CBSE Class 12 Accountancy Accounting for Debentures Notes 2026–27
CBSE Class 12 Accountancy: Accounting for Debentures – Complete Notes
Chapter: Accounting for Debentures
Class: 12 Subject: Accountancy Board: CBSE Session: 2026–27
Introduction
Debentures are an important source of long-term borrowed funds for a company. When a company needs money for expansion, purchase of assets, repayment of loans, or other business purposes, it may issue debentures to the public.
In this chapter, students learn how to record the issue of debentures, issue at par, premium or discount, issue for consideration other than cash, debentures issued as collateral security, interest on debentures, and writing off discount/loss on issue of debentures.
This chapter is important from the CBSE Board Exam point of view because questions can be asked in the form of journal entries, calculations, application-based questions and case/source-based questions.
1. Meaning of Debenture
A debenture is a written acknowledgement of debt issued by a company.
When a company issues debentures, it borrows money from the debenture holders. Therefore, debenture holders are creditors of the company, not owners.
Simple Example
Suppose a company needs ₹10,00,000 for expansion. It issues 10,000 debentures of ₹100 each.
The company receives ₹10,00,000 from the debenture holders and promises to pay:
Interest at the agreed rate periodically.
The principal amount according to the terms of redemption.
Therefore:
Debenture = Borrowed Capital of the Company
2. Features of Debentures
Important features of debentures are:
Debenture holders are creditors of the company.
Debenture holders generally receive fixed-rate interest.
Interest on debentures is a charge against profit.
Debentures may be issued at par, premium or discount.
Debentures may be secured or unsecured.
Debentures are generally issued for a specified period.
The amount borrowed through debentures is normally repaid according to the terms of redemption.
Debenture holders do not normally have voting rights as shareholders.
Board Exam Point
Shareholders are owners, whereas debenture holders are creditors of the company.
3. Types of Debentures
Debentures can be classified in different ways.
A. On the Basis of Security
1. Secured Debentures
These debentures are secured by a charge on the assets of the company.
If the company fails to repay the amount, the secured debenture holders have a claim over the secured assets according to the terms of the issue.
2. Unsecured Debentures
These debentures are not secured by any specific charge on the assets of the company.
B. On the Basis of Redemption
1. Redeemable Debentures
These debentures are repayable after a specified period or according to the terms of redemption.
2. Irredeemable Debentures
These are not normally repayable during the lifetime of the company, subject to the applicable legal provisions and terms.
C. On the Basis of Convertibility
1. Convertible Debentures
These debentures can be converted into shares or other securities according to the terms of issue.
2. Non-Convertible Debentures
These debentures cannot be converted into shares.
D. On the Basis of Registration
1. Registered Debentures
The names and details of debenture holders are recorded in the company's register.
2. Bearer Debentures
These are transferable by delivery, subject to the applicable legal provisions.
4. Issue of Debentures
Debentures may be issued:
At Par
At Premium
At Discount
For Consideration Other Than Cash
With Terms of Redemption
The accounting treatment depends on the terms of issue.
5. Issue of Debentures at Par
When debentures are issued at their face value, they are said to be issued at par.
Example
A company issues 1,000, 10% debentures of ₹100 each at par.
Face Value = ₹100
Issue Price = ₹100
Journal Entry
At the time of receipt of application money:
Bank A/c Dr.
To Debenture Application & Allotment A/c
On allotment:
Debenture Application & Allotment A/c Dr.
To Debentures A/c
If application and allotment are received together:
Bank A/c Dr.
To Debentures A/c
Example Calculation
1,000 debentures × ₹100 = ₹1,00,000
Therefore, the company receives ₹1,00,000 and creates a liability of ₹1,00,000.
6. Issue of Debentures at Premium
When debentures are issued for an amount more than their face value, they are said to be issued at premium.
Example
A company issues 1,000 debentures of ₹100 each at 10% premium.
