Chapter 2 of Class 12 Accountancy Part 2 deals with an important topic in corporate accounting – Issue and Redemption of Debentures. Debentures are long-term borrowings by companies and are treated as liabilities. This chapter explains how companies raise funds through debentures, different types of debentures, and the accounting treatment for their issue and redemption. It also covers related concepts like discount, premium, interest on debentures, and creation of Debenture Redemption Reserve (DRR).
I’m writing this article because I know many students find this chapter a bit confusing, especially when they encounter terms like ‘debentures issued at premium but redeemable at par’ or ‘redeemed by drawing lots’. But with a clear understanding and some practical examples, this chapter becomes quite manageable. It’s important because debentures are a common way for companies to raise funds without giving up ownership, unlike shares. Questions from this chapter often appear in exams in both theory and journal entry format. That’s why I’ve explained everything here in a simple, practical manner to help you learn faster and with confidence.
Meaning and Features of Debentures
Debentures are a kind of debt instrument issued by companies to borrow money from the public or institutions. These are repayable after a fixed period and carry a fixed interest rate.
Key features:
- Fixed interest paid, usually half-yearly or yearly
- Debenture holders are creditors, not owners
- They don’t have voting rights
- Can be secured (backed by assets) or unsecured
Types of Debentures:
- Based on Security: Secured and Unsecured
- Based on Convertibility: Convertible and Non-convertible
- Based on Redemption: Redeemable and Irredeemable
Issue of Debentures
Debentures can be issued in various ways depending on price and terms of redemption.
At Par
Debentures issued and redeemed at face value
Example: Face Value = ₹100, Issued at ₹100, Redeemed at ₹100
At Premium
Debentures issued above face value
Example: Face Value = ₹100, Issued at ₹110
At Discount
Debentures issued below face value
Example: Face Value = ₹100, Issued at ₹95
Combination (Issued at Discount and Redeemable at Premium)
This type involves two kinds of losses: issue loss and redemption loss.
Both are treated as fictitious assets and written off over time.
Example: Issued at ₹95 and redeemable at ₹105
Interest on Debentures
Interest on debentures is calculated on face value and is considered a charge against profit. Even if the company makes a loss, interest must be paid.
Example: 12% Debentures of ₹1,00,000
Interest = ₹12,000 per year
Redemption of Debentures
Redemption means repayment of the amount to debenture holders. It can be done in the following ways:
- Lump sum at maturity
- In instalments (draw of lots)
- By purchase from open market
- By conversion into shares or new debentures
Also, companies may need to create a Debenture Redemption Reserve (DRR) as per rules, especially for public issues.
Important Accounting Terms
| Term | Meaning |
|---|---|
| Discount on Issue of Debentures | Treated as a loss and shown as asset |
| Premium on Redemption | Added liability, shown separately |
| Loss on Issue of Debentures | Sum of above two losses |
| DRR (Debenture Redemption Reserve) | Reserve to ensure safety of redemption |
Download PDF – NCERT Class 12 Accountancy Part 2 Chapter 2
If you want to revise or practise from the official NCERT book, the PDF version is very useful. It has theory, formats, journal entries, and solved examples from CBSE’s point of view.
