Company Accounts Notes

COMPANY ACCOUNTS P a g e | 1
Chapter:1 Company Accounts - Shares

Joint Stock Company is the most practical form of organization for large scale business. In India the
Indian Companies Act of 195 go!erns "oint stock companies. #he capital of the company is di!ided
into shares and the o$ners hold shares of capital. #hey are therefore kno$n as shareholders of the
company.
Share and Share Capital
Meaning, Nature and Types
#he most striking feature of a "oint stock company is its o$nership structure. #he capital of a "oint
stock company is di!ided into small shares of fi%ed !alue. #his facilitates easy in!estment and easy
transfer. Shareholders do not directly mange the company. #hey elect directors $ho carry out
management. #he shareholders ha!e the safety of limited liability. In the e!ent of e%treme loss or
li&uidation $ith e%cessi!e outside liability' the non in!ested $ealth of a shareholder is not affected.
#he face !alue of the shares held by a person is the ma%imum amount that he can lose in a "oint
stock company. If the shares are fully paid up he need not pay anything further e!en if the company
is li&uidated $ith hea!y unsettled claims. If the shares held are partly paid up' a shareholder might
be asked to pay the unpaid portion of the shares.

Shares can be sold and purchased through the stock e%change. (y purchasing shares a person
gets part o$nership of the business. A share holder does not attain an automatic right to manage
the company. )irectors are the people $ho manage the business. #hey are elected by
shareholders. #hus a shareholder can !ote to elect directors. *e can also contest in the election to
become director.

A "oint stock company is regarded as an artificial person. It is considered to ha!e an identity apart
from the shareholders. A company can enter into contract' buy or sell properties in its o$n name' file
la$suits or can be sued. It can e!en file suit against its o$n shareholders.
Types of share capital
Share capital is basically classified into e&uity and preference share capital. +&uity capital is raised
by the issue of e&uity shares' $hich are the most common type of shares. #he benefits recei!ed by
e&uity shares are directly related to the performance of the business. ,hen the business earns
good profit e&uity shareholders $ill get more di!idends.

-reference shares other hand are the ones ha!ing priority in the payment of di!idend and
repayment of capital in the e!ent of li&uidation of a company. )i!ided for the preference shares are
paid at a prescribed rate. -reference shareholders ha!e fi%ed income irrespecti!e of the
performance of the business. +&uity di!idend is declared each year' $hich $ill !ary according to the
profit earned by the business. #he e&uity shareholders are the ones $ho actually bear the risk in
business. ,hen the performance of the business is good' they get a high percentage of income.
#he !alue of shares $ill also increase in the market. Capital appreciation is the prime attraction of
e&uity shares in a company ha!ing consistently good performance.

+&uity and -reference share capital are t$o basic channels of share capital. Apart from this basic
classification' share capital may be referred by different &ualifying terms highlighting certain specific
aspects of share capital. In this regard follo$ing terms are used to &ualify share capital.

1. Authorised Capital or Registered Capital
#his is the ma%imum amount of capital a company is authorised to raise from the public. Authorized
capital is fi%ed little higher than the immediate capital re&uirement of the business because
authorised capital is specified in the .emorandum of Association of the company and if the
company needs more capital in the near future it cannot do so $ithout first altering the
memorandum of association.
2. Issued Capital
A company $ill raise capital from the public only to the e%tent it needs money for in!estment.
/nused fund indicates inefficiency. #he portion of authorized capital that is offered to the public for
subscription is kno$n as issued capital.
3. Suscried Capital
,hen the shares are offered to the public there is no guarantee that the public $ill purchase all of
them. #he part of the issued capital that is actually subscribed by the public is kno$n as subscribed
capital.

!. Called up Capital
,hen shares are offered to the public the company $ill indicate ho$ and $hen they ha!e to pay the
money. /sually the company $ill not demand full payment at the time of issue itself. Instead' the
capital is collected part by part at application stage' allotment stage' first call stage etc. Called up
capital is the portion of subscribed capital $hich is actually demanded by the company.

". #aid up Capital
,hen company calls up capital some shareholders may fail to pay. #his amount is called calls in
arrears. #he amount paid by the shareholders is kno$n as paid up capital.

$. Reser%e Capital
0eser!e capital is the part of the uncalled capital set aside as reser!e' by the company to call up
only in the e!ent of li&uidation of the company.
Accounting for Share Capital
Capital of "oint stock companies is referred as share capital because it is di!ided into shares. Share
capital is usually not collected in lump sum' but in instalments at !arious stages' such as
application' allotment' 1
st
call etc. 1or the purpose of con!enient accounting' a temporary account
representing each of these stages $ill be opened in the ledger $hich $ill be closed once the
amounts e%pected on that stage is fully collected or the shares are cancelled for unpaid amounts.

1ollo$ing are the "ournal entries for issue of share capital2
Share Application Stage
#he first stage in issue of share is the application stage. At this point the company $ill gi!e
e%tensi!e publicity to the share issue and in!ite the public to apply for the shares. A prospectus
$hich is official in!itation to the public' containing details of the company' proposed number of
shares' its type' !alue etc. $ill be issued to the pubic and registered $ith the registrar of companies.

In response to the in!itation by the company' public $ill apply for the shares. A part of the !alue of
shares $ill be specified as application money $hich is to be paid along $ith the application. #his
amount $ill be deposited in the bank account of the company. Application money cannot be less
than 354 of the issue price. 1ollo$ing "ournal entries are passed at the collection and capitalisation
of application money.

i.. When share application money is received

(ank Account )r.
#o Share Application Account

ii. Application money credited to Capital Account

Share Application Account )r.
#o Share Capital

#he second entry $ill close the Share Application Account' and in the ledger there $ill be Cash at
(ank on one side and Share Capital on the other' pro!ided the number of applications in!ited and
the number of applications recei!ed are the same.

Share Allot&ent Stage
After the closure of share issue the directors proceed to the allotment of shares. An additional
amount to$ards the capital on the allotted shares is collected at this stage. #his amount is called
allotment money.

1ollo$ing "ournal entries are passed at allotment stage2

i.. Allotment money credited to capital

Share Allotment Account )r.
#o Share Capital

ii. Collection of allotment money

(ank Account )r.
#o share Allotment Account

Share Call
After the share allotment' the company $ill collect the remaining capital in one or t$o additional
instalments $hich are kno$n as calls on shares. Same accounting entries are passed for all calls.

1ollo$ing are the typical entries2

i. Call money credited to capital

Share 1
st
Call )r.
#o Share Capital

ii. Collection of call money

(ank Account )r.
#o Share 1
st
Call

Illustration !.'1
A(C 5td. in!ited applications for 1666 shares of 0s.16 each on 1
st
January' 3663. #he payments to
be made as follo$s2
0s.7 on application8 0s.7 on allotment8 0s.9 on 1
st
call
#he issue $as fully subscribed and the amounts due on allotment and first call ha!e been recei!ed.
-ass necessary Journal +ntries.

(ournal )ntries
#articulars *r. Cr

1.

Bank Account
Dr
To Share Application Account
(Application money on 1000 shares
@Rs.3 per share)

3,000

3,000

3.

Share Application Account
Dr
To Share apital

(Application money cre!ite! to capital
account)

3,000

3,000

7.

Share Allotment Account Dr.
To Share apital
(Share Allotment money @Rs.3 per
share cre!ite! to apital)

3,000

3,000

9.

Bank Account Dr.
To Share Allotment
(Share allotment money collecte!)

3000

3,000

5.

Share 1
st
all Account Dr.
To Share apital
(Share 1
st
call amount @Rs." per share
cre!ite! to capital)

",000

",000

.

Bank Account Dr.
To Share 1
st
all
(Share 1
st
call amount recei#e!)

",000

",000

+%er,Suscription and -nder,Suscription
+%er,suscription
It is unlikely that the public apply for the e%act number of applications in!ited by the company. ,hen
applications recei!ed e%ceed the number in!ited' the share is said to be o!er:subscribed. It also
means that the company recei!ed more application money than $hat $as originally in!ited. ;o$ the
company cannot con!eniently increase the number of shares and keep the money as capital.
Instead' it must refund the e%cess amount recei!ed or make a part allotment on applications ad"ust
the e%cess money against future calls from shareholders.

,hen there is o!er subscription share application account $ill not be closed by the transfer to
capital alone <second entry abo!e=. #his is because the company has recei!ed more money. >ne of
the follo$ing entries $ill be passed to close the share application account depending on the
treatment of money.

i. If the excess amount is refunded to applicants

#o (ank

ii. If the excess amount is adjusted to Allotment

#o Share Allotment

Illustration !.'2
>n 1
st
January 3667 A(C 5td. in!ited applications for 1666 shares of 0s. 16 each. #he payments to
be made as follo$s2
0s.7 on application
0s.7 on allotment
0s.9 on 1
st
call
Applications ha!e been recei!ed for 1366 shares. +%cess applications ha!e been re"ected.
Allotments $ere made. #he full amounts collected in due course.
-ass necessary Journal +ntries to record the abo!e.

($ote% This illustrates the treatment o& o#ersu'scription. (ere 1)00 applications ha#e 'een recei#e! on an issue o& 1000
shares. (ere the company has to stick to the 1000 shares issue!. ompare these three simple illustrations care&ully)

(ournal )ntries

#articulars *r. Cr

1.

Bank Account
Dr
(Application money recei#e! on 1)00
applications @Rs.) per share)

3,*00

3,*00

3.

Dr.
To Share apital
To Bank
account an! the money on re+ecte!
applications re&un!e!)

3,*00

3,000
*00

7.

Share Allotment Account
Dr.
To Share apital

3,000

3,000

9.

Bank Account
Dr.
To Share Allotment

3000

3,000

5.

Share 1
st
all Account
Dr.
To Share apital
(Share 1
st
call amount @Rs., per share

",000

",000

.

Bank Account
Dr.
To Share 1
st
all
(Share 1
st

",000

",000

-nder,suscription
/nder:subscription is a situation "ust the opposite of o!er:subscription. *ere the company has
recei!ed less number of applications than $hat $as in!ited. In case of under subscription the
company $ill proceed to allotment $ith $hate!er number of shares applied by the public.

Illustration !.'3
>n 1
st
be made as follo$s2
st
call
Applications ha!e been recei!ed for 966 shares. Allotments $ere made. #he full amounts collected
in due course.
-ass necessary Journal +ntries to record the abo!e.

(ournal )ntries
#articulars *r. Cr

1.

Bank Account
Dr
(Application money recei#e! on 1)00
applications @Rs.) per share)

),-00

),-00

3.

Dr.
To Share apital

),-00

),-00

account an! the money on re+ecte!
applications re&un!e!)

