Debenture Issuance: Journal Entries

1. The Core Accounting Framework: Shares vs. Debentures

Before diving into specific cases, let's establish the key terminology change. The logic and flow of entries—receiving application money, making an allotment, and calling for further installments—remain the same.

The primary substitutions you'll make are:

• Share Application/Allotment/Call becomes Debenture Application/Allotment/Call.
• Share Capital Account becomes % Debentures Account (e.g., 9% Debentures A/c).
• Securities Premium Reserve Account is used for premiums on debentures, just as it is for shares.
• A new account, Discount on Issue of Debentures Account, will be introduced for issues at a discount.

To see a quick overview of how these entries are adapted, let's watch a short segment of a video.

Now, let's apply this framework to the three possible scenarios for issuing debentures for cash.

2. Case 1: Issue of Debentures at Par

When debentures are issued at par, the issue price is exactly equal to their face value (or nominal value). If a debenture has a face value of ₹100, it is issued for ₹100.

The journal entries follow the familiar two-step process for each installment (e.g., application, allotment):

1. On receipt of money: Debit Bank A/c, Credit the relevant installment account (e.g., Debenture Application A/c).
2. On allotment/due date: Debit the installment account, Credit % Debentures A/c.

Let's see this in action with a worked example.

As you saw, the process is a direct application of the principles you learned for issuing shares at par.

3. Case 2: Issue of Debentures at Premium

A company with a strong financial standing may issue debentures at a premium, meaning the issue price is higher than the face value (e.g., a ₹100 debenture issued for ₹110). The extra ₹10 is the premium.

Accounting Treatment:

• The premium amount is a capital profit.
• It is credited to the Securities Premium Reserve Account.
• This is typically done in the journal entry for making the allotment money due.

The allotment entry looks like this:

Debenture Allotment A/c ...Dr. (With total allotment money due)
    To % Debentures A/c (With face value portion of allotment)
    To Securities Premium Reserve A/c (With premium amount)

Let's watch another worked example.

After the entries are passed, the debentures appear as a long-term liability, and the premium appears under 'Reserves and Surplus' in the Balance Sheet.

4. Case 3: Issue of Debentures at Discount

This is where a key difference from shares arises. While the Companies Act, 2013 prohibits the issue of shares at a discount (except for re-issue of forfeited shares or sweat equity), there is no such restriction on debentures.

Debentures are issued at a discount when the issue price is less than the face value (e.g., a ₹100 debenture issued for ₹95). The ₹5 difference is the discount.

Accounting Treatment:

• The discount is a capital loss for the company.
• It is debited to a new account: Discount on Issue of Debentures A/c.
• This debit is also typically made in the journal entry for making the allotment money due.

The allotment entry is structured as follows:

Debenture Allotment A/c ...Dr. (With amount received for allotment)
Discount on Issue of Debentures A/c ...Dr. (With discount amount)
    To % Debentures A/c (With full face value portion of allotment)

Let's see how this works in practice.

The % Debentures A/c is always credited with its face value, regardless of whether the issue is at par, premium, or discount. The premium or discount accounts for the difference between the face value and the cash received.

Conclusion

You have now covered the journal entries for the three primary ways debentures can be issued for cash. By leveraging your knowledge of share capital accounting, you can see that the process is very manageable.

Key Takeaways:

• Journal entries for debenture issues follow the same pattern as for share issues.
• The key is to use the correct account names: % Debentures A/c for the liability, Securities Premium Reserve A/c for premiums, and Discount on Issue of Debentures A/c for discounts.
• The % Debentures A/c is always credited with the face value of the debentures.
• Crucially, unlike shares, debentures can be issued at a discount.

Preview of the Next Lesson:
So far, we have only dealt with debentures issued for cash. However, companies also issue debentures for other reasons. In our next lesson, we will explore how to account for the issue of debentures for consideration other than cash (e.g., to purchase an asset) and as collateral security (as additional security for a loan).