Corporate Accounting and Auditing · Redemption of Preference Shares, Issue and Redemption of Debentures

Issue of Debentures: Journal Entries and Accounting Treatment

Updated 10 October 2026 · Fact-checked

A debenture is a written acknowledgement of a company's debt, usually carrying fixed interest. You record the issue in two stages: application and allotment money received, then the debenture account. Premium goes to Securities Premium. Discount is a loss on issue, debited and written off. Collateral issue needs only a memo or a disclosure note.

Understand Issue of Debentures

A debenture is a debt instrument. The company borrows money and promises to pay fixed interest and repay the principal on a due date. A debenture holder is a creditor, not an owner. A shareholder is an owner and gets dividend only if declared.

Key differences from shares: debenture holders have no voting rights, interest is a charge against profit and is payable even in a loss, and debentures can often be secured on assets. Debentures can also be issued at a discount. The discount, or the loss on issue, may be written off from Securities Premium under section 52(2)(c) of the Companies Act, 2013, or from profit, as the question directs. Shares form capital. Debentures form borrowings and appear under liabilities.

Types you must know: secured and unsecured (with or without a charge on assets), redeemable and irredeemable, convertible and non-convertible, registered and bearer. These classifications change the disclosure and the later redemption or conversion entries. They do not change the basic entries on issue.

Debentures can be issued at par (issue price equals face value), at a premium (issue price above face value) or at a discount (issue price below face value). Redemption can also be at par or at a premium. Always check both the issue terms and the redemption terms, because a loss on issue arises whenever the redemption amount exceeds the issue price.

Debentures can be issued for cash, for a consideration other than cash (for example, to a vendor for machinery) or as collateral security for a loan. In a collateral issue the company has not received money for the debentures. The loan is the real liability. The debentures are only an extra security and are handed over to the lender, who can enforce them only if the company defaults.

For the premium, section 52(1) of the Companies Act, 2013 says that where a company issues shares at a premium, a sum equal to the premium received must be transferred to a securities premium account. That sub-section speaks of shares. For premium on debentures, the usual accounting practice is also to credit Securities Premium. Once the account exists, its permitted uses under section 52(2) include writing off preliminary expenses, writing off the expenses of, commission on or discount allowed on an issue of shares or debentures, and providing for the premium payable on redemption of redeemable preference shares or debentures. Section 52(3) separately lets a prescribed class of companies that comply with the prescribed accounting standards apply the account in certain ways for equity shares.

Key rules to remember

Issue at par: Bank A/c Dr (cash received) To Debentures A/c (face value); Use the two-stage entries when the question has application and allotment: Debenture Application and Allotment A/c collects the money, then is transferred to Debentures A/c.
Issue at premium: Premium = Issue price − Face value; credit Securities Premium A/c; Premium is a credit, never income. Cash received = Face value + Premium.
Issue at discount: Discount = Face value − Issue price; debit Discount on Issue of Debentures A/c; Debentures A/c is still credited at full face value.
Issue at discount, redeemable at premium: Loss on Issue = Discount on issue + Premium on redemption; Debit Loss on Issue of Debentures A/c. Credit Debentures A/c at face value and Premium Payable on Redemption A/c.
Issue for consideration other than cash: Asset A/c Dr (agreed price) To Vendor A/c; Vendor A/c Dr To Debentures A/c (face value) and Securities Premium A/c (if any); Number of debentures = Purchase price ÷ Issue price. Face value credited = number × face value.
Collateral security: Debenture Suspense A/c Dr To Debentures issued as Collateral Security A/c (optional entry); or only a note; No cash entry. If the optional entry is passed, deduct the suspense balance from the debentures so that only the loan is shown as borrowing. Disclose the collateral debentures in the notes.
Where premium may be applied: Section 52(2): bonus shares, preliminary expenses, issue expenses/commission/discount, premium on redemption, buy-back under section 68; Section 52(1) covers premium on shares. For debentures, the premium is credited to Securities Premium by accounting practice, and these uses are available for the account. Section 52(3) gives a prescribed class of companies certain uses for equity shares.

