Fundamentals of Accounting · Introduction to Company Accounts

Issue and Redemption of Debentures: Journal Entries Explained

Updated 11 October 2026 · Fact-checked

A debenture is a certificate of a company's debt, repayable on a fixed date with interest. To solve questions, record cash received on application and allotment, credit Debentures at face value, show any discount as a loss or premium as a gain, then on redemption debit Debentures and any premium payable and credit Bank.

Understand Issue and Redemption of Debentures

A debenture is a loan taken by a company from the public or institutions. The holder is a lender, not an owner. The company must pay a fixed rate of interest, whether it earns a profit or not, and must repay the money as per the terms of issue. Section 71(8) of the Companies Act, 2013 says the company shall pay interest and redeem the debentures in accordance with the terms and conditions of their issue.

Shares vs debentures. This is a common written question. Remember these points:
- Shareholders are owners. Debenture holders are creditors.
- Shareholders get dividend, paid out of profits. Debenture holders get interest, paid even in a loss.
- Under Section 71(2), no company can issue debentures carrying voting rights. Equity shareholders vote.
- Debentures are often secured on assets. Shares are not.
- Interest is a charge against profit. Dividend is an appropriation of profit.

Types of debentures. By security: secured and unsecured. By tenure: redeemable and irredeemable. By convertibility: convertible and non-convertible. Under Section 71(1), a company may issue debentures with an option to convert them into shares, wholly or partly, at the time of redemption, but this needs a special resolution passed at a general meeting. By registration: registered and bearer.

Issue price. 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). Unlike shares, which cannot be issued at a discount except as Section 53 permits, debentures may be issued at a discount. The discount is a loss to the company and is shown as an asset-side item to be written off. The premium is a gain. It is credited to Securities Premium and is not a profit.

Redemption means repaying the debenture holders. It may be at par or at a premium. It may be done in one lump sum at the end, in instalments, by draw of lots, by buying debentures in the open market, or by converting them into shares. Section 71(4) requires a company issuing debentures to create a Debenture Redemption Reserve (DRR) out of profits available for dividend. The amount in it cannot be used except to redeem debentures. The exact amount to be created is set by rules made by the Central Government (Section 71(13)), so follow the percentage given in the question.

Key rules to remember

Amount received on issue: Cash received = Number of debentures × Issue price per debenture; Issue price is below face value for a discount and above it for a premium.
Discount or premium on issue: Discount (or Premium) = Face value − Issue price (or Issue price − Face value); Discount is debited to 'Discount on Issue of Debentures'. Premium is credited to 'Securities Premium'.
Premium payable on redemption: Premium on redemption = Face value × Premium % payable; Debit 'Premium on Redemption of Debentures' and credit Debenture holders along with the face value.
Debenture interest: Interest = Face value × Rate % × Period ÷ 12 months; Interest is always on face value, not on issue price.
Entry on issue (at par): Bank A/c Dr → Debenture Application and Allotment A/c; then Debenture Application and Allotment A/c Dr → Debentures A/c; With discount, also debit Discount on Issue. With premium, also credit Securities Premium.
Entry on redemption: Debentures A/c Dr + Premium on Redemption A/c Dr → Debenture holders A/c; then Debenture holders A/c Dr → Bank A/c; Two steps: first the amount becomes due, then it is paid.
Debenture Redemption Reserve: Surplus (Profit and Loss) A/c Dr → Debenture Redemption Reserve A/c; Amount as given in the question. It may be used only to redeem debentures (Section 71(4)).

How to solve Issue and Redemption of Debentures questions

Use this method for any debenture issue or redemption question. Write each entry with a short narration.

1Read the face value, the number of debentures, the issue price and the redemption price. Mark whether each is at par, premium or discount.
2Calculate the cash received: number × issue price. If it is payable in instalments, split it into application, allotment and call amounts.
3Pass the cash entry: Bank Dr to Debenture Application (and Allotment) A/c.
4Pass the transfer entry: Debenture Application A/c Dr, Discount on Issue Dr (if any), to Debentures A/c at face value, and to Securities Premium A/c (if any).
5If debentures are redeemable at a premium, note the premium payable. Record it as a loss when it becomes due, or earlier if the question asks for provision at issue.
6On redemption, debit Debentures and Premium on Redemption, credit Debenture holders. Then debit Debenture holders and credit Bank.
7If a DRR exists, follow the question. Once debentures are fully redeemed, the remaining DRR is usually transferred to General Reserve.
8Check that every entry has equal debits and credits, and that Debentures are always shown at face value.

Quickest way: Face-value anchor method

When to use it: Use this when time is short and the question has only one issue or one redemption to record.

Write the face value total first. This is always the credit to Debentures on issue and the debit on redemption.
Compare the issue price with face value. The difference is the discount (a debit) or the premium (a credit). Total debits must match total credits.
For redemption, add the premium payable to the face value. That total is the cash paid.
Check: Bank in the issue entry equals number × issue price. Bank in the redemption entry equals face value plus premium.