7.

Dr.
To Share apital

3,*00

3,*00

9.

Bank Account
Dr.
To Share Allotment

3,*00

3,*00

5.

Share 1
st
all Account
Dr.
To Share apital
(Share 1
st

),-00

),-00

.

Bank Account
Dr.
To Share 1
st
all
(Share 1
st

),-00

),-00
Issue and Allot&ent of #reference Shares
-reference shares as also part of capital. (ut these shares as the name suggest are ha!ing some
special pri!ileges or preferences. 1ollo$ing are the important features of preference shares.
-reference shares are issued $ith a prescribed rate of di!idend. #hus such shareholders ha!e an
assured income from their shares. ,hen the company does not make huge profits there is an
ad!antage to the -reference shareholder. (ut $hen the profit is high' a preference shareholder
must satisfy $ith his prescribed rate of di!idend.
In the e!ent of li&uidation of the company the preference shareholders get a priority o!er the e&uity
shareholder in the repayment of capital.
-reference shareholders ha!e less say in the management of the company. +&uity shareholders
$ho are the real risk bearing in!estors mainly control management.

1orm the accounting point of !ie$ there is no much difference bet$een the issue of e&uity shares or
preference shares. #he only difference is that the preference capital account $ill be clearly stated as
?preference share capital@ in the "ournal entry. (ut there is no need to specify ?e&uity capital@ $hen
it is issued. #he term capital is understood as e&uity capital.

Illustration !.'!
A limited company in!ited applications for 3666' A4 preference shares of shares of 0s.16 each on
1
st
January' 3663. #he payments to be made as follo$s2
0s.5 on application
0s.5 on allotment
#he issue $as fully subscribed and the amounts due on allotments $ere recei!ed. -ass necessary
Journal +ntries.

(ournal )ntries
#articulars *r. Cr

1.

Bank Account
Dr
To .re&. Share Application Account
(Application money on )000 shares
@Rs., per share recei#e!)

10,000

10,000

3.

.re&. Share Application Account
Dr
To /0 .re&. Share apital

(Application money cre!ite! to pre&.
share capital account)

10,000

10,000

7.

.re&. Share Allotment Account Dr.
To /0 .re&. Share apital
(Share Allotment money @Rs., per
share cre!ite! to .re&. apital)

10,000

10,000

A limited company in!ited applications for 5666' 94 preference shares of shares of 0s.16 each on
1
st
0s.9 on application8 0s. on allotment
#he issue $as fully subscribed and the amounts due on allotments $as been recei!ed. -ass
necessary Journal +ntries.
#ri%ate #lace&ent and #ulic Suscription of Share Capital
Issue of shares under pri!ate placement implies the issue of shares to a selected group of persons.
-ri!ate placement is an issue that is not a public issue. In order to make pri!ate placement' a
company should pass a special resolution to that effect. If the number of !otes cast in fa!our of
pri!ate placement is not sufficient to pass a special resolution' but more than the number of !otes
cast against' the directors can approach Central Bo!ernment for appro!al' stating that the proposed
pri!ate placement is most beneficial to the company.

)&ployee Stoc. +ption #lan /)S+#0
+mployeesC stock option plan implies the right gi!en to employees to purchase shares of the
company at pre: determined lo$ price. +S>- is a kind of compensation to the employees to create
a sense of belonging to the company. 1or the purpose of +S>- the term employees include
permanent employees and directors' of a company' its subsidiary companies andDor holding
companies. *o$e!er' employees belonging to promotersC group or directors holding more than 164
of the e&uity shares are not allo$ed participating in the +S>-. #he company keeps the plan open to
for a certain period for the employees to e%ercise their option to purchase shares. At the end of this
e%ercise period' the stock option $ill be closed. #he unused option $ill be considered lapsed. Any
share issued under +S>- is not allo$ed to be traded for a period of one year lock:in period. #his
condition is not applied for shares issued as part of public issue.
Cash )ntries through Cash 1oo.
,hen cash book is used in accounting all entries of receipt and payment are entered in the cash
book directly. All other transaction $ill be entered in the normal "ournal.

#he follo$ing e%ample illustrates the use of cash book and the effect of under subscription.

Illustration !.'!
>n 1
st
January 3663' A(C 5td. in!ited applications for 1666 shares of 0s.16 each payable as
follo$s2
st
call
Applications ha!e been recei!ed for 966 shares. Amounts due on allotment and 1
st
call ha!e been
duly collected. -repare Cash (ook <bank column only= and other necessary Journal +ntries.

($ote% This is a case o& un!er su'scription. The company issue! 1000 shares 1hereas only 200 shares ha#e 'een
su'scri'e!. All entries shoul! 'e 'ase! on the num'er o& shares actually su'scri'e!, not the num'er o& shares issue!)

Cash 1oo. /1an. Colu&n only0
)ate -articulars 5Df
(ank
0eceipts
)ate -articulars 5Df
(ank
-ayments
1.
To Share
Application
1,/00
9. To Share Allotment ),/00
To Share 1
st
all ,,000
By Balance c3! 9'66
9'66 9'66

(ournal )ntries
#articulars *r. Cr

3.

Dr
To Share apital
account)

1,/00

1,/00

7.

To Share apital

),-00

),-00


5.

Share 1
st
all Account Dr.
To Share apital
(Share 1
st

",,00

",,00

Issue of shares at #re&iu&
Shares of reputed companies are usually issued at a higher issue price that than the face !alue.
#his e%tra amount is kno$n as share premium. #his is a gain to be credited separately into a
securities premium account. Share premium is usually collected along $ith the allotment money.

Security premium is not an ordinary income of the company8 therefore it is not credited into the profit
and loss account. It is comes under the category of capital recipt. Security premium can be utilized
in the follo$ing $ays8

to $rite off preliminary e%penses if any
to $rite off discount on issue of shares
to issue bonus shares
to pro!ide for the premium payable on any redeemable preference shares of the company.

Illustration !.'"
A(C 5td. in!ited applications for 1666 shares of 0s.16 each at a premium of 0s.3 on 1
st
January'
3663. #he payments to be made as follo$s2

0s.7 on application8 0s.5 on allotment <including premium=8 0s.9 on 1
st
call

#he issue $as fully subscribed and the amounts due on allotments and first call ha!e been
recei!ed. -ass necessary Journal +ntries.

(ournal )ntries
#articulars *r. Cr
1.

Bank Account
Dr.
@Rs.) per share)
3,000

3,000

3.

Dr
To Share apital
Account

3,000

3,000

7.

Dr.
To Share apital
To Securities .remium

,,000

3,000
),000
(Share Allotment an! securities premium
cre!ite! to respecti#e accounts)

9.

Bank Account
Dr.
To Share Allotment

,000

,,000

5.

Share 1
st
all Account
Dr.
To Share apital
(Share 1
st

",000

",000

.

Bank Account
Dr.
To Share 1
st
all
(Share 1
st

",000

",000

Issue at *iscount
,hen shares are issued at a discount' the company is incurring a loss' $hich $ill be debited to
Ediscount on issue of sharesC account. #his $ill remain as a fictitious asset in the books of the
company and $ill be $ritten off in due course. /sually discount $ill be ad"usted at the time of
allotment of shares.
Check the follo$ing illustration2

Illustration !.'$
A(C 5td. in!ited applications for 1666 shares of 0s.16 each at a discount of 0e.1 on 1
st
January'
3663. #he payments to be made as follo$s2

st
call

#he issue ha!e been fully subscribed and the full amounts due on allotments and first call ha!e
been recei!ed. -ass necessary Journal +ntries.

(ournal )ntries
#articulars *r. Cr

1.

Bank Account
Dr
@Rs.) per share)

),000

),000

3.

Dr
To Share apital
account)

),000

),000

7.

Dr.
Discount on issue o& Shares
Dr.
To Share apital Account
(Share Allotte! at !iscount o& Re.1 per
share)

),000
1,000

3,000

9.

Bank Account
Dr.
To Share Allotment

),000

),000

5.

Share 1
st
all Account
Dr.
To Share apital
(Share 1
st

,,000

,,000

.

Bank Account Dr.
To Share 1
st
all
(Share 1
st

,,000

,,000
Calls in Ad%ance
Sometimes shareholders chose to pay the call money in ad!ance $hich should be credited to calls
in ad!ance account. >!ersubscription of issue is another reason for opening Calls in Ad!ance
Account. Suppose a person applied for 166 shares and the company allotted him only 56 shares'
the e%cess application money paid by him may be refunded or treated as calls in ad!ance. #his
amount is ad"usted against the amounts due from him in future. (alls in a!#ance can 'e !irectly
cre!ite! a4ainst ne5t call account, 1hich is an easier treatment. This metho! is &ollo1e! in the
&ollo1in4 illustration)

Interest is paid on the calls in ad!ance if it is specified in the in the Articles of Association of the
company or if the company adopts #able A for internal administration interest can be paid at the rate
of 4. #he follo$ing entries are passed to account the interest on calls in ad!ance2

i. Interest due
6nterest on alls in A!#ance Dr.
To Sun!ry Sharehol!ers Account

ii. Interest #aid
Sun!ry Sharehol!er7s Account Dr.
To Bank

Illustration !.'2
st
be made as follo$s2

st
call

#he issue ha!e been fully subscribed. .r. A' $ho is allotted 766 shares' paid the full amount at the
time of allotment. #he amounts due on allotment and first call ha!e been recei!ed. -ass necessary
Journal +ntries.

(ournal )ntries

#articulars *r. Cr

1.

Bank Account
Dr
@Rs.) per share)

),000

),000

3.

Dr
To Share apital
account)

),000

),000

7.

Dr.
(Amount on allotment amount cre!ite! to
capital account)

3,000

3,000

9.

Bank Account
Dr.
To Share Allotment
To Share 1
st
call

",,00

3,000
1,,00

5.

Share 1
st
all Account
Dr.
To Share apital
(Share 1
st

,,000

,,000

.

Bank Account
Dr.
To Share 1
st
all

3,,00

3,,00
(Share 1
st

$ote% The a!#ance payment 'y 8r. A can 'e cre!ite! to call in a!#ance account in 9: 3. 6n that case the call in a!#ance
shoul! 'e !e'ite! in 9: *, an! cre!it the &irst call account 1ith the &ull amount o& ,,000.But the a'o#e treatment is
easier.

Calls in Arrears
Sometimes shareholders fail to pay the amount due on calls. In that case $e ha!e t$o options in
passing the "ournal entry. 1irst option is "ust recording the actual amount collected to the respecti!e
call account. ;ormally the call account $ill !anish from books $ith the collection of money. (ut in
this case the unpaid amount $ill remain in the books in the call account as debit balance. #he
second option is to debit the (ank account for the amount recei!ed and debit the Calls in Arrears
Account for the unpaid amount and credit the respecti!e call account for the total. #he second
option is follo$ed in this te%t book.

