Hello! In our last lesson, we mastered the rules for creating and managing Debenture Redemption Reserve (DRR) and Debenture Redemption Investment (DRI). We learned what they are and why they exist. Now, it's time to learn where they go.
Today, we'll complete our study of debentures by focusing on their presentation in the company's final accounts. This lesson will guide you through the process of correctly placing debentures and all related items—like DRR, DRI, interest, and premium on redemption—into the Balance Sheet, following the format prescribed by Schedule III of the Companies Act, 2013.
This is a crucial skill for your exams, as it brings together everything we've learned about debentures into a single, structured financial statement.
1. The Balance Sheet Framework (as per Schedule III)
First, let's refresh our memory of the Balance Sheet format. All items are presented under specific Major Heads and Sub-heads. For debentures, we'll primarily be concerned with the Equity and Liabilities side.
Almost every item we discuss will be detailed in the Notes to Accounts, with only the final summary figure appearing on the face of the Balance Sheet.
2. Placing Debenture-Related Items
Let's systematically place each debenture-related account into its correct position.
Financial Statements of a Company - Notes
To start, let's get a comprehensive map of where everything goes. This resource provides a clear, detailed breakdown of the Balance Sheet headings and a very useful summary table.
Please review this document. First, quickly scan the detailed breakdown under the heading 'BALANCE SHEET (Companies Act 2013 Schedule III Part 1)' to see the structure. Then, focus on the summary table at the end. Specifically, look for the following items in the table and note their Main Head and Sub-head: Item 1: Debentures Item 6: Interest Accrued and due on Debentures Item 7: Interest Accrued but not due on Debentures Item 15: Debentures Redemption Reserve Item 30: Premium on Redemption of Debentures Item 51: Bonds (treated similarly to debentures)
Based on that reading, here is a consolidated summary of the key placements:
| Item | Major Head | Sub-head | Note |
|---|---|---|---|
| Debentures / Bonds | Non-current Liabilities | Long-term Borrowings | This is the main liability itself. |
| Debenture Redemption Reserve (DRR) | Shareholders' Funds | Reserves and Surplus | DRR is a reserve created from profits. |
| Premium on Redemption of Debentures | Non-current Liabilities | Other Long-term Liabilities | This is a liability that will be paid at redemption. |
| Interest Accrued and Due on Debentures | Current Liabilities | Other Current Liabilities | Interest that is due for payment but has not been paid. |
| Interest Accrued but not Due on Debentures | Current Liabilities | Other Current Liabilities | Interest for the period passed, but the payment date has not arrived. |
| Debenture Redemption Investment (DRI) | Non-current Assets | Non-current Investments | This is an asset, an investment made by the company. |
| Discount/Loss on Issue of Debentures | (See note below) | Other Non-Current/Current Assets | The unwritten-off portion is shown as an asset. |
A Note on "Discount/Loss on Issue of Debentures": The unwritten-off portion is an asset. The amount to be written off within 12 months is a Current Asset, and the remainder is a Non-Current Asset. However, it is also common practice to write off this loss from the Statement of Profit and Loss in the year of issue, which would show a reduction in Reserves and Surplus. For your exams, follow the specific instructions given in the question.
3. Special Case: Debentures Issued as Collateral Security
A very common exam scenario is when a company takes a loan from a bank and issues its own debentures as additional (collateral) security. The presentation for this has two distinct methods.
To understand these methods, please watch the following video. It clearly explains the journal entries and the Balance Sheet presentation for both approaches.
Issue of Debentures as Collateral Securities. DAY 05. 3 Marks Fixed in Class 12 Accounts Boards 2026
This video by Sunil Panda is a concise and exam-focused explanation of how to account for and present debentures issued as collateral security.
Watch the video from the beginning until 14:18. Pay close attention to: The concept of collateral security. Method 1 (Not Recording): How the balance sheet is presented when no entry is passed for the debentures (explained around 08:30). Method 2 (Recording): How the 'Debenture Suspense Account' is used and how the items appear in the Notes to Accounts for Long-term Borrowings (explained from 04:22 onwards).
Let's summarize the two methods discussed in the video.
Method 1: No Journal Entry is Passed
- In this method, no journal entry is recorded for the issue of debentures as collateral.
- Presentation: The Bank Loan is shown under Non-current Liabilities > Long-term Borrowings. In the Notes to Accounts, a brief narrative is added below the bank loan, like this:
(Secured by issue of 12,000, 10% Debentures of ₹100 each as Collateral Security)
Method 2: Journal Entry is Passed
-
Here, an entry is passed: Debenture Suspense A/c Dr. To % Debentures A/c.
-
Presentation: In the Notes to Accounts for Long-term Borrowings, both the loan and the debentures are shown.
