out of fresh issue' and 'partly out of both' lead to different CRR figures.
Keep the order: fresh issue, premium provision, CRR transfer, redemption, payment. A neat sequence is easier for the examiner to mark.

Practice questions from Company Accounts

Redemption of Preference Shares: frequently asked questions

What is the condition for redeeming preference shares under Section 55?

The shares must be fully paid. They must be redeemed out of profits available for dividend or the proceeds of a fresh issue of shares made for redemption.

How do you calculate Capital Redemption Reserve?

CRR is the nominal value of preference shares redeemed minus the nominal value of the fresh shares issued for the redemption. If the fresh issue is at least equal to the nominal value redeemed, no CRR is created.

Is premium on redemption included in the CRR?

No. CRR is based only on nominal values. Premium payable on redemption is provided out of profits or Securities Premium before redemption, not out of the fresh issue proceeds.

What is the difference between CRR and DRR?

CRR is created when preference shares are redeemed out of profits, and it is used for issuing fully paid bonus shares. DRR is a reserve created for debentures. Do not mix the two in answers.