#he company can charge interest on calls in arrears at 54 per annum if it is specified in the Articles
of Association or if the company adopts #able A for the internal administration. #able A F the model
set of Articles of Association of a company F specifies interest chargeable on calls in arrears at 54.
1ollo$ing "ournal entries are passed to account interest on calls in arrears

i. Interest due
Sun!ry Sharehol!er7s Account Dr.
To 6nterest on alls in Arrears

ii. Interest #aid
Bank Account Dr..
To Sun!ry Sharehol!ers

Illustration !.'3
A(C 5td. issued 1666 shares of 0s.16 each on 1
st
January' 3663. #he payments to be made as
follo$s2
st
call
#he issue ha!e been fully subscribed. .r. A' $ho is allotted 766 shares failed to pay the 1
st
call
amount. #he full amounts due on allotment and first call from all other shareholders ha!e been
recei!ed. -ass necessary Journal +ntries.

(ournal )ntries
#articulars *r. Cr

1.

Bank Account
Dr
@Rs.) per share)

),000

),000

3.

Dr
To Share apital
account)

),000

),000

7.

Dr.
capital account)

3,000

3,000

9.

Bank Account Dr.
To Share Allotment

3,000

3,000

5.

Share 1
st
all Account Dr.
To Share apital
(Share 1
st

,,000

,,000

.

Bank Account
Dr.
alls in arrears
Dr.
To Share 1
st
all
(Share 1
st

3,,00
1,,00

,,000

Issue of Shares for Consideration other than Cash
Company can issue shares in consideration of purchase of assets. 1ollo$ing "ournal entries are
passed for such issue2

a. Asset Account )r.
#o GendorCs Account
<Asset purchased=

b. GendorCs Account )r.
#o Share Capital
<Shares issued in consideration of asset=

$ote% 6t is #ery important to consi!er 1hether the shares are issue! at par, premium or !iscount. The #alue o& assets
shoul! 'e un!erstoo! as e;ui#alent o& cash recei#e! in normal transactions, 'ase! on 1hich the reset o& the accounts
shoul! 'e !e'ite! or cre!ite!.

Illustration !.'4
>n 1
st
January 3663' A(C 5td. purchased a building for 0s.99'666 from )eepa constructions' for
$hich they issued e&uity shares at the par to the !endor. -ass necessary "ournal entries.

(ournal )ntries
#articulars *r. Cr
1. Buil!in4 Account
Dr
To Deepa onstructions.

(Buil!in4s purchase!)
22,000

22,000

3.

Deepa onstructions
Dr.
To Share apital
(Shares issue! in consi!eration o&
Buil!in4 purchase)

22,000

22,000

Illustration !.1'
>n 1
st
$hich they issued e&uity shares at a premium of 164 to the !endor. -ass necessary "ournal entries.

(ournal )ntries
#articulars *r. Cr
1.

Buil!in4 Account
Dr
22,000

22,000

3

Deepa onstructions
Dr.
To Share apital
To Share apital
Buil!in4 purchase)

22,000

20,000
2,000

$ote% 6t is #ery important that you un!erstan! ho1 the a'o#e Rs.20,000 is 1orke! out. <hen you issue a Rs.10 share at
a premium o& 100 you 1ill 4et Rs.11. (ere you 4ot Rs.22,000 (in the &orm o& 'uil!in4). 6& you 1ant to split this into
capital an! premium, remem'er thatRe.1 out o& each Rs.11 4oes to premium an! Rs.10 to capital)

Illustration !.11
>n 1
st
$hich they issued e&uity shares at a discount of 164 to the !endor. -ass necessary "ournal entries.

(ournal )ntries
#articulars *r. Cr
1. Buil!in4 Account
Dr

22,000

22,000

3

Deepa onstructions
Dr.
Discount on 6ssue
Dr.
To Share apital
Buil!in4 purchase)

22,000
11,000

110,000

$ote% This is +ust the opposite o& 1hat you ha#e seen in the earlier illustration. The shares are issue! at a !iscount. The
#alue o& 'uil!in4 Rs.22,000 represents the cash you recei#e 1hen shares are issue! at !iscount. Suppose you issue
one share o& Rs.10 at a !iscount o& 100, you 1ill recei#e Rs.2 &rom that share. (ere you recei#e! Rs.22,000 (in the
&orm o& 'uil!in4s). Rs.2 recei#e! means Re.1 !iscount allo1e!, an! Rs.10 capital cre!ite!. 6n other 1or!s Rs.22,000
recei#e! means Rs.11,000 allo1e! as !iscount.
5orfeiture of Shares 6 Accounting Treat&ent
;ormally a company is not allo$ed to cancel or take back its shares. (ut $hen a person fails to pay
the allotment money or call money due on a share' the company is allo$ed to $ithdra$ those
shares and reissue them to another party. 1orfeiture is $ithdra$al of shares due to non:payment of
dues by the shareholder.
Capital representing the forfeited shares remo!ed from share capital account
/nsettled balances in temporary accounts such as Share Allotment' Share Call etc. <or calls in
arrears account= reduced to zero.
#he paid up portion the forfeited shares is transferred from the capital account to a separate
account called EShare 1orfeiture Account@.

Accounting entries for forfeiture of shares !ary according to the conditions of issue. 1ollo$ing are
the common conditions of forfeiture and their "ournal entries.

i. 5orfeiture of shares issued at par
Share Capital Account )r. <called up !alue of shares forfeited=
#o Share 1orfeiture Account <paid up portion of forfeited shares=
#o Calls in arrears <the unpaid amount of the respecti!e calls=

Illustration !.12
st
be made as follo$s2

st
call

#he issue ha!e been fully subscribed. #he amounts due $ere collected for allotment and 1
st
call $ith
the e%ception of .r. A' ha!ing 766 shares $ho failed to pay for the allotment and first call. #hese
shares ha!e been forfeited. -ass necessary Journal +ntries.
(ournal )ntries
#articulars *r. Cr

1.

Bank Account
Dr
@Rs.) per share)

3,000

3,000

3.

Dr
To Share apital
account)

3,000

3,000

7.

Dr.
capital account)

3,000

3,000

9.

Bank Account
Dr.
alls in arrears
Dr.
To Share Allotment
(Share allotment money collecte!, 1ith
the e5ception o& 300 shares)

),100
200

3,000

5.

Share 1
st
all Account
Dr.
To Share apital
(Share 1
st

",000

",000

.

Bank Account
Dr.
alls in arrears Dr
To Share 1
st
all
(Share 1
st

),/00
1,)00

",000

H.

Share apital Account
Dr.
To Share =or&eiture Account
To alls in Arrears Account
(Shares &or&eite! &or non payment)

3000

200
),100

$ote% 6n the a'o#e +ournal entry >- 1e ha#e taken out the entire capital o& Rs.3000 representin4 A7s 300 shares? the
pai! up portion o& this capital ie. the application money is trans&erre! to =or&eiture Account an! the rest to the alls in
arrears Account.
ii. 5orfeiture of shares issued at pre&iu&
a. 1here premium 1as collecte!
Share Capital Account )r. <the capital !alue=
Securities -remium Account )r. <the premium on forfeited shares=
#o Share 1orfeiture Account <the amount collected on shares=
#o Garious Calls Account <the unpaid amount on shares=

Illustration !.13
A(C 5td. in!ited applications for 1666 shares of 0s.16 each at a premium of 0s.3 per share on 1
st

st
call

#he issue ha!e been fully subscribed. #he amounts due $ere collected $ith the e%ception of .r. A'
$ho is allotted 766 shares and failed to pay for the allotment and first call. #hese shares ha!e been
forfeited. -ass necessary Journal +ntries.

(ournal )ntries
#articulars *r. Cr

1.

Bank Account
Dr
@Rs.) per share)

3,000

3,000

3.

Dr
To Share apital
account)

3,000

3,000

7.

Dr.
To Securities premium Account
(Amount on allotment amount an! Share
premium cre!ite! to respecti#e
accounts)

,,000

3,000
),000

9.

Bank Account
Dr.
alls in Arrears Account
Dr
To Share Allotment

3,,00
1,,00

,,000

5.

Share 1
st
all Account
Dr.
To Share apital
(Share 1
st

",000

",000

.

Bank Account
Dr.
alls in Arrears
Dr.
To Share 1
st
all
(Share 1
st

),/00
1,)00

",000

I
H.

Dr.
Securities .remium Account
Dr
(Shares 1ith !e&ault ha#e 'een &or&eite!)

3,000
*00

200
),-00

$ote% The a'o#e e5ample illustrates an important aspect. Stu!y this thorou4hly. @ook at 9ournal entry > -. Aou can see
the premium is also !e'ite! alon4 1ith the capital. Aou ha#e seen in an earlier section that i& premium is not collecte!
on the shares to 'e &or&eite! the premium also shoul! 'e !e'ite!. Ri4ht. But 1hy shoul! you !e'it the premiumB To
un!erstan! this you must &irst stu!y the entry > 3 C ". 6n entry > 3 you &in! the share allotment account is !e'ite! 1ith
Rs.,000, 1hich inclu!es premium an! capital. 6n entry >",there is calls in arrears o& Rs.1,,00. This is not just capital
alone. It is unsettled share capital + unsettled premium. 6n other 1or!s you cannot 1ipe out the calls in arrears 'y
simply re#ersin4 the capital alone. $o1 re&er the ne5t illustration in 1hich there is a !e&ault, a&ter collectin4 the premium
1here premium is not re#erse!. A4ain 6 remin! you not to mu4 up the rules, instea! learn these simple concepts
thorou4hly.

'. 1here premium not collecte!
Share Capital Account )r. <only the capital !alue=
#o Share 1orfeiture Account <capital collected on shares=
#o Garious Calls Account <capital unpaid amount on shares=

Illustration !.1!
st

st
call

#he issue $as fully subscribed. #he amounts due $ere collected $ith the e%ception of .r. A' $ho is
allotted 766 shares and failed to pay for the first call. #hese shares ha!e been forfeited. -ass
necessary Journal +ntries.

(ournal )ntries
#articulars *r. Cr
1. Bank Account
Dr
@Rs.) per share)
3,000
3,000

3.

Dr
To Share apital
account)

3,000

3,000

7.

Dr.
To Securities premium Account
(Amount on allotment amount an! Share
premium cre!ite! to respecti#e
accounts)

,,000

3,000
),000

9.

Bank Account
Dr.
To Share Allotment

,,000

,,000

5.

Share 1
st
all Account
Dr.
To Share apital
(Share 1
st

",000

",000

.

