Corporate Accounting and Financial Management · Related Aspects of Company Accounts

Issue and Redemption of Debentures: Entries and Methods

Updated 11 October 2026 · Fact-checked

A debenture is a company's borrowing, so on issue you credit Debentures and debit Bank. Discount on issue or premium on redemption is a loss, written off over the debenture life. On redemption you pay back the amount, and you may build a Debenture Redemption Reserve and a sinking fund. Pass entries in this order.

Understand Issue and Redemption of Debentures

A debenture is a loan taken by a company, shown as a liability. Debenture holders are lenders, not owners. They get interest at a fixed rate whether or not the company earns a profit. Shareholders get dividend only from profit. Under section 71(2), a company cannot issue debentures carrying voting rights.

Debentures can be issued at par (face value), at a premium (more than face value) or at a discount (less than face value). They can also be redeemable at par or at a premium. A premium on issue is a gain. As with share premium, it is credited to Securities Premium Account. Strictly, section 52(1) covers shares issued at a premium. Section 52(2)(c) allows the account to be applied in writing off the expenses, commission or discount on an issue of shares or debentures. Section 52(2)(d) allows it to be applied to provide for the premium payable on redemption of redeemable preference shares or debentures. A discount on issue and a premium on redemption are both losses to the company.

The key idea: whatever the company must repay is the liability. If it issues ₹100 debentures at ₹95 redeemable at ₹105, it receives ₹95 but owes ₹105. So you credit Debentures at ₹100 and record the ₹10 total loss (discount ₹5 plus redemption premium ₹5) with a debit to Loss on Issue of Debentures, and credit Premium Payable on Redemption ₹5. This loss is written off over the life of the debentures. The company may apply Securities Premium to write off the discount on issue (section 52(2)(c)) and the premium payable on redemption (section 52(2)(d)), in the manner and to the extent permitted. This is not routine or automatic, so follow what the question says. Otherwise, the loss is charged to the Statement of Profit and Loss.

On redemption, the company repays the debenture holders. It can pay in a lump sum at maturity, in instalments (series), by purchase in the open market, or by converting debentures into shares. Section 71(4) requires the company to create a Debenture Redemption Reserve (DRR) out of profits available for dividend, and this reserve can be used only for redeeming debentures. The quantum is set by the rules. Check the percentage and the exempt classes in your ICSI study material.

A sinking fund is a separate arrangement. Each year the company sets aside a fixed sum from profit and invests it outside the business. The investments and their interest grow to the amount needed at maturity. Then the investments are sold to repay the debenture holders.

Key rules to remember

Amount to credit to Debentures: Debentures A/c = Face value × number of debentures; Always credit at face value, whatever the issue price.
Discount on issue: Discount = Face value − Issue price; Debit Discount or Loss on Issue of Debentures. It is a capital loss, written off over the life.
Loss on issue of debentures: Loss = Discount on issue + Premium payable on redemption; Shown as a single loss when both exist. Write off over the debenture life.
Cash received on issue: Bank = Issue price × number of debentures; Cash comes in at the issue price, not the face value.
Redemption payment: Cash paid = Face value + Redemption premium, if any; The premium payable was provided for at issue, so clear that liability.
Capital Redemption Reserve for shares: CRR = Nominal value of shares bought back out of free reserves or securities premium (section 69(1)); CRR = Nominal value of preference shares redeemed out of profits (section 55(2)(c)); CRR is for shares only. It is not created when preference shares are redeemed out of a fresh issue of shares. Do not mix it with DRR for debentures.
Sinking fund annual instalment: Annual instalment = Amount needed ÷ Future value factor (annuity) at the given rate; Use the factor given in the question. Instalment × factor = amount needed.
Sinking fund investment interest: Interest = Opening investment × rate; Interest is credited to Sinking Fund A/c and reinvested, so the fund grows each year.

How to solve Issue and Redemption of Debentures questions

Use this order for any debenture problem. It stops you from missing the premium or the loss.

1Note the face value, issue price and redemption price. Work out discount on issue and premium on redemption.
2Pass the application and allotment entries. Debit Bank (or Debenture Application A/c) at the cash received. Credit Debentures at face value. Credit Securities Premium if issued at a premium.
3If issued at a discount or redeemable at a premium, debit Loss on Issue of Debentures for the total loss. Credit Premium Payable on Redemption for the premium part.
4Pass interest entries. Interest is on face value at the coupon rate. Show tax deducted at source (TDS) separately if the question gives it.
5Write off the loss each year. Use Securities Premium first if the question allows. Otherwise charge the Statement of Profit and Loss.
6For redemption, check the method: lump sum, instalments, open market purchase or conversion. Pass the entry for the right amount.
7If DRR or a sinking fund is asked, transfer from profit to the reserve, and invest in the fund investments. Release the reserve to General Reserve after redemption.
8Close with a quick check: Debentures liability is cleared, premium payable is cleared and the loss is fully written off.

