Grade 12 Account Note


Meaning and definition:

The term “debenture” indicates to long loan or long-term debt. A company may raise its long-term fund either by issuing of shares or by issuing of debenture. If a company decide to raise capital, it issue shares and if long-term loan then it issues debenture.  A debenture is a certificate issued by a company acknowledging debt of public borrowing. It is a portion of loan capital. The owners of debentures are called debenture holders. They are the creditors of the company and are entitled to receive an agreed and fixed rate of interest on their debentures regularly. Generally, the debentures are redeemed at the end of its maturity. The debenture holders have no right over the management and control of the company.


Features of debentures:
The following are the main features of debentures:

It is a written certificate issued by the company as an acknowledgement of a debt
It is issued under the company’s seal
It contains the rate of interest to be paid to the subscribers
It contains mode of payment of the principal amount and interest
It is a long term public borrowing from a large section of the general public


Types of debentures:

a) Registered debentures:

A debenture that cannot be transferred by a mere physical delivery is called registered debenture. The name of the holder of such debenture is registered with the company.

b) Bearer debenture:

A debenture, which is transferable by a mere delivery, is called bearer debenture. The holders of such debentures are its owners and are called debenture holders.

c)Secured debenture :

A debenture, which is issued against a specific fixed asset as security is called, secured debenture. Upon default of such debenture on due date, the debenture holder can realize their sum out of the sale realized from such fixed asset. Secured debenture are also called mortgaged debenture.

d) Unsecured debenture:

Debentures issued without any security are called unsecured debentures. The holders of such debentures are not given any security for the issue of such debentures. The holders of such debentures are treated as the general creditors of the company.

e) First debenture:

A debenture which is issues against a specific fixed asset not currently pledge as a security for the issue is called first debenture. Such debenture needs to be repaid fully before second debentures are issued.

f) Second debenture:

A debenture which is issued against a specific fixed asset already used as a security is known as second debenture. Such debentures are repaid only after the first debentures have been fully settled.

g) Redeemable debenture:

The debentures which are to be repaid within a specified date as per the terms of their issue are called redeemable debentures. The company is bound to pay the principal to debenture holders after the expiry of the period specified at the time of issue.

h)Convertible debenture:

A debenture which is issued with an option to convert it into common share, preference share or a new debenture within a specified period at a conversion ratio is called convertible debenture.

i)Non-convertible debenture:

The debentures, which have no option of being converted into equity or preference shares or new debentures, are called non-convertible debenture.

j)Collateral Debenture:

Debentures may also be issued to money lenders, i.e to the banks and financial institutions as an additional security along with the principal security for the sanction of the bulk amount of loan. Such debentures are called collateral debentures. The moneylenders can exercise its rights as debenture holders if issuing company fails to pay the loan amount and principal security falls short to recover the loan.


Difference between shares and debentures:



Shareholders are the owners of the company

Debenture holders are the creditors of the company

Dividend is paid on shares out of profits on the recommendation of directors

A fixed rate of interest is to be paid to the debenture holders

Rate of dividend on the share capital is not fixed

A rate of interest is prefixed

In the event of liquidation, the shareholders fund is refunded after every claim is settled

In the event of liquidation, debenture holders are refunded before payment to shareholders.



Importance of debentures

The importance of debenture can be pointed out as follows:

Debenture holders receive a fixed rate of return on their investment.
Debenture is refunded before the refund of share capital at the time of winding-up of the company.
Debenture holder’sinvestments are secured.
Debentures are transferable from one person to another.


Issue of debentures

A debenture is an instrument issued under the common seal of a company, acknowledging its debt to the holder under the terms and conditions specified. According to the company act 2053, a public limited company can raise capital after the permission of the concerned authority by issuing debentures with or without pledging immovable assets of the company.


Issue of debentures for cash

Debenture is issued for cash consideration either at par or at a premium or at discount, just like the issue of shares. The amount of debentures can be collected either on lump sum (single instalment) or on instalment basis.


Issue of debentures on a Lump-sum Basis:

If all the money is collected in single instalment at the time of application then such issue of debentures is said to be made on lump-sum basis. The whole amount of debenture is collected in a single instalment with application form in this option.


Issue of debenture on instalment basis:

The amount of debenture may be collected in several instalments. The debenture money is collected on several instalments as application, allotment and subsequent  calls as on shares. The entries regarding the issue of debentures are similar to the entries of the issue of shares.


Issue of debenture at par

If a company issues debentures inviting the public to subscribe at face value(or nominal value) then the debentures are said to be issued at par. Their par or face value is printed on the face of debenture certificate.


Issue of debenture at discount

A debenture may be issued at a price less than its face value. Such as issue of debenture is called issue of debentures at discount. For instance, when a company issues debentures of Rs.1,000 face value per debenture at Rs.950 each, then Rs.50 each is considered as discount on the issue of debenture.


Issue of debenture at premium

When debenture are issued at a price higher than its face value, such as issue is known as issue of debenture at premium. If the debentures face value of Rs.100 each is issued t Rs.110, the excess of Rs.10 over the face value is termed as debenture premium.