Bank Account Dr.
alls in Arrears Dr.
To Share 1
st
all
(Share 1
st

),/00
1,)00

",000

H.

Dr.

3,000

1,/00
1,)00

$otice here that the calls in arrears account contains only unpai! capital. $o unpai! premium.. There&ore there is no
nee! o& !e'itin4 the .remium Account. Aou can close the unsettle! account 'y +ust re#ersin4 the apital Account alone.
iii. 5orfeiture of shares issued at discount
,hen shares issued at discount are forfeited' the discount account must be re!ersed irrespecti!e of
the point at $hich default occurs. #his is because the capital account itself includes discount in it.

Share Capital Account )r. <the !alue of shares=
#o )iscount <amount of discount allo$ed on shares=
#o Garious Calls <amount unpaid on calls=

Illustration !.1"
A(C 5td. in!ited applications for 1666 shares of 0s.16 each at a discount of 0e.1 per share on 1
st

st
call

#he issue ha!e been fully subscribed. #he amounts due $ere collected $ith the e%ception of .r. A'
$ho is allotted 766 shares and failed to pay the allotment and first call. #hese shares ha!e been
forfeited. -ass necessary Journal +ntries.

(ournal )ntries
#articulars *r. Cr
1. Bank Account
Dr
@Rs.3 per share)
3,000
3,000

3.

Dr
To Share apital
account)

3,000

3,000

I
7.

Dr
Discount Account
Dr
(Amount on allotment an! !iscount
account a!+uste! in the 'ooks)

),000
1,000

3,000

9.

Bank Account
Dr.
To Share Allotment

1,"00

1,"00

5.

Share 1
st
all Account
Dr.
To Share apital
(Share 1
st

",000

",000

.

Bank Account
Dr.
To Share 1
st
all
(Share 1
st

),/00

),/00

H.

Dr.
To Share Allotment Account
To Share 1
st
all Account
To Discount Account

3,000

200
*00
1,)00
300

Allot&ent on #ro,rata asis
-ro rate allotment means proportionate allotment. ,hen there is o!er subscription of applications'
the company has the option to either re"ect the e%cess applications or to issue lesser number of
shares on the applications ad"usting the e%cess application money in to the amounts due at
subse&uent stages. #he second option is kno$n as pro:rata allotment.

Illustration !.1$
A limited Company in!ited applications for 1666 shares of 0s.16 each on 1
st
January' 3663. #he
payments to be made as follo$s2
st
call

Applications ha!e been recei!ed for 1566 shares. Allotments $ere made as follo$s2
566 applications F 566 shares

#he full amounts due $ere collected $ith the e%ception of .r. A belonging to category <a=' $ho is
allotted 766 shares and failed to pay the allotment and first call. *is shares ha!e been forfeited.


(ournal )ntries
#articulars *r. Cr
1. Bank Account
Dr
(cash recei#e! on 1,00 applications
@Rs.3 per share)
",,00
",,00

3.

Dr
To Share apital
To Share Allotment
account an! the e5cess amount carrie!
&or1ar!)

",,00

3,000
1,,00

7.

Dr
(Share capital cre!ite! on allotment)

3,000

3,000

9.

Bank Account
Dr.
alls in Arrears Dr.
To Share Allotment
the e5ception o& 300 shares o& cate4ory
a.)

D see note 'elo1

*00
200

1,,00


5.

Share 1
st
all Account Dr.
To Share apital
(Share 1
st

",000

",000

.

Bank Account
Dr.
alls in Arrears Dr.
To Share 1
st
all
(Share 1
st

),/00
1,)00

",000
H.

Dr.
(Shares 1ith !e&ault ha#e 'een
&or&eite!)

3,000

200
),100

$ote on 93: > "

ate4ory (') nee! not pay any amount at this point 'ecause their e5cess application money 1hich is carrie! &or1ar! to
allotment is su&&icient. ate4ory A, hol!in4 ,00 shares shoul! pay Rs.1,00 (,00 5 3) A &aile! to pay his amount Rs.200
(300 53) 1hich means amount is collecte! only &rom )00 shares ie Rs.*00 ()00 53)

Illustration !.12
A limited Company in!ited applications for 1666 shares of 0s.16 each on 1
st
January' 3663. #he
payments to be made as follo$s2

st
call

Applications ha!e been recei!ed for 1566 shares. Allotments $ere made as follo$s2


#he full amounts due $ere collected $ith the e%ception of Mr. A belonging to category b!' $ho is
allotted 766 shares and failed to pay the first call. *is shares ha!e been forfeited.


(ournal )ntries
#articulars *r. Cr
1. Bank Account
Dr
(cash recei#e! on 1,00 applications
@Rs.3 per share)
",,00

",,00


3.

Dr
To Share apital
To Share Allotment
account)

",,00

3,000
1,,00

7.

Dr
(Share capital cre!ite! on allotment)

3,000

3,000

9.

Bank Account Dr.
To Share Allotment
the e5ception o& 300 shares o& cate4ory
a)

D ate4ory (') nee! not pay at this point
'ecause their e5cess application money
is su&&icient.

1,,00

1,,00

5.

Share 1
st
all Account Dr.
To Share apital
(Share 1
st

",000

",000

.

Bank Account Dr.
alls in Arresrs
To Share 1
st
all
(Share 1
st

),/00
1,)00

",000

H.

Share apital Account Dr.
&or&eite!)

3,000

1,/00
1,)00
Re,issue of 5orfeited Shares
A company is allo$ed to reissue its forfeited shares. 0eissue reinstates the capital that $as $ritten
do$n on forfeiture. #he amounts already collected on such shares and kept aside in the share
forfeiture account' can be utilized for gi!ing discount on reissue. #he balance in share forfeiture
account' specifically pertaining to the shares reissued $ill be transferred to Capital 0eser!e
Account. If some of the forfeited shares are not reissued' the corresponding portion of share
forfeiture account should not be transferred to Capital 0eser!e.

Illustration !.13
st
be made as follo$s2

st
call

#he issue ha!e been fully subscribed. #he amounts $ere collected for allotment and 1
st
call $ith the
e%ception of .r. A' $ho is allotted 766 shares and failed to for the allotment and first call. #hese
shares ha!e been forfeited' and reissued J 0s.A per share. -ass necessary Journal +ntries.
(ournal )ntries
#articulars *r. Cr

1.

Bank Account
Dr
@Rs.) per share)

3,000

3,000

3.

Dr
To Share apital
account)

3,000

3,000

7.

Dr.
capital account)

3,000

3,000

9.

Bank Account Dr.
alls in Arrears Account Dr.
To Share Allotment

),100
200

3,000

5.

Share 1
st
all Account
Dr.
To Share apital
(Share 1
st

",000

",000

.

Bank Account
Dr.
alls in Arrears Account Dr
To Share 1
st
all
(Share 1
st

),/00
1,)00

",000


H.

Dr.
To alls in Arrears

3000

200
),100

A.

Bank Account
Dr.
Share &or&eiture Account
Dr.
To Share apital
(Reissue o& &or&eite! shares)

),"00
*00

3000

9.

Share =or&eiture Account
Dr.
To apital Reser#e
(Balance in the share &or&eiture account
trans&erre! to apital Reser#e.)

300

300

Illustration !.14
st
be made as follo$s2

st
call

#he issue $as fully subscribed. #he full amounts due $ere collected for allotment and 1
st
call $ith
the e%ception of .r. A' $ho is allotted 766 shares and failed to pay the amounts due on allotment
and first call. #hese shares ha!e been forfeited. 366 of these shares ha!e been reissued J 0s.A
per share. -ass the entries from forfeiture and reissue of ACs shares.

(ournal )ntries
#articulars *r. Cr

1.

To Share 1
st
all Account

3,000

200
1,)00
200

3.

Bank Account
Dr.
Share &or&eiture Account
Dr.
To Share apital
(.art o& the &or&eite! shares ha#e 'een
reissue!)

1,*00
"00

),000


7.

Dr.
To apital Reser#e
(The unuse! portion o& the share
&or&eiture account representin4 the
reissue! shares trans&erre! to capital
reser#e)

)00

)00

Illustration !.2'
st

0s.7 on application
0s.5 on allotment <including premium=
0s.9 on 1
st
call
#he issue $as fully subscribed. #he full amounts due $ere collected $ith the e%ception of .r. A'
$ho is allotted 766 shares and failed to pay for the allotment and first call. #hese shares ha!e been
forfeited and reissued on three different dates as follo$s.

i= 166 of shares $ere reissued to .r.C J 0s.A per share.
ii= 166 shares $ere reissued to .r. ) at par.
iii= 166 shares $ere reissued to .r. + J 0s.11 per share.
-ass the Journal +ntries for forfeiture' reissue and the disposal of the share forfeiture account.

(ournal )ntries
#articulars *r. Cr

1.

Securities .remium Account Dr
To Share 1
st
all Account
&or&eite!)

3,000
*00

1,,00
1,)00
200

3.

Bank Account Dr.
Share =or&eiture Account Dr.
To Share apital

(.art reissue o& &or&eite! shares)

/00
)00

1,000

7.

To Share apital
(The surplus in &or&eiture account
representin4 reissue! shares ha#e 'een
trans&erre! to capital reser#e)

100

100


9.

Bank Account Dr.
To Share apital
(.art reissue o& &or&eite! shares at par)

1,000

1,000

5.

To apital Reser#e
(Enuse! share &or&eiture amount on
reissue! shares trans&erre! to capital
reser#e)

300

300

.

Bank Account Dr.
To Share apital
To Securities .remium Account
(=or&eite! shares reissue! at premium)

1,100

1,000
100

H.

To apital Reser#e
(Enuse! &or&eiture amount on reissue!
shares trans&erre! to capital reser#e)

300

300

Illustration !.21
A limited company forfeited 766 shares of 0s.16 each' .r. K $ho had applied for 566 shares on
account of non payment of allotment money 0s.7 L 3 <premium= and first call 0s.3. >nly 0s.7 per
share $as recei!ed $ith application. >ut of these 366 shares $ere reissued to .r. M as fully paid
shares for 0s.A per share e%cluding premium.

A company forfeited 156 shares of 0s.16 each fully called up issued at 164 discount on $hich 0s.7
per share $as recei!ed $ith application. Amount re&uired to be paid $as 0s'3 on allotment' 0s.3 on
first call and 0s.3 on final call. >ut of these 166 shares $ere reissued to .r.. as fully paid shares at
0s.A per share. NC(S+ 95O
Bi!e Journal +ntries relating to forfeiture and reissue.

(ournal )ntries
a.
#articulars *r. Cr
1.

Dr.
Securities .remium Account
Dr.
),"00
*00

200
*00
1,,00

3.