Face Value = ₹100
Premium = 10% of ₹100 = ₹10
Issue Price = ₹110
Total amount received:
1,000 × ₹110 = ₹1,10,000
Journal Entry
Bank A/c Dr. ₹1,10,000
To Debentures A/c ₹1,00,000
To Securities Premium A/c ₹10,000
Important Point
The amount of premium is credited to Securities Premium A/c.
7. Issue of Debentures at Discount
When debentures are issued for an amount less than their face value, they are said to be issued at discount.
Example
A company issues 1,000 debentures of ₹100 each at 5% discount.
Face Value = ₹100
Discount = ₹5
Issue Price = ₹95
Amount received:
1,000 × ₹95 = ₹95,000
Journal Entry
Bank A/c Dr. ₹95,000
Loss on Issue of Debentures A/c Dr. ₹5,000
To Debentures A/c ₹1,00,000
Important Point
The difference between face value and issue price is treated as loss on issue of debentures.
8. Issue of Debentures at Par but Redeemable at Premium
Sometimes debentures are issued at face value but are repayable at an amount higher than face value.
Example
10,000 debentures of ₹100 each are issued at par and are redeemable at 10% premium.
Face Value = ₹10,00,000
Redemption Premium = ₹1,00,000
Amount payable on redemption = ₹11,00,000
Journal Entry
Bank A/c Dr. ₹10,00,000
Loss on Issue of Debentures A/c Dr. ₹1,00,000
To Debentures A/c ₹10,00,000
To Premium on Redemption of Debentures A/c ₹1,00,000
Why is there a loss?
The company receives ₹10,00,000 but has to repay ₹11,00,000.
Therefore, the extra ₹1,00,000 is a loss on issue of debentures.
9. Issue of Debentures at Discount but Redeemable at Premium
This is a very important Board Exam situation.
Example
A company issues 1,000 debentures of ₹100 each at 5% discount, redeemable at 10% premium.
Face Value = ₹1,00,000
Discount = ₹5,000
Cash received = ₹95,000
Premium on Redemption = ₹10,000
Total Loss:
Discount on Issue + Premium on Redemption
= ₹5,000 + ₹10,000
= ₹15,000
Journal Entry
Bank A/c Dr. ₹95,000
Loss on Issue of Debentures A/c Dr. ₹15,000
To Debentures A/c ₹1,00,000
To Premium on Redemption of Debentures A/c ₹10,000
Exam Formula
Loss on Issue of Debentures = Discount on Issue + Premium on Redemption
10. Issue of Debentures for Consideration Other Than Cash
A company may issue debentures not for cash but for purchasing an asset or acquiring a business.
For example, a company purchases machinery and pays the seller by issuing debentures.
This is called issue of debentures for consideration other than cash.
Case 1: Debentures Issued at Par for Purchase of Asset
Suppose machinery is purchased for ₹5,00,000 and payment is made by issuing debentures of ₹100 each at par.
Step 1: Purchase of Machinery
Machinery A/c Dr. ₹5,00,000
To Vendor A/c ₹5,00,000
Step 2: Issue of Debentures to Vendor
Vendor A/c Dr. ₹5,00,000
To Debentures A/c ₹5,00,000
11. Issue of Debentures at Premium for Purchase of Asset
Suppose machinery is purchased for ₹5,00,000 and the company issues debentures of ₹100 each at 10% premium.
Issue price per debenture = ₹110.
Number of debentures:
₹5,00,000 ÷ ₹110 = 4,545.45, which is not a whole number.
Therefore, in an actual question, the purchase consideration would normally be framed so that the required number of debentures is appropriate.
General Journal Entry
Vendor A/c Dr.
To Debentures A/c
To Securities Premium A/c
The total credit equals the purchase consideration.
12. Issue of Debentures as Collateral Security
Meaning
Sometimes a company takes a loan from a bank or another financial institution and provides debentures as additional or secondary security for the loan.
These debentures are called debentures issued as collateral security.
Simple Meaning
Collateral security = Additional security for a loan
For example:
A company takes a loan of ₹5,00,000 from a bank and gives ₹6,00,000 debentures as collateral security.
