Courses

Courses for Kids

Free study material

Talk to our experts

1800-120-456-456

Issue and Redemption of Debentures Class 12 Accountancy Chapter 2 CBSE Notes - 2025-26

Q: 10. From a revision perspective, why would a company issue debentures as collateral security instead of simply taking a loan?

A company issues debentures as collateral security to provide an additional layer of security to a lender against a loan. The key concept to revise is that this is a secondary security. If the company defaults on the loan repayment, the lender has the right to these debentures. The primary reason is strategic: it can help secure a loan on more favourable terms without an immediate cash outflow from the debenture issue itself. For accounting, remember that no journal entry is passed for the issue, but it must be disclosed in the notes to accounts in the Balance Sheet.

Latest Updates

Book Free Demo :

Turn Doubts into Confidence with One-to-One Learning

Accountancy Notes for Chapter 2 Issue and Redemption of Debentures Class 12 - FREE PDF Download

In Redemption of Debentures Notes, students will explore the intricacies of debenture - financial instruments that companies use to raise long-term capital. This note concisely summarises the chapter, emphasising key concepts and important points such as the processes involved in issuing and redeeming debentures, including legal aspects, accounting treatments, and financial implications for companies.

Table of Content

These notes provide a comprehensive understanding of how debentures contribute to a company's capital structure and financial management strategies. Vedantu makes it easier for students to understand the chapter and its ideas in the Accountancy Class 12 Revision Notes PDF. Students can get the PDF of these notes, making it simple to study and review whenever they need with the updated Class 12 Accountancy Syllabus.

Courses

Access Revision Notes for Class 12 Accountancy Chapter 2 Issue and Redemption of Debentures

Debentures are acknowledgements of debt, raised by a company from the public.
They are similar to bonds but can be issued without a pre-determined interest rate.
Charges are obligations under trust deeds on assets, which are mortgaged either by the first or second charge.
Debentures come in various types, including secured and unsecured, redeemable and perpetual, convertible and non-convertible, zero coupon rate and specific rate, registered and bearer debentures.
They are issued at par when the amount collected is equal to their nominal or face value, or at a premium if the issue price is more than the nominal or face value. If the issue price is less than the nominal or face value, it is issued at a discount.
Debentures can be issued for consideration other than cash, such as patents, copyrights, or intellectual property rights transfer.
Purchase consideration is the amount paid by the purchasing company in consideration for the purchase of assets or business.
Collateral security is any additional security. Debenture redemption discharges liability by repayment to debenture holders, usually at the expiry of the issued period.

What are Debentures?

A debenture is a document bearing the company's common seal that acknowledges a debt. It comes from the Latin verb "Debere," which means "to borrow."

Difference between Shares and Debentures

Shares	Debentures
A share is a symbol of ownership in a business. That belongs to owned capital.	An admission of debt is represented by debentures. It is included in borrowed funds.
We refer to the return on shares as a dividend.	Interest is the term for the yield on debentures.
They are not given back at any point in the business's existence.	Since they have a deadline, they must be paid back after the allotted time has passed.
Voting rights are granted to shareholders.	Debenture holders are not entitled to vote
They are not convertible into debt instruments.	They could be changed to shares.

Types of Debentures

From the point of view of Security

Secured Debentures: These are debentures on which a charge is placed against the company's assets to be paid in the event of default.

Unsecured Debentures: They are not specifically charged against the company's assets.

From the point of view of Tenure

Redeemable Debentures: These are debentures that, depending on the duration of the period, may be repaid in full or in instalments throughout the company's existence.

Irredeemable Debentures: These debentures must be repaid when a company is wound up or when a significant period passes.

From the point of view of Convertibility

Convertible Debentures: Debentures that, at the discretion of the firm or the holders of the debentures, are convertible into equity shares or any other security are referred to as convertible debentures.

Non-Convertible Debentures: Debentures that are not convertible into shares or any other kind of securities are referred to as non-convertible debentures.

From a Coupon Rate Point of View

Specific Coupon Rate Debentures: Debentures with a particular rate of coupon—also known as coupon rate debentures—are issued with a specified interest rate.

Zero Coupon Rate Debentures: No set interest rate is associated with these debentures. These debentures are offered at significant discounts to compensate the investors, and the amount of interest associated with the length of the issuance is determined by taking the difference between the nominal value and the issue price.

From the point of view of Registration

Registered Debentures: Debentures that are registered are those for which the corporation maintains a register containing all relevant information, such as the names, addresses, and holding details of the debenture holders.

Bearer Debentures: These are debentures that are transferable through delivery and for which the issuing business maintains no record.

Issue of Debentures

The process for debentures is similar to shares, with investors applying based on a prospectus. Companies can request payment in full or in instalments and can be issued at par, premium, or discount.

Issue of Debentures for Cash

Debentures are said to be issued at par when their issue price is equal to the face value.

