Corporate Accounting and Financial Management · Accounting for Debentures

Issue of Debentures and Journal Entries

Updated 11 October 2026 · Fact-checked

Issue of debentures means a company raising a loan by issuing debenture certificates. You record cash received in application and allotment accounts, then credit Debentures at face value. Premium goes to Securities Premium, and discount is debited to Discount on Issue of Debentures. For non-cash issues, debit the asset and credit the vendor first.

Understand Issue of Debentures and Journal Entries

A debenture is a debt instrument. The company borrows money and promises to pay interest and repay the principal later. The holder is a lender, not an owner. So debenture money is never share capital, and it is shown under borrowings.

A debenture can be issued in three ways. At par, the issue price equals face value. At a premium, the issue price is above face value. At a discount, the issue price is below face value. The gain or loss on the issue price is separate from any premium payable at redemption.

The journal entries follow the same flow as share issue. Money comes in on application, then on allotment, then on calls if any. You open a Debenture Application A/c and a Debenture Allotment A/c, and close them into the Debentures A/c at face value.

The law on shares and debentures differs here. Section 53(1) of the Companies Act, 2013 says that, except as provided in section 54, a company shall not issue shares at a discount. Under section 53(2), a share issued at a discount is void. Section 53(2A) gives one more exception: a company may issue shares at a discount to its creditors when their debt is converted into shares under a statutory resolution plan or a debt restructuring scheme under RBI guidelines. Section 53 speaks of shares, so it does not stop a company from issuing debentures at a discount. A discount on debentures is treated as a loss and written off over the life of the debentures.

Section 52(1) requires a securities premium account where a company issues shares at a premium. It does not mention premium on debentures. The usual textbook convention is to credit premium on debentures to Securities Premium as well. Treat that as a convention, not as a statutory requirement. Separately, section 52(2)(c) says the securities premium account may be applied to write off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures.

A company can also issue debentures for consideration other than cash, for example to buy machinery. Here you first record the purchase against the vendor, then record the issue of debentures to the vendor. It can also issue debentures as collateral security for a loan. These are only a back-up. No liability arises unless the company defaults, so the usual treatment is a note, not a full entry.

Key rules to remember

Amount payable on issue: Issue price = Face value + Premium, or Face value − Discount; Work on the issue price for cash received, but always credit Debentures A/c at face value.
Application entry: Bank A/c Dr; to Debenture Application A/c; Record the actual money received with the applications.
Allotment entry at par: Debenture Application A/c Dr (amount received on application); Debenture Allotment A/c Dr (amount due on allotment); to Debentures A/c (face value); For an issue at par, application plus allotment equals face value, so the entry balances. When the allotment money is received, pass a separate entry: Bank A/c Dr; to Debenture Allotment A/c.
Issue at premium: Debentures A/c credit = Face value; Securities Premium credit = Premium (usual convention); Premium is a capital receipt and is never credited to the Profit and Loss Statement. Crediting it to Securities Premium is the usual convention for debentures. Section 52(1) itself applies to shares.
Issue at discount: Discount on Issue of Debentures A/c Dr = Face value − Issue price; This is a loss and is written off. Section 52(2)(c) allows the securities premium account to be applied to write off discount allowed on an issue of shares or debentures, if a balance is available.
Premium on redemption: Loss on Issue of Debentures A/c Dr; to Premium on Redemption of Debentures A/c. Amount = redemption premium per debenture × number of debentures issued; This is a separate, additional entry passed at the time of issue when the debentures are redeemable at a premium. It is over and above the allotment entry. If the debentures are also issued at a discount, the discount and this loss may be combined in one Loss on Issue of Debentures account or shown separately as Discount on Issue and Loss on Issue.
Issue for consideration other than cash: Asset A/c Dr; to Vendor A/c. Then Vendor A/c Dr; to Debentures A/c (and Securities Premium, or Discount on Issue Dr); Vendor is settled at the issue price of the debentures.
Collateral security: Optional: Debenture Suspense A/c Dr; to Debentures A/c. Disclose by note; No cash is received. No interest is payable on collateral debentures unless the company defaults and the lender enforces them.