7.

To Share 1st all Account

Dassumin4 that the shares are allotte!
on proFrata 'asis on ,00 applications
Bank Account
Dr.
Dr.
To Share apital

To apital Reser#e
(:5cess o& &or&eiture amount, 'elon4in4
to &or&eite! shares trans&erre! to capital
reser#e)

1,*00
"00

*00

),000

*00

.
#articulars *r. Cr
1.

3.

7.

Dr.
To Share 1
st
all Account
To Share )
n!
all Account
To Discount on 6ssue Account

Bank Account
Dr.
Discount on 6ssue
Dr.
Dr.
To Share apital

To apital Reser#e
(:5cess o& &or&eiture amount, 'elon4in4
to &or&eite! shares trans&erre! to capital
1,,00

/00
100
100

)00

",0
300
300
300
1,0

1,000

)00
reser#e)
Illustration !.22
Journalise the follo$ing transactions in the books of -oonam 5td.2
166 shares of 0s.166 each' issued at a discount of 164 $ere forfeited for the non payment of
allotment money of 0s.56 per share. #he first and final call on these shares at 0s.36 per share $as
not made. #he forfeited shares $ere reissued for 0s.H'666 as fully paid up.
56 shares of 0s.16 each issued at a premium of 0s.5 each payable $ith allotment $ere forfeited for
non payment of allotment money of 0s. 9 per share including premium. #he first and final call on
these shares at 0s.7 $as not made. #he forfeited shares $ere reissued at 0s.13 per share as fully
paid up.
1666 shares of 0s.16 each issued at par $ere forfeited for the non payment of the final call of 0s.3
per share. #hese shares $ere reissued J0s.A per share as fully paid up. N)elhi 3663O

(ournal )ntries
#articulars *r. Cr
1.

Dr.
To Discount on 6ssue
Account
(Shares issue! on !iscount &or&eite!)

/,000

),000
,,000
1,000

3.

Bank Account Dr.
Discount on 6ssue Account Dr
To Share apital
(=or&eite! shares reissue! as &ully pai!)

-,000
1,000
),000

10,000

(ournal )ntries
#articulars *r. Cr
1.

Share apital Account Dr
Share .remium Account Dr
(Shares &or&eite! &or not payment)

3,0
),0

1,0
",0


3.

Bank Account
Dr.
To Share apital

*00

,00
100

7.

To apital Reser#e
(Share &or&eiture trans&erre!)

1,0

1,0

(ournal )ntries
#articulars *r. Cr

1.

To Share =inal all Account

10,000

/,000
),000

3.

Bank Account Dr.
To Share apital
( =or&eite! shares reissue!)

/,000
),000

10,000

7.

To apital Reser#e

(Share &or&eiture 'alance trans&erre!)

*,000

*,000

Illustration !.23
Journalise the follo$ing transactions in the books of ;a!een 5td.2
i. 566 shares of 0s.166 each' issued at a discount of 164 $ere forfeited for non payment of
allotment money of 0s.56 per share. #he first and final call of 0s.16 per share on these shares
$as not made. #he forfeited shares $ere reissued at 0s.A6 per share as fully paid up.
ii. 366 shares of 0s.16 each issued at a premium of 0s.5 per share payable $ith allotment $ere
forfeited for the non payment of allotment money of 0s.9 per share including premium. #he first
and final call of 0s.7 per share $as not made. #he forfeited shares $ere reissued at 0s.19 per
share as fully paid up.
iii. A66 shares of 0s.16 each issued at par $ere forfeited for the non payment of the final call of 0s.3
per share. #hese shares $ere reissued at 0s.A per share as fully paid up.

i0
(ournal )ntries
#articulars *r. Cr
1.

Dr.
(Shares &or&eite! &or !e&ault)
",,000

),,000
,,000
1,,000

3.

Bank Account Dr.
Discount on 6ssue Account Dr.
To Share apital
(=or&eite! shares reissue!)

"0,000
,,000
,,000

,0,000

7.

To apital Reser#e
(:5cess amount in share &or&eiture
account trans&erre!)

10,000

10,000

ii0
(ournal )ntries
#articulars *r. Cr
1. Share apital Account Dr.
Share .remium Account Dr.
1,"00
1,000

*00
1,/00

3.

Bank Account Dr.
To Share apital
To Share .remium Account

),/00

),000
/00

7.

To apital Reser#e
(Share &or&eiture account trans&erre! to
capital reser#e)

*00

*00


iii0
(ournal )ntries
#articulars *r. Cr

1.

To Share =inal all Account

/,000

*,"00
1,*00

3.

Bank Account
Dr.
To Share apital

*,"00
1,*00

/,000

7.

To apital Reser#e
(Surplus in share &or&eiture trans&erre! to
capital reser#e)

",/00

",/00

Illustration !.2!
>n 1
st
January 3663 A(C 5td. in!ited applications for 1666 shares of 0s.16 each' at a discount of
0e.1 per share. #he payments to be made as follo$s2

st
and final call

Applications ha!e bee recei!ed for 966 shares. #he amounts due for allotment and 1
st
call ha!e
been collected $ith the e%ception of 56 shares for allotment and first call. #hese shares ha!e bee
forfeited and reissued at 0s. 16 per share.
(ournal )ntries
#articulars *r. Cr

1.

Bank Account Dr.

(Application recei#e! &or 200 shares)

),-00

),-00

3.

Share Application Account Dr
To Share apital
(Application money trans&erre! to share
capital)

),-00

),-00

7.

Discount on 6ssue Dr.
To Share apital
(Allotment an! !iscount amount cre!ite!
to capital)

1,/00
200

),-00

9.

Bank Account Dr.
To Share Allotment
(Allotment money collection 1ith the
e5ception o& !e&aulte! shares)

1,-00

1,-00

5.

Share 1
st
all Account Dr.
To Share apital
(1
st
call amount cre!ite!)

3,*00

3,*00

.

Bank Account Dr.
To Share 1
st
all
(Share 1
st
call amount collecte!)

3,"00

3,"00

H.

To Share =or&eiture
To Share 1
st
call

,00

1,0
100
)00
,0

A.

Bank Account Dr.
To share apital
(Shares reissue! at par)

,00

,00

9.

Share =or&eiture Account Dr
To apital Reser#e
(Enuse! &or&eiture amount trans&erre! to
capital reser#e)

1,0

1,0

$ote% (ere shares are reissue! at par. There&ore reinstatin4 the !iscount account !oes not make
sense.

Illustration !.2"
>n 1
st
be made as follo$s2
0s.7 on application8 0s.7 on allotment8 0s'9 on 1
st
and final call

Applications ha!e been recei!ed for 3766 shares. Allotments ha!e been made as follo$s2
a. 566 applications F full allotment
b. 1666 applications F 564 allotment
c. A66 applications F re"ected
Amounts due on the shares ha!e been recei!ed $ith the e%ception of 166 shares belonging to
category <a=' for allotment and an additional 166 shares belonging to category <b= for the 1
st
call. All
the shares ha!e been forfeited and reissued for 0s.1A66.

-ass necessary "ournal entries.

(ournal )ntries
#articulars *r. Cr
1. Bank Account Dr.

(Application &ro )300 shares recei#e!)

*,200
*,200

3. Share Application Account Dr
To Share apital
To Bank

(Share application money trans&erre! to
respecti#e accounts re&un! ma!e on
re+ecte! applications.)
*,200
3,000
1,,00
),"00

7. Share Allotment Account Dr.
To Share apital
(Allotment money cre!ite! to capital)

3,000

3,000
9. Bank Account Dr.
To Share Allotment
(Allotment money collecte! 1ith !e&ault
on 100 shares)

1,)00

1,)00

5. Share 1
st
all Account Dr.
To Share apital
(=irst call amount cre!ite! to share
capital)

",000

",000
. Bank Account Dr.
To Share =irst all
(=irst call amount recei#e! 1ith !e&ault
on )00 shares)

3,)00

3,)00

H. Share apital Account Dr.
To Share 1
st
all Account
To Share &or&eiture Account
(Shares 1ith !e&ault &or&eite!)

),000

300
/00
200

A. Bank Account Dr.

1,/00
)00

),000

9. Share =or&eiture Account Dr.
To apital Reser#e
(Surplus in the share &or&eiture account
trans&erre!)
-00

-00

Illustration !.2$
>n 1
st
January 3663 A(C 5td. in!ited applications for 1666 shares of 0s. 16 each at a premium of
0s.3 per share. #he payments to be made as follo$s2
0s.7 on application
0s.5 on allotment <including premium=
0s.9 on 1
st
and final call

Applications ha!e been recei!ed for 1A66 shares. Allotments ha!e been mad as follo$s2

766 applications F re"ected
566 applications F full allotment
1666 applications F 564 allotment
+%cess application money $as retained for future calls. #he mounts due for allotment and 1
st
call
ha!e been collected $ith the e%ception of 166 shares on $hich full allotment $as made and 166
shares on $hich part allotment $as made.

166 shares <56 from each category= ha!e been reissued J 0s.A per share as fully paid.

-ass necessary "ournal entries to record the abo!e transactions.

(ournal )ntries
#articulars *r. Cr
1. Bank Account Dr.

(Application &ro )300 shares recei#e!

,,"00

,,"00

3. Share Application Account Dr
To Share apital
To Bank
(Share application money trans&erre! to
respecti#e accounts re&un! ma!e on
re+ecte! applications.)

,,"00

3,000
1,,00
200

7. Share Allotment Account Dr.
To Share apital
To Share .remium
(Allotment money an! premium cre!ite!)

,,000

3,000
),000

9. Bank Account Dr.
To Share Allotment
(Allotment money collecte! 1ith !e&ault
on )00 shares)
),/00

),/00

5. Share 1
st
all Account Dr.
To Share apital
(=irst call amount cre!ite! to share
capital)

",000

",000

. Bank Account Dr.
To Share =irst all

(=irst call amount recei#e! 1ith !e&ault
on )00 shares)

3,)00

3,)00

H. Share apital Account Dr.
Share .remium Account Dr.
To Share 1
st
all Account
To Share &or&eiture Account
(Shares 1ith !e&ault &or&eite!)

),000
"00

-00
/00
200

A. Bank Account Dr.

/00
)00

1,000

9. Share =or&eiture Account Dr.
To apital Reser#e
(Surplus in the share &or&eiture account
trans&erre!)

),0

),0

*isclosure of Share Capital In Co&pany7s 1alance Sheet
Share capital is the first item sho$n on the liabilities side of a companyCs balance sheet. Schedule
GI' -art I of the Indian Companies Act is the detailed format of horizontal balance sheet. #his is
discussed in the first chapter of Section II 6 Analysis of 5inancial State&ents.