Calls in arrears

When debenture holders fail to pay debenture allotment or/and debenture calls, such an outstanding amount is called ‘calls in arrear’. There are two alternative methods of calls in arrear they are;

Showing calls-in-arrears: The outstanding amount on debenture allotment and debenture calls is shown in a separate account called calls in arrears account.

Without showing calls-in-arrears: The calls in arrears amounts are not shown separately in the book of account but are deducted out of debenture allotment and/or debenture call.



The company may receive the debenture call amount in advance. Such an amount is known as calls-in-advance. It may be received with allotment money for subsequent calls or with first call money for second and final call.


Over subscription of debentures

If the applications received for debenture exceed the number of debentures offered to the public then it is called the over-subscription of debentures. For example, if a company issues 5,000 debentures of Rs. 100 each but receives applications for 8,000 debentures, then it is a case of over-subscription.

The company may deal the case of over-subscription with one of the following alternative method:

i)Full rejection of excess application method:  Under this method, the excess applications for debentures are rejected and the application money is returned along with a letter of regret to those applicants whose applications were rejected.

ii)Pro-rata allotment method: Under this method, the debentures are allotted to all the applicants proportionately. All the debentures application are allotted on pro-rata basis, i.e., in proportion to what they have applied for. In other word, all the applicants are offered a less than the number of debenture applied for. Under this method, the surplus money is adjusted against the allotment or subsequent calls.

iii)Mixed method: Under this method, some applicants are fully accepted, some are accepted proportionately and some are rejected. The application money should be refunded to whom no debentures were allotted. The excess of application money on proportionately allotted debentures may be utilized towards the allotment and subsequent calls.



Under-subscription is a situation in which the total number of debentures issued is not fully subscribed. It occurs when the number of debenture applied for is less than the number of debentures offered. In this case, all the debenture applications received are either accepted fully or rejected fully.


Issue of debentures for Non-cash Considerations

The issue of debentures for the considerations other than cash is called ‘issue of debenture for non-cash considerations’. The company may issue debentures for discharging the amount due on purchase of assets, purchase of business and as lateral securities.


Issue of debentures as collateral security

The issue of debentures to a bank/money lender for the sanction of a loan as a collateral security is called collateral debentures. On repayment of the loan, the collateral security is automatically released but in case of failure of repayment, the lender automatically becomes a debentureholder.



There are two alternative methods for recording the debentures issued as collateral security.

First method: The issue of debentures for collateral security is not recorded in the books of account but a note is written in the balance sheet.

Balance sheet
As on……..





Loan ………………………..

(…Debentures of Rs…..issued as collateral security for loan)


Bank ……………………….







Second method: Under this method, the issue of debentures as collateral security is recorded in the books of account.





Debit Rs.

Credit Rs.


Debenture suspense a/c …………………………Dr.

           To Debenture a/c








Issue of Redeemable Debentures

The debentures, which are issued with a maturity date, are known as redeemable debentures. The repayment of the principal amount of debentures to the debentureholders is made on maturity of the debentures.


Redemption of debentures

Redeemable debentures are issued with a maturity period. After the maturity of the period the principal amount of the debentures is repaid to the debentureholder. The payment is made as per the terms laid down in the prospectus at the time of issue of debentures. The methods of redemption of debentures are as follows:


Modes of Redemption of Debentures

1.Redemption in instalments

a)Redemption of a fixed sum of debentures.
b)Redemption by purchase of debentures in the open market.

2.Redemption by conversion

3.Redemption in lump sum after the expiry of maturity period

a)Creating a sinking fund or debenture redemption reserve account
b)Taking an insurance policy.


Redemption of debentures on lump-sum basis

Under this method, all the principal amount of debentures is repaid at once on a lump sum basis. The company may redeem the debentures after the maturity period is over or even before the expiry of the specified period of time by serving a notice to the debenture-holders.


Redemption of Debentures by Annual Drawing/ Instalments

When the principal amount of debentures is repaid by annual drawing of annual drawing of debentures in equal instalments over the maturity period, such a process is called redemption of debentures by annual drawing. The company may redeem the principal annually on equal instalment.


Purchase of one’s own debentures from open market

Under this method, the company purchase its own debentures from the open market. The buying of debentures is generally made prior to the expiry to the expiry of such debentures; the buying of debentures is also called redemption of debenture.


Conversion of debenture

Convertible debentures are redeemed by converting them into new debentured or into shares. Holders of convertible debentures enjoy the option of having their debentures converted either into shares or new debentures according to the terms and conditions of the issue. The new debentures or shares can be issued either at par or at premium or at discount.


Writing off discount on issue of debentures

Discount on the issue of debentures is a capital loss. A separate account entitled loss on issue of debentures account may also be opened to show discount on issue and provision set aside for premium payable on redemption. The loss is written off as per the decision of the BOD. The discount on issue of debentures is shown on the assets side of the balance sheet till it is fully written off.


The amount of discount on issue of debentures is written off in the following manner in case of redeemable debentures.

1.Annual installment basis:

The total principal amount of debentures may be redeemed at the end of the maturity period in single installment. Each year an equal amount of discount is written off under this method. The amount of annual discount to be written off is determined by using the following formula.

2.Debentures outstanding amount basis(Ratio)

When the debentures are redeemable by annual drawings, the loss/discount on issue of such redeemable debentures are written off in the basis of the debentures outstanding ratio.

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