How to solve Issue of Debentures and Journal Entries questions

Use this order for any question on issue of debentures. It stops you from missing a discount, a redemption premium or a non-cash leg.

1Read the terms. Note the number, face value, rate of interest, issue price (par, premium or discount) and redemption terms (par or premium).
2Compute the total face value, the total premium or discount, and the total redemption premium, if any.
3Write the amounts payable on application, allotment and calls. Check that the instalments add up to the issue price, not the face value, if the issue is at a discount.
4Pass the entry for money received on application: Bank Dr to Debenture Application A/c.
5Pass the allotment entry. Debit Application A/c, and debit Allotment A/c for the amount due. Credit Debentures A/c at face value and credit Securities Premium for any premium. Debit Discount on Issue for any discount.
6If debentures are redeemable at a premium, debit Loss on Issue of Debentures A/c and credit Premium on Redemption of Debentures A/c.
7Pass entries for money received on allotment and on any call. Add a call entry if the question has one.
8For non-cash or collateral issues, use the special entries in the formulas. Add a short note for collateral debentures.

Quickest way: The one-line check for every issue

When to use it: Use this when you have little time and just need the allotment entry right.

Write the total face value. Credit this amount to Debentures A/c.
Compare the issue price with the face value. If the issue price is higher, credit the difference to Securities Premium. If it is lower, debit the difference to Discount on Issue of Debentures.
Add any redemption premium as Loss on Issue of Debentures Dr to Premium on Redemption of Debentures.
Check that total debits equal total credits before moving on.

Common mistakes in Issue of Debentures and Journal Entries

Crediting Debentures A/c at the issue price instead of face value.
Students copy the pattern for share capital at a premium or take cash received as the base.
Fix: Always credit Debentures A/c at face value. Show premium and discount separately.
Treating the discount as a gain or ignoring it.
The discount reduces cash, so it feels like it does not need an entry.
Fix: Debit Discount on Issue of Debentures A/c. It is a loss, and it is written off later.
Applying section 53 to debentures and saying the discount is void.
Students remember that issue at a discount is prohibited and apply it to all securities.
Fix: Section 53 prohibits issue of shares at a discount. Debentures can be issued at a discount, and the loss is written off.
Confusing premium on issue with premium on redemption.
Both use the word premium, so the entries get mixed up.
Fix: Premium on issue is cash received, credited to Securities Premium. Premium on redemption is a liability payable later, credited to Premium on Redemption of Debentures, with a debit to Loss on Issue.
Passing a full cash entry for collateral debentures.
Students treat every debenture issue as a source of cash.
Fix: No cash is received for collateral debentures. Either pass no entry and add a note, or use the Debenture Suspense entry. The loan itself is the real liability.
Skipping the vendor account in a non-cash issue.
Students try to debit the asset and credit Debentures directly in one line.
Fix: Use two steps: Asset Dr to Vendor, then Vendor Dr to Debentures. It shows the purchase price and the settlement separately.

Worked examples

Example 1

Bharat Textiles Ltd issued 5,000 10% debentures of ₹100 each at a discount of 5%, payable ₹20 on application and the balance on allotment. All debentures were applied for and allotted. Pass journal entries.

Show the solution

Face value = 5,000 × ₹100 = ₹5,00,000.
Issue price = ₹100 − ₹5 = ₹95 per debenture. Total cash = 5,000 × ₹95 = ₹4,75,000.
Application money = 5,000 × ₹20 = ₹1,00,000.
Allotment money due = 5,000 × (₹95 − ₹20) = 5,000 × ₹75 = ₹3,75,000.
Discount = 5,000 × ₹5 = ₹25,000.
Entry 1: Bank A/c Dr ₹1,00,000; to Debenture Application A/c ₹1,00,000.
Entry 2: Debenture Application A/c Dr ₹1,00,000; Debenture Allotment A/c Dr ₹3,75,000; Discount on Issue of Debentures A/c Dr ₹25,000; to 10% Debentures A/c ₹5,00,000.
Entry 3: Bank A/c Dr ₹3,75,000; to Debenture Allotment A/c ₹3,75,000.
Check: debits in entry 2 are ₹1,00,000 + ₹3,75,000 + ₹25,000 = ₹5,00,000, which equals the credit.