(a) If the whole amount is received in one instalment:

(i) On receipt of the application money

Bank A/c	Dr.
To Debenture Application & Allotment A/c

(ii) On Allotment of debentures

Debenture Application & Allotment A/c	Dr.
To Debentures A/c

(b) If the debenture amount is received in two instalments:

(i) On receipt of application money

Bank A/c	Dr.
To Debenture Application A/c

(ii) For adjustment of applications money on allotment

Debenture Application A/c	Dr.
To Debentures A/c

(iii) For allotment money due

Debenture Allotment A/c	Dr.
To Debentures A/c

(iv) On receipt of allotment money

Bank A/c	Dr.
To Debenture Allotment A/c

(i) On making the first call

Debenture First Call A/c	Dr.
To Debentures A/c

(ii) On the receipt of the first call

Bank A/c	Dr.
To Debenture First Call A/c

Note: Similar entries may be made for the second call and final call. However, normally the whole amount is collected on application or in two instalments, i.e., on application and allotment.

Issue of Debentures at a Discount

Debentures issued at a discount below their nominal value can be written off either by debiting it to or out of the Securities Premium Reserve. The discount should be written off within 12 months of the balance sheet date or operating cycle, and the remaining portion is listed under Other Non-Current Assets.

Debentures issued at Premium

A debenture is issued at a premium when the price charged exceeds its nominal value, credited to the Securities Premium Reserve account and displayed on the balance sheet.

Issue of Debentures for Consideration other than Cash

A company may issue debentures for consideration other than cash, which may be issued at par, premium, or discount, and the entries made in such situations are similar to those of shares issued for consideration other than cash.

Issue of Debentures as a Collateral Security

A collateral security is a subsidiary or secondary security a company uses when obtaining a loan or overdraft from a financial institution. It can be pledged or mortgaged against the loan, or additional assets can be issued as collateral security. If the company fails to repay the loan, the lender can receive money from the sale of the primary security, or invoke collateral security, which can be presented for redemption or sold in the open market.

Terms of Issue of Debentures

A company issues debentures, which can be redeemed at par or premium, and can discharge liability by repayment to holders. Common redemption situations depend on the terms and conditions.

(i) Issued at par and redeemable at par.

(ii) Issued at a discount and redeemable at par.

(iii) Issued at a premium and redeemable at par.

(iv) Issued at par and redeemable at a premium.

(v) Issued at a discount and redeemable at a premium.

(vi) Issued at a premium and redeemable at a premium.

Notes:

1. When debentures are redeemable at a premium, the premium payable on redemption is debited to ‘Loss on Issue of Debentures A/c’. It may be noted that when debentures are issued at a discount and are redeemable at a premium, the amount of issue discount is also debited to ‘Loss on Issue of Debentures’. It may be noted that when the debentures are issued at a discount and are redeemable at par, the amount debited to ‘Discount on Issue of Debentures A/c’ as usual.

2. redemption premium is a liability of a company payable in future. It is a provision and is shown under the head Non-current liabilities under the subhead ‘Long-term Borrowings’ until debentures are redeemed.

Interest on Debentures

A company issues debentures, which are repaid at a fixed percentage (half yearly) until repaid. The interest is calculated at the nominal value of the debentures and is charged against the company's profit. If the interest exceeds the limit, it is deducted at the source (TDS) and deposited with tax authorities.

Accounting Treatment

The following journal entries are recorded in the books of a company in connection with the interest in debentures:

When interest is due Debenture Interest A/c

Dr.

To Income Tax payable A/c

To Debentureholders A/c

(Amount of interest due on debenture and tax deducted at source )

For payment of interest to debenture holders Debenture holders A/c

Dr.

To Bank A/c

(Amount of interest paid to debenture holders)

On transfer debenture Interest Account to a statement of Profit and Loss Statement of Profit and Loss

Dr.

To Debenture Interest A/c

(Debenture interest transferred to profit and loss A/c)

On payment of tax deducted at source to the Government Income Tax Payable A/c

Dr.

To Bank A/c

(Payment of tax deducted at source on interest on debentures)

Writing off Discount/Loss on Issue of Debentures

Discount or loss on debentures issued is a capital loss, written off in the year. If capital profit is insufficient, it should be written off against revenue profits.

Redemption of Debentures

Redemption of debentures refers to extinguishing or discharging the liability on account of debentures by the terms of issue. In other words, redemption of debentures means repayment of the amount of debentures by the company. There are four ways by which the debentures can be redeemed. These are :

1. Payment in lump sum

2. Payment in instalments

3. Purchase in the open market

4. By conversion into shares or new debentures

1. Time of redemption of debentures:- Generally, debentures are redeemed on the due date but a company may redeem its debentures before the maturity date if its articles provide for such.