5or infor&ation only

1uy 1ac. of Shares
A company permitted to buy back its o$n shares for cancellation as per section HHA. (uy back can be from2
a. from e%isting e&uity shareholders on a proportionate basis
b. open market
c. odd lot shareholders
d. employees of the company under +S>- scheme of s$eat e&uity

#he follo$ing procedures are to be obser!ed in buy back of shares2
(uy:back should be authorized by the Articles of Association of the company
A special resolution should be passed in the general meeting of shareholders to initiate the buy:back
#he buy back should not e%ceed 354 of the paid capital and free reser!es in a financial year
#he debt e&uity ratio should not be more that 321 after such buy:back
>nly fully paid up shares can be bought back
(uy back should be completed $ith 13 months from the date of passing the special resolution
#he company must file a sol!ency declaration $ith the 0egistrar and the S+(I in the form of affida!it signed by t$o
directors that the company is capable of meeting its liabilities and $ill not render insol!ent $ithin one year from the date
of declaration adopted by the (oard. Sec.HH A <=

)8tinguish&ent of Certificates Sec.22 A /20
A company that buys back its o$n shares should physically destroy the share certificates $ithin se!en of completion of
buy:back in the presence of merchant bankers or 0egistrar or Statutory Auditor.

No 5urther Issue Sec.22 A /30
A company is not allo$ed to make fresh issue of shares $ithin 39 months from the date of buy:back of its o$n shares
e%cept for the follo$ing cases2
-rior commitment of con!ersion of )ebentures or -reference shares into e&uity shares
Issue of (onus Shares
Issue under +S>- or s$eat e&uity shares

S)1I 9uidelines
In addition to the abo!e:mentioned conditions S+(I had issued certain guidelines regarding buy:back of shares.
1ollo$ing are the important points2
(uy:back cannot be through negotiated deals or pri!ate arrangement. #he company must make public announcement
regarding buy:back at least in one ;ational +nglish )aily' one *indi )aily and one 0egional 5anguage daily all $ith $ide
circulation $here registered office of the company is situated
-ublic announcement should specify the follo$ing among other things2
Specific date of buy back date bet$een 76 to 93 days
Company must file information to S+(I $ithin se!en $orking days from the date of public announcement
#he offer for buy:back shall remain open to the members for a period of 15 to 76 days.
#he company shall complete the !erification of offers $ith 15 days from the date of closure and the shares lodged shall
be considered accepted for cancellation unless the re"ection is made $ithin days from the date of closure.

#roportionate uy,ac.
In case the number of shares presented by shareholders is more than the number of securities to be bought back' the
buy:back from each member should be proportionately reduced. Suppose shareholders present 366 shares $here the
company intends to buy only 166' only 564 of the shares submitted from each member shall be accepted.

)scro: Account
#he $ord escro$ means a contract or bond deposited $ith a third person' $ho is to deli!er it to the party in!ol!ed in a
contract on fulfilment of certain conditions. In order to ensure that the company fulfils the obligation under buy back it is
re&uired to open an escro$ account $ith a merchant banker $ith an amount e&ui!alent 354 of the total obligation under
buy:back scheme' $here the total is not more than 0s.166 crores2 and 164 of the obligations e%ceeding 0s.166 crores.
#his account can consist of <a= cash deposit $ith commercial bank <b= bank guarantee <c= deposit of acceptable
securities $ith ade&uate margin against prince !ariance. #his amount is kept as a guarantee' and after payment of all
the amounts due on buy:back scheme' it $ill be released to the company. In case of non:fulfilment of obligation under
buy:back' S+(I can forfeit the escro$ account.

#referential Allot&ent
-referential allotment is the bulk allotment to an indi!idual' !enture capitalist or a company. -referential allotment is
made to a pre:identified buyer at a predetermined price. S+(I prescribed that the price shall be the a!erage of highs
and lo$s of the last 3 $eeks preceding the date on $hich the directors ha!e resol!ed to make such preferential
allotment. -referential allotment is made to indi!iduals or institutions $ish to make a strategic in!estment in the
company. #hey may or may not be e%isting shareholders. -referential allotment can take place only if three:fourth of the
e%isting shareholders appro!es such an allotment. Shares issued on preferential allotment are not to be sold in the open
market for a period of three years. #his period is kno$n as lock in period.

S:eat );uity
S$eat e&uity are shares issued to employees or directors of a company at reduced rate. #hey are issued for
consideration other than cash for such as technical kno$ ho$ or intellectual property. 1ollo$ing are the conditions to be
fulfilled for the issue of s$eat e&uity2
#he company must ha!e been in business for not less than 1 year.
S$eat e&uity shares should belong to a class of shares already issued.
Issue of s$eat should be authorized by special resolution passed by shareholders.
S+(I regulations should be follo$ed $here the shares are listed in a stock e%change.

Rights Issue
,hen a company makes fresh issue of shares' the e%isting shareholders ha!e the right to subscribe them in the
proportion in $hich they are holding shares. #his condition is a safeguard that enables e%isting shareholders to retain
their control o!er the company. #hey ha!e the option to accept the offer' re"ect the offer or to sell their rights.
Chapter:2 Company Accounts - Debentures
Meaning of debentures
)ebentures are debt instruments issued by a "oint stock company. Amounts collected by $ay of
debentures form part of the loan capital of a company. #hey are repayable after a fi%ed period.
)ebentures are issued in units of small !alue for con!enient buying and selling. )ebenture holders
get interest on their debentures. #hey are creditors of the company. #hey do not get di!idend. >nly
shareholders get di!idend.

According to S.3 <13= of the companies Act' 195' debentures include ?debenture stock' bonds and
any other securities of a company@. #he basic difference bet$een debentures and bonds is that the
debentures are usually secured. /nlike debentures bonds can be floated $ith a fi%ed interest or
floating interest rate. #hey can also be issued $ithout interest as discount bonds. )iscount bonds
are issued at a discount on the face !alue. #he in!estor gets full amount on redemption of
debenture. 1rom the point of !ie$ of in!estor' bonds are instruments carrying higher risks and
higher rates of returns compared to debentures.

The characteristics of deentures can e su&&arised as follo:s<

)ebentures are debt instruments.
#hey generally carry fi%ed rate of interest.
#hey are normally repayable at the end of a fi%ed period. 0epayment of debenture or cancellation of
debenture liability in the books of the company is kno$n as rede&ption of deentures.
#hey can be issued at par' premium or at discount depending on the reputation of the company.
#hey can either be placed pri!ately or offered for public subscription.
#hey may or may not be listed in the stock e%change.
If offered for public subscription' they should be rated by a credit rating agency appro!ed by S+(I'
prior to listing.
Interest is payable on debentures at a fi%ed rate irrespecti!e of the profit earned by the business.
)ebentures may be issued $ith or $ithout the security of assets of the company.
In the e!ent of $inding up of the company the debenture holders are treated as creditors and gi!en
priority in repayment of their money.
)ebenture holders normally do not ha!e representation in the (oard of the company.

Distinction between Shares and Debentures
Shares *eentures
1.

3.

7.

9.

5.

.

H.

A.

Shares represent the o$nership of
the company

Share holders are paid di!idend only
if the company makes profit

)i!idend is usually paid once a year

#here is no fi%ed rate of di!idend on
shares.

)irectors are elected by
shareholders and thus the
shareholders participate in the
management through
representati!es

Shares are permanent <e%cept
redeemable preference shares=

Shares are not issued on the
security of any asset of the company

In the e!ent of $inding up of the
company' share holders get their
payment at the end' only after all
other claims are settled.
)ebentures represent the loan of
the company
)ebenture holders are paid interest
at the fi%ed rate irrespecti!e of profit

Interest on debenture is usually paid
in si% months

Interest on debenture is paid at a
fi%ed rate
)ebenture holders are allo$ed to
ha!e their representati!es in the
(oard only under special
circumstances

)ebentures are repayable at the
end of a fi%ed period and failure to
repay the debentures on due date
can cause dis&ualification of
directors.

)ebentures can be issued on the
security of any specific asset or $ith
a general charge on all the assets of
the company.
Secured debentures get priority o!er
all the normal creditors. /nsecured
debentures are listed $ith other
creditors and settled prior to any
payment to shareholders.


Types of Debentures
)ebentures are classified as follo$s2

1. +n the 1asis of Repay&ent
a. Redee&ale *eentures
#hese debentures are paid off or redeemed after the prescribed period.
. Irredee&ale or #erpetual *eentures
#hese debentures are permanent debentures of a company. #hey are paid back only in the e!ent
of $inding up of a company.
2. +n the 1asis of Transferaility
a. Registered *eentures
#hese are debentures for $hich the company maintains record of debenture holders. #herefore
$hen such debentures are sold or transferred it should be intimated to the company for making
change in the register of debenture holders.
. 1earer *eentures
#hese debentures are transferable by mere deli!ery. #here is no need or registration of transfer
$ith the company.

3. +n the 1asis of Security
a. Si&ple or Na.ed *eentures
#hese are debentures not secured by any asset of the company. If the company goes into
li&uidation these debentures are treated as unsecured creditors.
. Mortgage *eentures
.ortgage debentures are issued on the security of certain assets of the company. #hey can be
secured by fi%ed assets or floating assets of the company. If the debentures are secured by a
fi%ed charge on assets' the company cannot sell or e%change the assets $ithout paying off the
debentures. *o$e!er in case of floating charge' the company can buy or sell the assets in!ol!ed
until the $inding up procedures are initiated or the debenture holders e%ercise their right to
EcrystalliseC the claim.

!. +n the asis of Con%ersion
a. Con%ertile *eentures
#hese debentures are issued $ith an option to debenture holders to con!ert them into shares
after a fi%ed period. Con!ertible debentures are either partially con%ertile deentures or fully
con%ertile deentures. In case of partially con!ertible debentures part of the instrument is
redeemed and part of it is con!erted into shares.
In case of fully con!ertible debentures the full !alue of the debenture is con!erted into e&uity.
Con!ertible debentures are generally issued to pre!ent sudden outflo$ of the capital at the time
of maturity of the instrument' $hich may cause li&uidity problems. #he con%ersion ratio' $hich
is the number of e&uity shares e%changed per unit of the con!ertible debenture is clearly stated
$hen the instrument is issued.
. Non Con%ertile *eentures
#hese are debentures issued $ithout con!ersion option. #he total amount of the debenture $ill
be redeemed by the issuing company at the end of the specific period.