The debentures are not issued as the primary source of funds. They provide additional security to the lender.
13. Accounting Treatment of Debentures as Collateral Security
There are two methods commonly discussed in Accountancy.
Method 1: No Entry
No journal entry is passed for the issue of debentures as collateral security.
The fact is disclosed in the Notes to Accounts.
Method 2: Entry Method
The company may pass:
Debenture Suspense A/c Dr.
To Debentures A/c
The amount is equal to the face value of debentures issued as collateral security.
When the loan is repaid
The entry is reversed:
Debentures A/c Dr.
To Debenture Suspense A/c
Board Exam Tip
If the question specifically asks for the accounting treatment using the entry method, use the Debenture Suspense method.
14. Interest on Debentures
Interest on debentures is the amount paid by the company to debenture holders for using their money.
It is usually calculated at a fixed rate on the face value of debentures, unless the question specifies otherwise.
Formula
Interest on Debentures = Face Value × Rate of Interest × Time
Example
A company has ₹10,00,000, 10% debentures.
Annual interest:
₹10,00,000 × 10% = ₹1,00,000
Therefore, annual interest is ₹1,00,000.
15. Journal Entries for Interest on Debentures
When Interest Becomes Due
Debenture Interest A/c Dr.
To Debentureholders A/c
When Interest is Paid
Debentureholders A/c Dr.
To Bank A/c
Transfer of Interest to Statement of Profit and Loss
Statement of Profit and Loss A/c Dr.
To Debenture Interest A/c
Important Exam Point
Interest on debentures is a charge against profit. It is payable whether the company earns profit or suffers a loss, subject to the applicable terms and law.
Note: The concept of TDS on debenture interest is excluded from the prescribed scope of this chapter.
16. Writing Off Discount/Loss on Issue of Debentures
When debentures are issued at discount or are redeemable at a premium, the company incurs a loss.
This loss cannot normally be charged completely to one year's profit when the benefit/borrowing relates to several years. Therefore, it is written off over the relevant period according to the applicable accounting treatment.
The amount may arise due to:
Discount on issue of debentures
Premium on redemption of debentures
Both discount and premium
17. Loss on Issue of Debentures
Formula
Loss on Issue of Debentures = Discount on Issue + Premium on Redemption
Example
A company issues debentures of ₹10,00,000 at 5% discount, redeemable at 10% premium.
Discount = ₹50,000
Premium on Redemption = ₹1,00,000
Therefore:
Total Loss = ₹50,000 + ₹1,00,000 = ₹1,50,000
18. Writing Off Loss on Issue of Debentures
The loss is written off over the period for which the debentures are outstanding, subject to the applicable accounting requirements.
Journal Entry for Writing Off Loss
Statement of Profit and Loss A/c Dr.
To Loss on Issue of Debentures A/c
The amount written off each year depends on the required period and the method applicable to the question.
19. Important Exam Calculation
Suppose:
Face value of debentures = ₹5,00,000
Issued at 4% discount
Redeemable at 6% premium
Redemption period = 5 years
Step 1: Calculate Discount
₹5,00,000 × 4% = ₹20,000
Step 2: Calculate Premium on Redemption
₹5,00,000 × 6% = ₹30,000
Step 3: Calculate Total Loss
₹20,000 + ₹30,000 = ₹50,000
Step 4: Write Off the Loss
If written off equally over 5 years:
₹50,000 ÷ 5 = ₹10,000 per year
Annual entry:
Statement of Profit and Loss A/c Dr. ₹10,000
To Loss on Issue of Debentures A/c ₹10,000
20. Quick Revision Table
| Situation | Amount Received | Main Accounting Treatment |
|---|---|---|
| Issued at Par | Face Value | Credit Debentures A/c with face value |
| Issued at Premium | More than Face Value | Credit Debentures A/c + Securities Premium A/c |
| Issued at Discount | Less than Face Value | Debit Loss on Issue of Debentures A/c |
| Issued at Par, Redeemable at Premium | Face Value | Debit Loss on Issue; credit Premium on Redemption |
| Issued at Discount, Redeemable at Premium | Less than Face Value | Total loss includes discount + redemption premium |
| Issued for Asset Purchase | Depends on issue terms | Vendor A/c is settled through debentures |
| Collateral Security | No separate cash proceeds from debenture issue | No-entry method or Debenture Suspense method |
| Interest on Debentures | — | Treated as charge against profit |
21. Important Journal Entries – One-Page Revision
Issue at Par
Bank A/c Dr.