2. Sources of Redemption of debentures:- A company may source its redemption of debentures either out of capital or out of profits.

Redemption by Payment in Lump Sum

When the company pays the whole amount in a lump sum, the following journal entries are recorded in the books of the company:

1. If debentures are to be redeemed at par

(a)

Debentures A/c	Dr.
To Debenture holders

(b)

Debenture holders	Dr.
To Bank A/c

2. If debentures are to be redeemed at a premium

Debentures A/c	Dr.
Premium on Redemption of Debentures A/c	Dr.
To Debenture holders

Redemption by Payment in Instalments

When, as per terms of the issue, the debentures are to be redeemed in instalments beginning from a particular year, the actual debentures to be redeemed are selected usually by draw of lots. At the time of redemption, the following journal entries will be recorded.

(a)

Debentures A/c	Dr.
To Debentureholders A/c

(b)

Debenture holders A/c	Dr.
To Bank A/c

Redemption by Purchase in the Open Market

Redeemal by purchase in the open market allows a company to purchase debentures for immediate cancellation, allowing them to be redeemed at their convenience and a discounted market price.

5 Important Topics of Class 12 Accountancy Chapter 2 You Shouldn’t Miss!

S. No	Topics for Chapter 2 Issue and Redemption of Debentures
1	Introduction to Debentures
2	Types of Debentures
3	Issue of Debentures
4	Redemption of Debentures
5	Interest on Debentures

Importance of Class 12 Accountancy Chapter 2 Issue and Redemption of Debentures

This revision note will help students to consolidate and summarise key concepts from the chapter.
They provide a quick review before exams, saving time and focusing on important topics.
They facilitate better retention of information by condensing essential details into concise formats.
Essential for exam preparation to highlight important points, formulas, and concepts.
Assist in applying theoretical knowledge to practical problems or scenarios.
Ideal for last-minute revision sessions to refresh memory and reinforce learning.

Tips for Learning the Class 12 Chapter 2 Issue and Redemption of Debentures Class 12 Notes

Begin by grasping the concept of debentures as a form of long-term borrowing by companies.
Familiarise yourself with the legal requirements and accounting treatments involved in issuing and redeeming debentures.
Learn and practice formulas for calculating interest on debentures, redemption of debentures, and other related accounting entries.
Work through practical scenarios involving the issuance and redemption of debentures to understand their impact on a company's financial statements.
Analyse various scenarios such as different interest rates, redemption methods, and debenture terms to understand their financial implications.
Review and solve previous year's exam questions to familiarise yourself with the types of problems and scenarios that are typically tested.

Conclusion

The study of the Issue and Redemption of Debentures is essential for understanding how companies raise funds through long-term borrowing. Redemption of Debentures Class 12 Notes has equipped students with knowledge about the issuance process, accounting treatments, and the legal framework surrounding debentures. By grasping these concepts covered in the Redemption of Debentures Notes PDF, students are better prepared to analyse financial statements, evaluate company strategies, and navigate the complexities of corporate finance.

Chapter-wise Revision Notes Links for 12 Accountancy Part II

Chapter No.	Revision Notes Links for 12 Accountancy - Chapter-wise - Part II
1	Accounting for Share Capital Notes
3	Financial Statements of a Company Notes
4	Analysis of Financial Statements Notes
5	Accounting Ratios Notes
6	Cash Flow Statement Notes

Chapter-wise Revision Notes Links for 12 Accountancy Part I

Chapter No.	Revision Notes Links for 12 Accountancy - Chapter-wise - Part I
1	Accounting for Partnership: Basic Concepts Notes
2	Reconstitution of a Partnership Firm - Admission of a Partner Notes
3	Reconstitution of a Partnership Firm - Retirement of a Partner Notes
4	Dissolution of Partnership Firm Notes

Important Study Materials For Class 12 Accountancy

S.No.	Important Links for Class 12 Accountancy
1.	CBSE Class 12 Accountancy NCERT Books Part I
2.	CBSE Class 12 Accountancy NCERT Books Part II
3.	CBSE Class 12 Accountancy Sample Papers
4.	NCERT Solutions for Class 12 Accountancy
5.	NCERT Book for Class 12 Accountancy
6.	CBSE Accountancy Class 12 Previous Year Question Paper

FAQs on Issue and Redemption of Debentures Class 12 Accountancy Chapter 2 CBSE Notes - 2025-26

1. What is the best way to quickly revise the key concepts in the Issue and Redemption of Debentures chapter?

For a quick revision, start by summarising the definition of a debenture as a long-term debt instrument. Then, create a concept map of the different types of debentures (e.g., secured/unsecured, redeemable/irredeemable, convertible/non-convertible). Follow this by reviewing the journal entries for issuing debentures at par, premium, and discount. Finally, summarise the four main methods of redemption to cover the entire lifecycle of a debenture.