Common mistakes in Issue and Redemption of Debentures

Crediting Debentures with the issue price instead of face value.
Students copy the cash figure into the credit side.
Fix: Debentures are always credited at face value. The gap goes to Discount on Issue (debit) or Securities Premium (credit).
Treating premium on issue as profit and crediting the Profit and Loss Account.
Premium feels like an income.
Fix: Credit Securities Premium. Under Section 52, it can be used only for the purposes listed there, such as writing off the discount on issue of debentures or the premium payable on redemption of debentures.
Calculating interest on issue price or on a part-year as a full year.
Students rush and ignore the period.
Fix: Use face value × rate × months ÷ 12. Read the date of issue and the end of the accounting year carefully.
Forgetting the premium payable on redemption in the final cash payment.
Students focus on face value only.
Fix: Cash paid = face value + premium on redemption. Credit Debenture holders with the full amount before paying.
Mixing up debenture and share features in the shares vs debentures answer, for example saying debenture holders get dividend.
Both are ways of raising money, so students blur them.
Fix: Remember: debenture holder = creditor = interest. Shareholder = owner = dividend and voting rights.
Using DRR for anything other than redemption, or ignoring it in the question.
Students treat it like a normal reserve.
Fix: Under Section 71(4), the DRR amount cannot be used except for redemption of debentures. Create it from profits available for dividend.

Worked examples

Example 1

Sharma Ltd issued 10,000 10% debentures of ₹100 each at ₹95 each, redeemable at par. The full amount was received with applications and the debentures were allotted. Pass the journal entries.

Show the solution

Cash received = 10,000 × ₹95 = ₹9,50,000.
Face value = 10,000 × ₹100 = ₹10,00,000.
Discount on issue = ₹10,00,000 − ₹9,50,000 = ₹50,000.
Entry 1 (receipt): Bank A/c Dr ₹9,50,000 to Debenture Application and Allotment A/c ₹9,50,000.
Entry 2 (allotment): Debenture Application and Allotment A/c Dr ₹9,50,000 and Discount on Issue of Debentures A/c Dr ₹50,000 to 10% Debentures A/c ₹10,00,000.
Check: debits ₹9,50,000 + ₹50,000 = ₹10,00,000 equals credit ₹10,00,000.

Answer: Bank receives ₹9,50,000. 10% Debentures is credited at ₹10,00,000. Discount on Issue of ₹50,000 is debited and written off over the life of the debentures, or out of Securities Premium where permitted by Section 52(2)(c).

Example 2

Mehta Ltd redeems ₹5,00,000 of its debentures at a premium of 10%. The company has a Debenture Redemption Reserve of ₹2,00,000 and pays by bank. Pass the journal entries for redemption and the treatment of the reserve.

Show the solution

Premium on redemption = ₹5,00,000 × 10% = ₹50,000.
Total payable to debenture holders = ₹5,00,000 + ₹50,000 = ₹5,50,000.
Entry 1 (due): Debentures A/c Dr ₹5,00,000 and Premium on Redemption of Debentures A/c Dr ₹50,000 to Debenture holders A/c ₹5,50,000.
Entry 2 (payment): Debenture holders A/c Dr ₹5,50,000 to Bank A/c ₹5,50,000.
Entry 3 (DRR after redemption, as usually done): Debenture Redemption Reserve A/c Dr ₹2,00,000 to General Reserve A/c ₹2,00,000.
Check: each entry has equal debits and credits.

Answer: Bank pays ₹5,50,000 in total. Debentures of ₹5,00,000 are cleared, and the premium of ₹50,000 is a loss. Once the debentures are redeemed, the DRR of ₹2,00,000 is transferred to General Reserve.

Exam tips

For written questions, always show two steps in issue entries (cash received, then transfer to Debentures) unless the question says to pass one entry.
Write narrations in one line. Examiners give marks for correct accounts and amounts, so avoid long narrations.
For 'difference between shares and debentures', give 4 to 5 points in a clear two-column layout in your answer sheet.
State clearly whether debentures are issued at par, premium or discount at the start of your answer. It shows your approach.
For DRR questions, use the percentage given in the question. Do not use any figure from memory.

Practice questions from Introduction to 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?

A shareholder is an owner and gets dividend out of profits, with voting rights for equity shares. A debenture holder is a lender and gets fixed interest whether or not there is a profit. Under Section 71(2), debentures cannot carry voting rights.

Can a company issue debentures at a discount?

Yes. The rules for shares are different, because Section 53 prohibits issue of shares at a discount except as permitted. For debentures, the discount is recorded as a debit item and written off. Section 52(2)(c) allows Securities Premium to be used to write off discount allowed on an issue of debentures.

What is a Debenture Redemption Reserve?

It is a reserve created out of profits available for payment of dividend, as required by Section 71(4) of the Companies Act, 2013. The amount cannot be used for any purpose except redemption of debentures. The quantum is as prescribed by rules.

What are the methods of redemption of debentures?

The common methods are payment in a lump sum at the end, payment in instalments or by draw of lots, purchase in the open market, and conversion into shares. Always follow the method and terms given in the question.