To Debentures A/c
Issue at Premium
Bank A/c Dr.
To Debentures A/c
To Securities Premium A/c
Issue at Discount
Bank A/c Dr.
Loss on Issue of Debentures A/c Dr.
To Debentures A/c
Issue at Par, Redeemable at Premium
Bank A/c Dr.
Loss on Issue of Debentures A/c Dr.
To Debentures A/c
To Premium on Redemption of Debentures A/c
Issue at Discount, Redeemable at Premium
Bank A/c Dr.
Loss on Issue of Debentures A/c Dr.
To Debentures A/c
To Premium on Redemption of Debentures A/c
Interest Due
Debenture Interest A/c Dr.
To Debentureholders A/c
Interest Paid
Debentureholders A/c Dr.
To Bank A/c
Writing Off Loss
Statement of Profit and Loss A/c Dr.
To Loss on Issue of Debentures A/c
22. Common Mistakes to Avoid in Board Exams
Mistake 1: Confusing Debenture Holder with Shareholder
Remember:
Shareholder = Owner
Debenture Holder = Creditor
Mistake 2: Forgetting Securities Premium
When debentures are issued at premium, the premium is credited to:
Securities Premium A/c
Mistake 3: Ignoring Redemption Premium
If debentures are redeemable at premium, the redemption premium forms part of the loss on issue.
Mistake 4: Calculating Interest on Issue Price
Normally, interest is calculated on the face value of debentures unless the question gives another basis.
Mistake 5: Missing the Discount
For debentures issued at discount:
Face Value − Issue Price = Discount
23. CBSE Board Exam Tips 2026–27
For better performance in the Board Examination:
Learn the basic meaning and features of debentures.
Practise all major journal entries.
Clearly understand par, premium and discount.
Practise questions involving redemption at premium.
Remember the accounting treatment of collateral security.
Practise calculations of interest on debentures.
Understand how loss on issue of debentures is written off.
Read the wording of the question carefully before passing entries.
Always show calculations clearly in numerical questions.
Revise the difference between issue price, face value and redemption value.
24. Most Important Formulas
Issue Price
Issue Price = Face Value ± Issue Adjustment
Premium on Issue
Premium = Face Value × Rate of Premium
Discount on Issue
Discount = Face Value × Rate of Discount
Interest on Debentures
Interest = Face Value × Rate × Time
Loss on Issue
Loss on Issue = Discount on Issue + Premium on Redemption
Annual Write-off
Annual Write-off = Total Loss ÷ Relevant Period
25. Final Revision
Before the CBSE Board Exam, make sure you can answer these questions:
What is a debenture?
Who is a debenture holder?
State any four features of debentures.
Explain the different types of debentures.
What is meant by issue of debentures at par?
How are debentures issued at premium recorded?
How are debentures issued at discount recorded?
What is meant by issue of debentures for consideration other than cash?
What are debentures issued as collateral security?
Explain the accounting treatment of collateral security.
What is interest on debentures?
How is interest on debentures calculated?
What is loss on issue of debentures?
How is discount/loss on issue of debentures written off?
What happens when debentures are issued at discount and redeemable at premium?
Conclusion
Accounting for Debentures becomes easy when students understand the basic difference between face value, issue price and redemption value. The most important part of this chapter is practising the journal entries and calculations related to issue at par, premium, discount, redemption at premium, collateral security, interest and writing off loss on issue.
For CBSE Class 12 Accountancy Board Exam 2026–27, students should focus on understanding the accounting treatment rather than simply memorising entries. Regular practice of numerical and application-based questions will help in scoring better marks.
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