2. How should I structure my revision of Chapter 2: Issue and Redemption of Debentures to cover all topics effectively?

A structured revision plan ensures complete coverage. Follow these steps:

Step 1: Start with the fundamentals: clearly define debentures and contrast them with shares.
Step 2: Master the journal entries for the Issue of Debentures under all conditions (for cash, for consideration other than cash, and as collateral security).
Step 3: Dedicate time to the Redemption of Debentures, focusing on the accounting treatment for each method.
Step 4: Revise the specific accounting for Debenture Redemption Reserve (DRR) and writing off the discount/loss on issue.
Step 5: Practice problems combining different issue and redemption scenarios.

3. What are the main methods of redeeming debentures that I need to summarise for the CBSE exam?

For your revision, focus on the four primary methods by which a company can redeem its debentures as per the CBSE Class 12 syllabus:

Payment in a lump-sum: The entire amount is paid to debenture holders on the maturity date.
Payment in instalments: Repayment is made in specified instalments over a period, often decided by a 'draw of lots'.
Purchase in the open market: The company buys its own debentures from the stock market and cancels them.
Conversion into shares or new debentures: Debenture holders are given the option to convert their holdings into equity shares or new debentures.

4. Which accounting entries are most crucial for a last-minute revision of this chapter?

For a last-minute revision, concentrate on the accounting entries that cover the most common scenarios:

Entries for the issue of debentures for cash (at par, premium, and discount).
Entries for the issue of debentures as collateral security and for consideration other than cash.
The entry for recording interest on debentures and the related TDS (Tax Deducted at Source).
Entries for the redemption of debentures, especially when they are redeemed at a premium.
The entry for writing off the 'Loss on Issue of Debentures' account.

5. How are the terms of issue and redemption interconnected, and why is this concept vital for revision?

The terms of issue and redemption are financially linked and dictate key accounting treatments. For instance, if debentures are issued at a discount but will be redeemed at a premium, both the discount and the future premium payable are recognised as a 'Loss on Issue of Debentures' at the time of issue itself. Understanding this interconnection is vital because it ensures the company properly accounts for the total expected loss over the life of the debenture, reflecting the 'prudence concept' of accounting. This is a common area for practical questions in exams.

6. What common misconceptions about debenture redemption should I be careful of during revision?

When revising debenture redemption, avoid these common mistakes:

Confusing Redemption Methods: Assuming all debentures are redeemed in a lump sum at maturity, while forgetting about redemption by instalments or purchase in the open market.
Incorrect DRR Treatment: Misunderstanding the rules for creating a Debenture Redemption Reserve (DRR) or applying it to companies exempted under the Companies Act, 2013.
Profit/Loss on Cancellation: Incorrectly calculating or recording the profit or loss when a company purchases its own debentures from the open market for cancellation. Profit on cancellation is a capital profit and must be transferred to the Capital Reserve.

7. Why is it important to clearly understand the difference between shares and debentures for revision?

Understanding the difference is fundamental because it defines the relationship between the company and the fund provider. Shareholders are owners with voting rights, receiving dividends (appropriation of profit). In contrast, debenture holders are creditors (lenders) with no voting rights, receiving fixed interest (a charge against profit). This distinction is crucial for correctly preparing financial statements, especially when determining payment priority during a company's winding up, where debenture holders are paid before shareholders.

8. What are the key rules for creating a Debenture Redemption Reserve (DRR) that are important to remember for the 2025-26 syllabus?

As per the Companies Act, 2013 and SEBI guidelines for the 2025-26 syllabus, the key concept to revise is that DRR is a reserve created out of profits available for dividend distribution. It is mandatory for certain companies to ensure funds are available for redemption. Remember that All India Financial Institutions (AIFIs) regulated by RBI and Banking Companies are exempted from creating DRR. For other specified companies, a certain percentage of the value of outstanding debentures must be transferred to the DRR before redemption begins.

9. How do I summarise the accounting process for writing off a 'Discount or Loss on Issue of Debentures'?

To quickly revise this, remember that 'Discount or Loss on Issue of Debentures' is a capital loss. The accounting standard states it should be written off in the year it is incurred. The process is:

First Priority: Write it off against the Securities Premium Reserve (SPR), if any balance exists.
Second Priority: If SPR is insufficient or non-existent, write off the remaining amount against the Statement of Profit and Loss.

10. From a revision perspective, why would a company issue debentures as collateral security instead of simply taking a loan?

A company issues debentures as collateral security to provide an additional layer of security to a lender against a loan. The key concept to revise is that this is a secondary security. If the company defaults on the loan repayment, the lender has the right to these debentures. The primary reason is strategic: it can help secure a loan on more favourable terms without an immediate cash outflow from the debenture issue itself. For accounting, remember that no journal entry is passed for the issue, but it must be disclosed in the notes to accounts in the Balance Sheet.