Quickest way: Three-line check for the issue entry

When to use it: Use it when a question gives both an issue price and a redemption price and you have little time.

Write three numbers: cash received, face value credited, and amount payable on redemption.
Debit Bank with the cash. Credit Debentures with the face value. The gap goes to Loss on Issue, and any redemption premium is credited to Premium Payable.
Check that debits equal credits before you move on. If they do not, you missed the premium or the discount.

Common mistakes in Issue and Redemption of Debentures

Crediting Debentures at the issue price instead of the face value.
You copy the cash figure from the bank entry.
Fix: The liability is the face value. Put the difference in Discount on Issue or Loss on Issue of Debentures.
Treating the premium payable on redemption as an income at issue.
It is confused with a premium on issue, which is a gain.
Fix: A premium on redemption is a liability and a loss. Credit Premium Payable on Redemption and debit Loss on Issue.
Calculating interest on the issue price or on the redemption amount.
You use the cash figure you see on the bank line.
Fix: Interest is always on the face value at the coupon rate, unless the question says otherwise.
Confusing DRR (debentures) with Capital Redemption Reserve (shares).
Both are redemption reserves and have similar names.
Fix: DRR comes from section 71(4) and applies to debentures. Capital Redemption Reserve arises under section 55(2)(c) when preference shares are redeemed out of profits (not when they are redeemed out of a fresh issue of shares), and under section 69(1) when shares are bought back out of free reserves or securities premium.
Showing sinking fund investments as free cash after redemption.
You forget to sell the investments before paying holders.
Fix: First sell the investments and credit Sinking Fund Investment A/c. Then pay the holders. Finally move Sinking Fund A/c to General Reserve.

Worked examples

Example 1

Delta Ltd issues 1,000 debentures of ₹100 each at a discount of 5%, redeemable at a premium of 10% after 5 years. Pass the journal entries for the issue and for the write off of the loss in year 1, assuming the loss is written off equally over 5 years.

Show the solution

Face value = 1,000 × ₹100 = ₹1,00,000.
Cash received = 1,000 × ₹95 = ₹95,000.
Discount on issue = ₹5,000. Premium on redemption = 10% of ₹1,00,000 = ₹10,000.
Total loss = ₹5,000 + ₹10,000 = ₹15,000.
Entry 1: Bank A/c Dr ₹95,000 and Loss on Issue of Debentures A/c Dr ₹15,000. Credit 10% Debentures A/c ₹1,00,000. Credit Premium Payable on Redemption A/c ₹10,000. Debits ₹1,10,000 equal credits ₹1,10,000.
Write off per year = ₹15,000 ÷ 5 = ₹3,000.
Entry 2: Statement of Profit and Loss Dr ₹3,000 and Loss on Issue of Debentures A/c Cr ₹3,000.

Answer: Debentures are credited ₹1,00,000, Premium Payable ₹10,000, Bank debited ₹95,000 and Loss on Issue ₹15,000. Yearly write-off is ₹3,000.

Exam tips

Write a short working note with face value, cash, discount and premium before any journal entry. It earns method marks even if one figure is wrong.
Always state the legal source in theory parts. DRR is under section 71(4), no voting rights under section 71(2), and debenture trustee under section 71(5).
In ICSI style, name the provision, apply it to the facts, then give a clear conclusion.
For sinking fund questions, show the table with columns for opening balance, interest, instalment and closing balance.
Be ready for the short difference between shares and debentures: ownership vs loan, dividend vs fixed interest, voting rights vs none, and repayment at winding up.

Practice questions from Related Aspects of Company Accounts

Issue and Redemption 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 and Redemption of Debentures: frequently asked questions

What is the difference between shares and debentures?

Shares represent ownership and carry voting rights, and the dividend depends on profit. Debentures represent a loan, carry fixed interest and cannot carry voting rights under section 71(2) of the Companies Act, 2013. Debenture holders are creditors and are paid before shareholders.

How do I pass the entry for debentures issued at a discount and redeemable at a premium?

Debit Bank with the cash received and Loss on Issue of Debentures with the discount plus the premium. Credit Debentures at face value and Premium Payable on Redemption with the premium. Then write off the loss over the life of the debentures.

What is the Debenture Redemption Reserve?

Section 71(4) requires a company issuing debentures to create a DRR out of profits available for dividend. You cannot use it except to redeem debentures. The quantum and the companies covered are set by the rules, so learn them from your study material.

How does a sinking fund work for redeeming debentures?

The company sets aside a fixed sum from profit each year and invests it outside the business. Interest on the investments is added to the fund. At maturity, the investments are sold and the cash pays the debenture holders.