How to solve Issue of Debentures questions

Use this method for any debenture issue question. It prevents missed accounts and wrong face values.

1Read the face value, issue price and redemption price. Work out premium or discount on issue and premium on redemption.
2Decide the nature of the issue: cash, other than cash, or collateral. Collateral is the most common trap.
3Write the cash stage entries first: application money, then allotment money, then transfer to Debentures A/c.
4Credit Debentures A/c always at face value. Put premium on issue in Securities Premium A/c. Put discount or loss on issue as a debit.
5If redemption is at a premium, credit Premium Payable on Redemption A/c and debit the whole loss to Loss on Issue of Debentures A/c.
6For other than cash: debit the asset at the agreed price, credit the vendor, then clear the vendor by issuing debentures.
7For collateral: pass a loan entry for the money borrowed. Treat the debentures by a memo or a suspense entry and give a note.
8Show how the items appear in the balance sheet. Debentures are in long-term borrowings. The loss on issue, if any, is written off against Securities Premium (section 52(2)(c)) or against profit, as the question directs.

Quickest way: Three-line check for debenture entries

When to use it: Use when time is short and the question gives only the face value, issue price and redemption terms.

Line 1: Cash received = issue price × number. Debit Bank with that figure.
Line 2: Credit Debentures at face value. Take the difference to Securities Premium (credit) or Discount (debit).
Line 3: If redemption is above face value, the premium on redemption is credited to a liability and the same amount is debited to Loss on Issue. Check that total debits equal total credits.

Common mistakes in Issue of Debentures

Crediting Debentures A/c with the cash received instead of the face value
Students copy the share entry pattern or forget that a discount is a separate debit.
Fix: Debentures A/c always carries the full face value. Cash is shown in Bank and the difference sits in Premium or Discount.
Leaving the discount or loss on issue of debentures unwritten, or treating it as capital
Students stop at passing the issue entry and forget that the discount or loss has to be written off.
Fix: Debit Discount or Loss on Issue, then write it off from Securities Premium (section 52(2)(c) allows this) or from profit, as the question directs.
Ignoring premium on redemption when debentures are issued at a discount
The question may give only the issue discount in one line and the redemption terms in another.
Fix: Add both: Loss on Issue = discount on issue + premium on redemption. Credit the premium to Premium Payable on Redemption A/c.
Passing a cash entry for collateral debentures
Students treat every issue as a normal issue.
Fix: No cash is received for the debentures. The loan entry records the money. The debentures are shown by a note or a suspense entry only.
Making the face value wrong in non-cash issues
Students credit the purchase price to Debentures even when issue is at a premium or discount.
Fix: Number of debentures = purchase price ÷ issue price. Credit face value for that number, and the balance to premium or debit discount.
Treating debenture holders as owners and paying 'dividend'
Debentures are confused with preference shares.
Fix: Debenture holders are creditors. Their return is interest, a finance cost charged to profit and loss.

Worked examples

Example 1

Mehta Industries Ltd issued 5,000 12% debentures of ₹100 each at a discount of 5%, redeemable at a premium of 10%. All money was received. Pass the journal entries and find the loss on issue.

Show the solution

Face value = 5,000 × ₹100 = ₹5,00,000.
Issue price = ₹95 per debenture, so cash received = 5,000 × ₹95 = ₹4,75,000.
Discount on issue = ₹5,00,000 − ₹4,75,000 = ₹25,000.
Premium on redemption = 10% × ₹5,00,000 = ₹50,000.
Loss on issue = ₹25,000 + ₹50,000 = ₹75,000.
Entry 1: Bank A/c Dr ₹4,75,000 To Debenture Application and Allotment A/c ₹4,75,000.
Entry 2: Debenture Application and Allotment A/c Dr ₹4,75,000; Loss on Issue of Debentures A/c Dr ₹75,000 To 12% Debentures A/c ₹5,00,000 To Premium Payable on Redemption of Debentures A/c ₹50,000.
Check: debits ₹5,50,000 = credits ₹5,50,000.