". +n the 1asis of #re,Mature Rede&ption Rights<
a. *eenture :ith =Call> option
A callable debenture is one in $hich the issuing company has the option of redeeming the
security before the specified redemption date at a pre:determined price.
. *eenture :ith =#ut> option
#his is a debenture in $hich the holder has the option of getting it redeemed before maturity.
$. +n the 1asis of Coupon Rate /interest rate0
a. 5i8ed Rate *eentures
.ost of the time debentures are issued $ith a prefi%ed rate interest. #hese debentures are called
fi%ed interest debentures
. 5loating rate *eentures
1loating rate as the names suggests keeps changing. It is usually linked $ith -50 <prime lending
rate=. It may add a risk premium to -50 on debenture. #hus -50 L 56 ?basis points@ and if the
-50 is 11 percent' debenture interest rate $ill be 11.5 percent.
c. ?ero Coupon 1onds
#hese are debentures issued $ith no interest specified. #hey are issued at a substantial discount
to compensate the in!estors. #hese bonds are kno$n as deep discount onds. #he difference
bet$een the face !alue and the issue price is the total amount of interest for the duration of the
bond. 1rom the account point of !ie$ this discount is recorded as ?)eferred Interest +%pense
Account@ at the time of issue bonds and proportionate amounts are $ritten off each year o!er the
life of the bond.
Issue of Debentures
5ike shares debentures can also be issued at par' premium or discount. Collection of money also
can be made in instalments. )ebentures can be issued for cash or consideration other than cash.

Journal +ntries for the issue of debentures are similar to that of shares. In comparison $ith issue of
shares' all temporary accounts for issue of debentures bear the prefi% EdebentureC instead of share'
such as debenture application' debenture allotment' debenture 1
st
call etc. Share capital account on
the credit side of the "ournal entry is replaced by )ebenture Account bearing a prefi% indicating the
rate of interest.

(ournal )ntries for the issue of *eentures
Journal entries for the issue of debentures $ill !ary according to the conditions of issue and the
conditions of redemption. )ebentures can be issued at par' premium or discount. Similarly the
debentures can be redeemed at par' premium or discount. #hus there can be nine different
combinations for the issue of debentures.

1. )ebentures issued at par' to be redeemed at par
3. )ebentures issued at par' to be redeemed at premium
7. )ebentures issued at par' to be redeemed at discount

9. )ebentures issued at premium' to be redeemed at par
5. )ebentures issued at premium' to be redeemed at premium
. )ebentures issued at premium' to be redeemed at discount

H. )ebentures issued at discount' to be redeemed at par
A. )ebentures issued at discount' to be redeemed at premium
9. )ebentures issued at discount' to be redeemed at discount

1urthermore' there are options for collecting the amount in lump sum or in instalments' like shares.
+!en though the abo!e combinations look like a deadly minefield for making "ournal entries' you can
safely $ork your $ay through if you remember the follo$ing simple facts2
#re&iu& on Issue of debentures is an item of profit for the company' "ust like securities premium
you studied in the pre!ious chapter.
#re&iu& on Rede&ption of debentures is a loss for the company (4ain &or the !e'enture
hol!er, 'ut 1e are 1ritin4 the 'ooks o& the company). (e careful not to get confused bet$een these
t$o premiums.
*iscount on Issue is a loss for the company' "ust as the discount you kno$ in the pre!ious
chapter.
*iscount on Rede&ption is a gain for the company.

6ssue o& !e'entures un!er #arious con!itions are 4i#en 'elo1. Gery simple illustrations are 4i#en
1ith each case +ust to hi4hli4ht the amounts taken into account in each case.

a. Issue of *eentures at #ar
a1. *eentures Issued at #ar :hich is Redee&ale at #ar /a&ount collected in
instal&ents0
:5ample% A limite! company issue! a !e'enture o& Rs.100, to 'e pai! as &ollo1s% Rs.)0 on
application, Rs.30 on allotment, an! Rs.,0 on 1
st
call.

#articulars A&ount *r. A&ount Cr.
i. A&ount recei%ed as application &oney
(ank Account )r.
#o )ebenture Application Account
<)ebenture application money collected=

)0

)0
ii. *eenture application a&ount transferred
to deenture account
)ebenture Application Account )r.
#o )ebenture Account
<)ebenture application money transferred to
debenture account=

)0

)0
iii. 5or Allot&ent of *eentures
)ebenture Allotment Account )r.
<)ebenture allotments made=O

30

30

i%. 5or Collecting the Allot&ent Money
(ank Account )r.
)ebenture Allotment Account
<Allotment money recei!ed=

30

30
%. 5or Ma.ing the *eenture 1
st
call
)ebenture 1
st
call account )r.
<1
st
call made on debentures=

,0

,0

%i. 5or Collecting the *eenture 1
st
call
A&ount
(ank Account )r.
#o )ebenture 1
st
call
<)ebenture 1
st
call amount recei!ed=

,0

,0
a2. *eentures Issued at #ar :hich is Redee&ale at #ar /a&ount collected in lu&p
su& at the ti&e of issue0
:5ample% A limite! company issue! a !e'enture o& Rs.100, to 'e pai! in lump sum at the time o&
application.

Bank Account Dr.
To De'enture Application Account
(=ull amount recei#e! on issue o& !e'entures)

100
100
De'enture Application Account Dr.
To De'enture Account
(De'enture application money cre!ite! to
De'enture account)
100
100

a3. *eentures issued at par redee&ale at pre&iu&
This is the &irst time you come across the accountin4 e&&ect o& re!emption o& !e'entures.
Re!emption is !iscusse! in !etail at a later section in this chapter. Ri4ht no1 1e are consi!erin4
only issue o& !e'enture. <hen company issues !e'entures they sometimes promise to 4i#e more
money at the time o& re!emption to make the issue attracti#e. This is calle! premium on
re!emption. Aou stu!ie! premium on issue o& shares earlier. That is 4oo! &or the company 'ecause
the share applicants are payin4 more money to the company. But premium here is a loss &or the
company 'ecause the company is payin4 more money to the !e'enture hol!ers. $o1 rea! my
o&&icial #ersion 'elo1%

#he premium on redemption is a loss for the company. #his loss should be accounted at the time of
issue. #hus there are t$o things happening $hen a premium on redemption is brought into books.
1irst' the company accepts a liability to be settled in future in form of premium. #his premium
account should be credited because it is a liability' not because it is an income. (Remem'er this is
!i&&erent &rom premium on issue 1hich is cre!ite! in 'ooks because it is an income). Secondly' as
the company accepts a liability $ithout a corresponding asset' it incurs a loss. #his loss is debited
as E5oss on IssueC. <6s this e5planation clear enou4hB See the e5ample 'elo1, then rea! the
comment 4i#en in 'o5)

:5ample% A limite! company issue! a !e'enture o& Rs.100, to 'e re!eeme! a&ter 3 years at a
premium o& Rs.10. (i4nore application account).

(ournal entry
Bank Account Dr
"oss on Issue #r.
To $remium on %edemption
(De'enture issue! at par, repaya'le at
premium)
100
&'

100
&'

Do you kno1 e5actly 1hat happens 1hen 1e create a lia'ility in the 'ooksB A lia'ility comes into 'ooks !ue to t1o reasons%

1 F.By recei#in4 an asset, 1ith a commitment to 4i#e it 'ack in &uture. =or e5ample loan taken &rom 'ank, (ere you 4et cash at 'ank
(asset) 1hich is couple! 1ith a 'ank loan (lia'ility). <hen you pay 'ack the 'ank loan your asset an! lia'ility are re!uce!.

) .FBy postponin4 the payment o& an e5pense. =or e5ample, i& you !o not pay the telephone 'ill 1hen it is !ue, your cash 1ill remain
1ith you, 'ut at the same time you also create a lia'ility in your 'ooks in the &orm o& outstan!in4 telephone char4e 1hich al1ays
hol!s a claim a4ainst your assets This is e5actly 1hat happens 1ith premium on re!emption o& !e'entures. This is a !e&inite &uture
payment 1hich crops up the moment you issue !e'enture 1ith this commitment. Since it is to 'e pai! in &uture it is a lia'ility as 1ell
as a loss.

$o1, let us consi!er another aspect. 6& it is a &uture lia'ility, shoul! 1e consi!er it a present lossB Aes 1e shoul!? 'ecause the
principle o& conser#atism re;uires us to take into account all prospecti#e losses 1hen it comes to our kno1le!4e, 'ut the 4ains to 'e
taken only at the point they 'ecome 4ains. Secon!ly, this is a lia'ility o& the present moment, only the payment part is set &or &uture.
Same 1ay a !e'enture is sche!ule! to pay in &uture. But it is a present lia'ility, not a &uture lia'ility.
a!. *eentures issued at par, redee&ale at discount
)iscount on redemption of debenture is a BAI;. (ut the conser!ati!e principle of accounting
cautions against accounting the future gains before recei!ing it. In other $ords this is a discount
$hich $ill be realised $hen the company redeems the debenture after 5 or 16 years. #his should be
accounted only $hen it is realised. 0ight no$' for accounting purpose' assume that there is no
discount on redemption at all.

:5ample% A limite! company issue! a !e'enture o& Rs.100, to 'e re!eeme! a&ter 3 years at a
!iscount o& Rs.10. (i4nore application account).

6n this e5ample 1e collect !e'enture amount in lump sum. But 1hen 1e collect amounts in
instalments all a!+ustments re4ar!in4 premium, !iscounts etc. are 4enerally treate! 1ith allotment.

(ournal entry
Bank Account Dr.
(De'enture issue!, at par re!eema'le at
!iscount)

100
100
D(ey, 1hat happene! to that !iscountB
Sh..sh..... keep ;uiet a'out the !iscount.
. Issue of *eentures at #re&iu&
This is the type o& premium you stu!ie! in issue o& shares. This is a 4ain &or the company. There is
no pro'lem in un!erstan!in4 the accountin4 &or this premium.

-remium on issue of debenture is a gain for the issuing company. *ere the company collects more
than the face !alue of debenture. #his amount $ill be credited to the -remium on Issue of
)ebenture $hich is regarded as capital re!enue.

#here are three cases of issue at premium are discussed belo$. )ebentures issued at premium <1=
redeemable at par <3= redeemable at premium and <7= redeemable at discount. >nly the first case is
rele!ant in practical situations. >ther t$o are only academic cases.
1. *eentures Issued at #re&iu&, Redee&ale at #ar
#his is the most reasonable case of issue at premium. *ere the company issues debentures at
premium $ith the condition that they $ill repay only the actual !alue of debentures at the time of
redemption.
(ournal )ntry
(ank Account )r. (the amount recei#e! inclu!in4 premium)
#o )ebenture Account (#alue o& !e'enture)
#o -remium on Issue (amount o& premium)
<)ebentures issued to be redeemed at par=
2. *eentures Issued at #re&iu&, Redee&ale at #re&iu&
#his is a complicated arrangement. #he company makes a gain $hile issuing the debenture at a
premium. At the same time it incurs a loss $hile agreeing to redeem the debenture at a premium.
;otice the "ournal entry $ith this e%ample.