Answer: Debentures are credited at ₹5,00,000 (face value). Cash received is ₹4,75,000. Discount on Issue of Debentures A/c of ₹25,000 is debited, shown as a loss to be written off.

Example 2

Sundaram Industries Ltd bought machinery worth ₹5,50,000 from Kaveri Machines Ltd. It paid by issuing 9% debentures of ₹100 each at a premium of 10%. Pass the journal entries.

Show the solution

Issue price = ₹100 + ₹10 = ₹110 per debenture.
Number of debentures = ₹5,50,000 ÷ ₹110 = 5,000.
Face value = 5,000 × ₹100 = ₹5,00,000.
Premium = 5,000 × ₹10 = ₹50,000.
Entry 1 (purchase): Machinery A/c Dr ₹5,50,000; to Kaveri Machines Ltd ₹5,50,000.
Entry 2 (settlement): Kaveri Machines Ltd Dr ₹5,50,000; to 9% Debentures A/c ₹5,00,000; to Securities Premium A/c ₹50,000.
Check: ₹5,00,000 + ₹50,000 = ₹5,50,000, which equals the debit.

Answer: 5,000 debentures with face value ₹5,00,000 are issued. Machinery is debited at ₹5,50,000, Debentures credited at ₹5,00,000 and Securities Premium at ₹50,000.

Exam tips

Write the face value, issue price and total amounts first. Most marks are lost by wrong base figures, not by wrong entries.
Give a narration under each entry. Examiners in descriptive papers check it.
If a question says the debentures are collateral security, state clearly that no cash is received and explain the treatment in one or two lines.
For theory questions, explain that section 53(1) prohibits issue of shares at a discount, except as provided in section 54 and in section 53(2A) for creditors on debt conversion. Then state that section 53 deals with shares, so debentures may be issued at a discount.
Cross-check your figures: the debits to Application, Allotment (and Call) together equal the issue price, which is face value less any discount or plus any premium. If you include the Discount on Issue debit, the total debits in the allotment entry equal the credit to Debentures plus any Securities Premium.

Practice questions from Accounting for Debentures

Issue of Debentures and Journal Entries 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 and Journal Entries: frequently asked questions

Can a company issue debentures at a discount?

Yes. Section 53(1) of the Companies Act, 2013 says that, except as provided in section 54, a company shall not issue shares at a discount, and section 53(2) makes such shares void. Section 53 speaks of shares, so it does not stop an issue of debentures at a discount. The discount is debited to Discount on Issue of Debentures A/c and written off.

Where is premium on issue of debentures credited?

Premium received on issue is a capital receipt, so it is never credited to the Profit and Loss Statement. By the usual textbook convention, you credit it to Securities Premium. Section 52(1) of the Act requires a securities premium account for shares issued at a premium, so for debentures this is a convention and not a statutory requirement.

What is the entry for debentures issued as collateral security?

No cash is received, so no entry is strictly required. You disclose the fact in a note. If you want to record it, debit Debenture Suspense A/c and credit Debentures A/c. Interest is not paid on these debentures.

How do I record debentures issued for consideration other than cash?

First debit the asset and credit the vendor at the agreed price. Then debit the vendor with the amount payable, which equals the issue price × the number of debentures. Credit Debentures A/c at face value, and credit Securities Premium for any premium. If the issue is at a discount, debit Discount on Issue of Debentures A/c for the discount, so the debits and credits still agree.