Competitive Exams Corporate Accounting: Debenture Issue and Redemption

Accounting treatment of Issue of debenture

For rendering the accounting treatment of issue of debenture, you should know debenture and what is use of debenture in any corporate.

Debenture is just long term loan which is taken by company. For this company issue debentures. This is just like a paper on which company has written that company is taking loan from debenture holder with given term. Company has to decide the rate of interest and repayment amount and time of repayment of debenture. These terms must be written in debenture paper at the time of issue of debenture. There are many type of debenture which can be issued by company. It may convertible or non convertible. It means that company converts debenture in to share if company issued convertible debenture but if company issued non convertible, company has no right to convert debentures into shares. Company can also redeemable and non redeemable debenture. It means that company repays the full amount of debenture holder after some time if company has issued redeemable debentures but if company issued non redeemable debentures, company will not repay in his life time. These debentures only will redeem after the winding up of company.

Because of this is important transaction relating to company, so it is very necessary to record in the books of company. Let us start the accounting treatment of issue of debenture.

A Issue of Debenture at Par

  • 1st journal Entry
  • When company receives application money of debentures
  • Bank account Debit
  • Debenture Application Account Credit
  • 2nd Journal Entry
  • When company accepts the applications
  • Debenture Application Account Debit
  • Debenture Account Credit
  • 3rd Journal Entry
  • When Allotment money of debenture due
  • Debenture Allotment Account Debit
  • Debenture Account Credit
  • 4th Journal Entry
  • When Allotment money of debenture received
  • Bank Account Debit
  • Debenture Allotment Account Credit
  • 5th Journal Entry
  • When Call money of debenture is payable
  • Debenture Calls Account Debit
  • Debenture Account Credit
  • 6th Journal Entry
  • When Call money of debenture is received
  • Bank Account Debit
  • Debenture Calls Account Credit
  • B-When Company issue of debenture at premium
  • If premium is receivable with application money
  • 1st Journal Entry
  • When amount of application received with premium
  • Bank Account Debit
  • Debenture Application account Credit
  • 2nd Journal Entry
  • Debenture Application Account Debit
  • Debenture Account Credit
  • Security premium Account credit
  • If premium receivable on allotment then
  • Debenture Allotment account debit
  • Debenture Account Credit
  • Security Premium Account Credit
  • And allotment money received with premium
  • Bank account Debit
  • Debenture Allotment Account Credit
  • When Debenture Issued At discount
  • Debenture Allotment Account Debit
  • Discount on Issue of Debenture Account Debit
  • Debenture Allotment Account Credit
  • When discounted amount of debenture is received
  • Bank Account Debit
  • Debenture Allotment Account Credit
  • Redemption of Debenture and method of redemption
  • Redemption of Debenture means repayment at the maturity of debenture. Because earlier we told that debentures are long term loan so it is very necessary to redeem the debentures.

1st Method: Lumbsum method

It means when company repay the Lumbsum amount to debenture holder. There following sub method of this method

Without Provision

According to Company law, if you have to redeem without any provision, it is necessary to make reserve of debenture redemption reserve with 50% of total amount of debenture so that company can easily repay the debenture without any provision at the time of redemption the following journal entry will pass.

Debenture Account Debit: Debenture holder Account Credit

  • 2nd journal Entry
  • Profit and loss Appropriation Account Debit
  • Debenture Redemption Reserve Account Credit
  • 3rd Journal Entry
  • Debenture holder Account Debit
  • Bank Account Credit
  • 4th Journal Entry
  • Debenture redemption Reserve account Debit
  • General Reserve Account Credit

Sinking Fund Method of redemption of Debenture

This is very important method of redemption of debenture. Sinking fund means take one part of profit for repayment of debenture. This is calculated with sinking fund table. This is invested in such scheme which gives us Lumbsum amount so that we can easily repay the debenture without any tension. This is very popular and scientific method of redemption of debenture. In this method we open the sinking fund and sinking fund investment account. Sinking funds other name is also Debenture Redemption Fund Account. The following accounting treatment is done by the accountant of company when the company follow this method.