Answer: Cash received is ₹4,75,000. Loss on issue of debentures is ₹75,000. Debentures are credited at ₹5,00,000 and Premium Payable on Redemption at ₹50,000.

Example 2

Sharma Ltd bought machinery from Rao Engineers for ₹6,00,000 and paid by issuing 9% debentures of ₹100 each at a premium of 20%. Separately, it took a loan of ₹10,00,000 from State Bank and gave 12,000 debentures of ₹100 each as collateral security for that loan. Pass the entries for both.

Show the solution

Machinery purchase: issue price = ₹100 + ₹20 = ₹120 per debenture.
Number of debentures = ₹6,00,000 ÷ ₹120 = 5,000.
Face value = 5,000 × ₹100 = ₹5,00,000. Premium = 5,000 × ₹20 = ₹1,00,000.
Entry 1: Machinery A/c Dr ₹6,00,000 To Rao Engineers ₹6,00,000.
Entry 2: Rao Engineers Dr ₹6,00,000 To 9% Debentures A/c ₹5,00,000 To Securities Premium A/c ₹1,00,000.
Loan: Bank A/c Dr ₹10,00,000 To Bank Loan A/c ₹10,00,000.
Collateral debentures (face value 12,000 × ₹100 = ₹12,00,000): no cash is received. Either pass the optional entry Debenture Suspense A/c Dr ₹12,00,000 To Debentures issued as Collateral Security A/c ₹12,00,000, or give only a note.
In the balance sheet, show the bank loan under long-term borrowings at ₹10,00,000. If the optional entry is passed, deduct the suspense balance of ₹12,00,000 from the collateral debentures of ₹12,00,000, so the collateral issue adds nothing to borrowings. Disclose the collateral debentures in the notes. The 9% debentures of ₹5,00,000 issued to Rao Engineers are a separate borrowing.

Answer: Rao Engineers is settled by 5,000 debentures: Debentures ₹5,00,000 and Securities Premium ₹1,00,000. The collateral debentures of ₹12,00,000 face value involve no cash. They are only noted, or shown in a suspense entry that is deducted from them. The loan of ₹10,00,000 is the borrowing for the collateral transaction.

Exam tips

Read for the word 'collateral'. It means a note or a memo entry, not a full issue entry.
Write the face value, issue price and redemption price in rough work at the top. Most errors come from mixing them.
In MCQs, check whether the question asks for cash received, loss on issue or the credit to Debentures A/c. They are three different figures.
When the redemption premium is given, show the Premium Payable on Redemption account in the entry. Step marks go to it.
Finish with a balance sheet note on borrowings and any unwritten-off loss on issue. The examiner expects the presentation.

Practice questions from Redemption of Preference Shares, Issue and Redemption of Debentures

Issue of Debentures in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Issue of Debentures: frequently asked questions

What is the difference between shares and debentures?

Shares are ownership capital. Debentures are borrowings and the holders are creditors. Shareholders can vote and get dividends only if declared. Debenture holders get fixed interest, even in a loss, and usually have no voting rights.

How do you record issue of debentures at a discount?

Credit Debentures A/c at full face value, debit Bank with the cash actually received, and debit Discount on Issue of Debentures A/c with the difference. If debentures are also redeemable at a premium, debit the total as Loss on Issue and credit Premium Payable on Redemption.

What is the accounting treatment of collateral security debentures?

No cash is received for the debentures, so there is no cash entry. Record the loan as a borrowing. Show the debentures either by an optional Debenture Suspense entry, deducted so that only the loan is borrowing, or by a note. The lender may enforce them only if the company defaults.

Where does the premium on issue of debentures go?

Credit it to Securities Premium A/c. Section 52(1) of the Companies Act, 2013 speaks of premium on shares, and for debentures this is the usual accounting practice. The uses in section 52(2) are available for the account, such as writing off the discount on or expenses of an issue of debentures, and providing for premium payable on redemption.