- First, the Bank Loan is listed.
- Then, the Debentures issued as collateral are shown, and the
Debenture Suspenseaccount is immediately subtracted from it. The net effect is zero.
Example (Notes to Accounts):
1. Long-term Borrowings- Bank Loan: ₹ 10,00,000
- 12,000, 10% Debentures of ₹ 100 each: ₹ 12,00,000
- Less: Debenture Suspense A/c: (₹ 12,00,000) -> ₹ 0
- Total: ₹ 10,00,000
The total amount that goes to the face of the Balance Sheet is just the loan amount (₹10,00,000) in both cases. Method 2 simply provides more disclosure within the Notes.
If a question is silent, it is generally better to use Method 2 as it provides fuller disclosure.
4. Worked Examples from NCERT
To see these principles in action, let's review how different issue scenarios are presented in the Balance Sheet.
Acompany raises its capital by means of issue of
The NCERT textbook provides the most authoritative examples. Let's quickly look at how simple issues at par, discount, and premium are shown in the Balance Sheet.
Please review the 'Balance Sheet (Extract)' and the 'Notes to Accounts' for the following illustrations: Illustration 1: Issue at Par. Notice how the debentures appear under 'Long-term borrowings'. Illustration 3: Issue at Premium. See how 'Securities Premium Reserve' is shown under 'Reserves and Surplus' and the debentures under 'Long-term borrowings'. Illustration 14: Collateral Security. This reinforces what we learned from the video, showing the presentation for both Method 1 and Method 2.
These illustrations demonstrate the direct application of the rules we've discussed. The key is to prepare the Notes to Accounts correctly first, and then transfer the summary totals to the Balance Sheet.
Test your understanding!
X Ltd. issued 15,000, 10% Debentures of ₹100 each. You are required to show the relevant items in the company's Balance Sheet and Notes to Accounts for the following independent cases:
(a) The debentures are issued at a premium of 10%.
(b) The debentures are issued as collateral security against a bank loan of ₹12,00,000. (Use Method 2).
Show answer
Here's how the extracts would look.
Case (a): Issued at a Premium of 10%
Balance Sheet of X Ltd. as at... (Extract)
| Particulars | Note No. | Amount (₹) |
|---|---|---|
| I. EQUITY AND LIABILITIES | ||
| 1. Shareholders' Funds | ||
| (b) Reserves and Surplus | 1 | 1,50,000 |
| 2. Non-current Liabilities | ||
| (a) Long-term Borrowings | 2 | 15,00,000 |
| II. ASSETS | ||
| 2. Current Assets | ||
| (d) Cash and Cash Equivalents | 3 | 16,50,000 |
Notes to Accounts:
| Note No. | Particulars | Amount (₹) |
|---|---|---|
| 1. | Reserves and Surplus | |
| Securities Premium Reserve (15,000 x ₹10) | 1,50,000 | |
| 2. | Long-term Borrowings | |
| 15,000, 10% Debentures of ₹100 each | 15,00,000 | |
| 3. | Cash and Cash Equivalents | |
| Cash at Bank | 16,50,000 |
Case (b): Issued as Collateral Security
Balance Sheet of X Ltd. as at... (Extract)
| Particulars | Note No. | Amount (₹) |
|---|---|---|
| I. EQUITY AND LIABILITIES | ||
| 2. Non-current Liabilities | ||
| (a) Long-term Borrowings | 1 | 12,00,000 |
Notes to Accounts:
| Note No. | Particulars | Amount (₹) |
|---|---|---|
| 1. | Long-term Borrowings | |
| Bank Loan | 12,00,000 | |
| 15,000, 10% Debentures of ₹100 each issued as collateral security | 15,00,000 | |
| Less: Debenture Suspense Account | (15,00,000) | |
| 12,00,000 |
Conclusion
Congratulations on completing the final topic in our module on debentures! You now have a comprehensive understanding of how to account for them from issue to redemption, and finally, how to present them in the company's financial statements.
Key Takeaways:
- Debenture presentation is governed by Schedule III of the Companies Act, 2013.
- Debentures are shown under Non-current Liabilities > Long-term Borrowings.
- DRR is part of Shareholders' Funds > Reserves and Surplus.
- Premium on Redemption is under Non-current Liabilities > Other Long-term Liabilities.
- DRI is an asset, shown under Non-current Assets > Non-current Investments.
- Collateral Security has two presentation methods, with the second method (using Debenture Suspense A/c) offering more disclosure.
Preview of the Next Lesson:
We have now concluded our detailed study of Partnership and Company Accounts. We will now shift our focus to the analysis and interpretation of the financial statements we've learned to prepare. In our next lesson, we will begin the module on Analysis of Financial Statements by exploring its objectives and limitations.