  • In the end of first year
  • 1st journal entry for taking reserve from profit
  • Profit and loss appropriation account Debit
  • Sinking Fund Account Credit
  • 2nd Journal Entry for invest the sinking fund
  • Sinking fund investment Account Debit
  • Bank Account Credit
  • In the end of next years but not end last year
  • 3rd Journal Entry for receiving interest on investment
  • Bank Account Debit
  • Interest on sinking fund investment Account Credit
  • 4th Journal Entry for transferring interest to sinking fund
  • Interest on Sinking fund investment account Debit
  • Sinking fund Account Credit
  • 5st journal entry for taking reserve from profit
  • Profit and loss appropriation account Debit
  • Sinking Fund Account Credit
  • 6th Journal Entry for invest the sinking fund
  • Sinking fund investment Account Debit
  • Bank Account Credit
  • At the end of last year
  • Bank Account Debit
  • Interest on sinking fund investment Account Credit
  • 7th Journal Entry for transferring interest to sinking fund
  • Interest on Sinking fund investment account Debit
  • Sinking fund Account Credit
  • 8st journal entry for taking reserve from profit
  • Profit and loss appropriation account Debit
  • Sinking Fund Account Credit
  • 9th Journal Entry for receiving the money from sale of investment
  • Bank account Debit
  • Sinking fund investment account Credit
  • 10th journal entry for any profit on sale
  • Sinking Fund investment Account Debit
  • Sinking fund account Credit
  • 11th journal entry for repayment to debenture holders
  • Debenture Account debit
  • Bank account credit
  • 12th journal entry for balance of sinking fund transferred to general reserve account
  • Sinking fund account debit
  • General reserve account credit

Accounting Treatment of Provision for Income Tax

Before writing this article, I have studied deeply several books of accounting. Actually this type of provision is needed in Corporate type business. Because in the sole trade and partnership firm there is no treatment of provision for income tax and income tax paid because above two type business level, it is the duty of business man to pay income tax personally. So in above situation if he take any fund from business for paying income tax, it is deemed as drawing or other words we can say that his capital will reduce if you pick some amount for paying any income tax. No other treatment is done in sole trade or partner ship

Now In Case of Company or Corporate

I am giving you full detail of accounting treatment, if you have to do this type of work in any company.

  • Ist Step
  • Understanding the meaning of Company. I have already read on it see.
  • 2nd Step
  • Understanding the meaning of provision of Income tax
  • In India, we all company pay income tax of previous year income. Means what we earn in last year we have to pay tax on next year that is called assessment year. But Under the law of Income tax, all company have to pay tax in advance.
  • So without actual earning we starts to estimate earning.
  • For Example
  • Suppose company can guess that it will earn RS. 5 crore in this year.
  • So on this advance guess company make his reserve or provision of income, it may be the 5% or 10% or 15% or 30% on his estimated income. This is called provision for income tax.
  • Now company Make the voucher entry of this provision by providing amount from profit and loss account
  • Profit and loss account Debit
  • Provision for income tax account Credit
  • After provision or estimated income tax, company submit his advance income tax return to income tax department
  • then pass the following entry
  • Advance Income tax account debit
  • Bank Account credit
  • After one year when income tax department calculate the real income tax by providing the real income position of company in previous year.
  • Adjustment of actual income tax with provision
  • Actual income tax will adjust with provision of income tax by passing following adjustment entry
  • Provision for income tax account Debit
  • Income tax Account Actual after assessment credit
  • We must calculate the difference between actual paid tax and advance + tds
  • If advance and tds is more than actual tax, then income tax department return your excess tax paid
  • At this time two general entries will pass
  • 1st transfer advance tax and tds to income tax account
  • Income tax account debit
  • Advance tax account Credit
  • Tds account Credit
  • 2nd journal entry will pass for return the amount
  • Bank account debit
  • Income tax account credit
  • If advance and tds is less than actual tax, then income tax department demand more tax from you, and you will pay by following journal entry
  • 1st transfer advance tax and tds to income tax account
  • Income tax account debit
  • Advance tax account Credit
  • Tds account Credit
  • 2nd journal entry will pass for return the amount

Indian Company law 1956's section 210, 216, and 217 binds board of directors of company to show profit and loss account and balance sheet of company and auditors reports copies in annual general meeting of Company. All these reports are called annual reports of company. It is also compulsory for company to publish both in print and now in website also. These reports show the performance of company to public.

These days many companies are using charts and graphs for publishing their final accounts. Because, it is attractive and gives good impression to customers and interested people of company. Many charts are so popular and be successful for comparison of financial data of company.

Due to advancement of Internet technology you can make charts and Graphs of production cost, sale, income and expenses classification and distribution of income into dividend and tax and present in website of Company. For learning point of view I have made some chart of companys data. All these reports are made in excel or in online with Docs spreadsheet.