:5ample% A company issue! !e'enture o& Rs.100 at a premium o& Rs.10 to 'e re!eeme! at a
premium o& Rs.,.

(ournal )ntry<
(ank Account )r.116 (actual amount recei#e!)
5oss on Issue )r. 5 (the amount o& re!emption premium)
#o )ebenture Account 166 <actual #alue o& !e'enture)
#o -remium on Issue 16 <amount o& premium)
#o -remium on 0edemption 5 <amount o& premium on re!emption)
<)ebentures issue at premium to be redeemed at premium=
3. *eentures Issued at #re&iu&, Redee&ale at *iscount
,hen debentures issued at premium are redeemed at discount the company makes a double gain.
-remium on issue and discount on redemption are gains. *o$e!er the gain on discount on
redemption $ill be recorded only at the time of redemption. It $ill be treated as if no discount e%ists
at the time of issue.
Therefore @ournal entry is<
(ank Account )r.
#o -remium on Issue
<)ebentures issued at
premium' to redeemed at
Actual amount
recei#e!

Galue o& De'enture
Amount o&
.remium
discount=

c. Issue of *eentures at *iscount
)iscount on issue of debentures is a loss for the company. /nlike the discount on redemption of
debentures this discount has to be accounted right at the time of issue itself. Journal entries for the
!arious arrangements of issue of debentures at discount are as follo$s2
c1. Issue of *eentures at *iscount, Redee&ale at #ar
#his is the normal discount. #he treatment is e%actly like that of issue of shares. #he company
recei!es less money on the shares. #he loss is debited to discount account' and the debenture is
credited $ith the full !alue.

(ank Account )r.
)iscount on Issue of )ebenture )r.


<)ebentures issued at discount to be redeemed
at par=
ash recei#e!
Amount of
#iscount

=ull #alue o&
!e'enture
c2. Issue of *eentures at *iscount, Redee&ale at #re&iu&
#his is something $e call double trouble. )iscount on issue of debentures and premium on
redemption of debenture are losses. #his is like burning the candle on both sides. #he company
loses at the time of issue because it gets less than the face !alue of debenture due to discount on
issue. It loses at the time of redemption because it pays more than the face !alue of debenture due
to premium of redemption.

5ook at this simple e%ample. A company issues debenture of 0s.166 at a discount of 0s.3' to be
redeemed at a premium of 0s.5

(ank Account )r (actual amount recei#e!)
5oss on Issue )r (!iscount loss Hpremium
loss)
#o )ebenture Account (actual #alue o& !e'.)
#o -remium on 0edemption (amount o&
premium to 'e pai!
9A
H

100
,

c3. Issue of *eentures at *iscount, Redee&ale at *iscount
In this case there are t$o discounts8 discount on issue and discount on redemption. As $e ha!e
seen before discount on issue is a loss for the company and the discount on redemption a gain.
)iscount on redemption is not sho$n in the "ournal entry at the time of issue. In other $ords $e
must pass "ournal entry assuming that there is only one discount' $hich is discount on issue of
debentures.

(ank Account )r.
)iscount on Issue )r.

<)ebentures issued at discount' repayable
amount
recei#e!
!iscount on
issue

=ull #alue o&
!e'enture
at discount=

;o$ it is time for some simple illustrations highlighting the abo!e points.
;o$ it is time for some simple illustrations highlighting the abo!e points.
Illustration ".'1
A limited company issued 54 debentures of 0s.166 each for the total !alue of
0s.566'666' at par repayable after 5 years at par. #he payments for debentures are to be made as
0s.35 on application' 0s.35 on allotment and 0s.56 on 1
st
call. #he company collected full amounts
on all these debentures. -ass necessary "ournal entries.
(ournal )ntries
Bank Account Dr.
De'enture Application Account
(Application money recei#e! &or ,000
!e'entures)
1),,000

1),,000
De'enture Application Account Dr.
To /0 De'enture Account
(Application money trans&erre! to De'enture
Account)
1),,000

1),,000
De'enture Allotment Account Dr.
(Allotment money cre!ite! to De'enture
Account)
1),,000

1),,000
Bank Account Dr.
To De'enture Allotment Account
(De'enture allotment money collecte!)
1),,000
1),,000
De'enture 1
st
all Account Dr.
(De'enture 1
st
call money !ue)
),0,000
),0,000
Bank Account Dr.
To De'enture 1
st
all Account
(De'enture 1
st
call amount collecte!)
),0,000
),0,000

Illustration ".'2
-ass "ournal entries for the issue of )ebenture of 0s.166 under the follo$ing cases2
1. )ebenture issued at 0s.166' redeemable after 5 years at 0s.166
3. )ebenture issued at 0s.166' redeemable after 5 years at 0s.165
7. )ebenture issued at 0s.166' redeemable after 5 years at 0s.9A
9. )ebenture issued at a premium of 16' repayable at par
5. )ebenture issued at a premium of 0s.16' redeemable at a premium of 0s.5
. )ebenture issued at a premium of 0s.5' redeemable after 5 years at 0s.9A
H. )ebenture issued at 0s.9A' redeemable at par
A. )ebenture issued at 0s.95' redeemable after 5 years at 0s.163
9. )ebenture issued at 0s.95' redeemable after 5 years at a discount of 0s.3
#art
icul
A&ount *r. A&ount Cr.
ars
1. Bank Account
Dr.
To
De'enture
Account
(De'enture
issue! at par,
an! repaya'le
at par)
166
166

3. Bank Account
Dr.
@oss on 6ssue
Dr.
To
De'enture
Account
To
.remium on
Re!emption o&
De'enture
(De'enture
issue! at par,
repaya'le at
premium)
166
5

166
5

7. Bank Account Dr.
(De'enture issue! at par repaya'le at
!iscount)
D Discount on !e'enture not sho1n in the
Books
166
166
9. Bank Account Dr.
To .remium on 6ssue
(De'enture issue! at premium, repaya'le at
par)
116
166
16
5. Bank Account Dr.
@oss on 6ssue Dr.
To .remium on 6ssue Account
To .remium on Re!emption Account
(De'enture issue! at premium, re!eema'le
at premium)
116
5

166
16
5
. Bank Account Dr.
To .remium on 6ssue
(De'enture issue! at premium, re!eema'le
at !iscount)
165
166
5
H. Bank Account D Dr.
9A
3

(De'enture issue! at !iscount, re!eema'le
at par)
166
A. Bank Account Dr.
@oss on 6ssue Dr.
To .remium o& Re!emption
(De'enture issue! at !iscount., re!eema'le
at premium)
95
H

166
3
9. Bank Account Dr.
Discount on 6ssue Account Dr.
(De'enture issue! at !iscount, re!eema'le
at !iscount)
95
5

166
*isposal of *iscount on Issue of *eentures
,hen debentures are issued at discount' the discount account becomes a fictitious asset in the
books of the company. (alance in this account $ill appear in all subse&uent balance sheets' under
the heading E.iscellaneous +%penditureC. )iscount on issue of debentures is $ritten off from the
books in annual instalments' o!er the period for $hich the debentures are held by the company.
#his ensures fair distribution of e%penses and pre!ents $ide fluctuations in profits.
Ratio of *istriution
#he general rule for distribution of discount on issue of debenture is determined on the basis of the
e%act !alue of debentures held by the company. ,hen the debentures are redeemed in lump sum at
the end of a certain number of years' discount can be e&ually di!ided for those years' because the
debenture balances remain same in all these years. (ut if the debentures are redeemed in
instalments' the debenture balances are bound to change in each year. #he debenture held for the
year should be taken as standard for distributing the discount.

Illustration ".'3
>n Jan 1
st
199A8 A(C 5td. issued A4 debentures of 0s.356'666 at a discount of 164. #he
debentures are to be paid off at the end of 5 years. Sho$ discount on debenture account for the
period.
*eenture *iscount Account
*ate #articulars
A&ount
*r.
*ate #articulars
A&ount
Cr.
122/
9an.01
To /0
De'enture

),,000
122/
Dec.31
By . C @. A3c
By Balance c3!
,,000
)0,000
),,000 ),,000
1222
9an 01

To 'alance '3!

)0,000

1222
Dec.31

By .C@ A3c
By Balance c3!

,,000
1,,000
)0,000 )0,000
)000
9an.01

To Balance '3!

1,,000
)000
Dec.31

By .C@ Account
By Balance '3!

,,000
10,000
1,,000 1,,000
)001
9an.01

To Balance '3!

10,000
)001
Dec.31

By .C@ Account
By Balance '3!

,,000
,,000
10,000 10,000
)00)
9an.01

To Balance '3!

,,000
)00)
Dec.31

By .C@ Account

,,000
,,000 ,,000

Illustration ".'!
>n Jan 1
st
debentures are to be paid off in 5 e&ual instalments starting from the end of 1
st
year. Sho$ discount
on debenture account for the period.

$ote% 6n the pre#ious illustration !e'enture 'alances 1ere the same &or all the years an! there&ore
the !iscount 1as 1ritten o&& e;ually. (ere the !e'enture 'alances 1ill chan4e at the en! o& each
year. <e nee! to 1rite o&& !iscount on the 'asis o& !e'enture hel! in each year as &ollo1s%
Mear Galue of )ebenture
199A 356'666
1999 366'666
3666 156'666
3661 166'666
3663 56'666
#he ratio of debenture is 356236621562166256 ie.529272321

*ate #articulars
A&ount
*r.
*ate #articulars
A&ount
Cr.
122/
9an.01
To /0 De'enture 3-,,00122/
Dec.31
By . C @. A3c
By Balance c3!
1),,00
),,000
3-,,00 3-,,00
1222
9an 01
To 'alance '3!

),,000

1222
Dec.31
By .C@ A3c
By Balance c3!
10,000
1,,000
),,000 ),,000
)000
9an.01
To Balance '3! 1,,000)000
Dec.31
By .C@ Account
By Balance '3!
-,,00
-,,00
1,,000 1,,000
)001
9an.01
To Balance '3! -,,00)001
Dec.31
By .C@ Account
By Balance '3!
,,000
),,00
-,,00 -,,00
)00)
9an.01
To Balance '3! ),,00)00)
Dec.31
By .C@ Account ),,00
),,00 ),,00

Illustration ".'"
>n Jan 1
st
debentures are to be paid off in three e&ual instalments starting from the end of 7
rd
year. Sho$
discount on debenture account for the period.
Mear Galue of )ebenture
766'666
766'666
766'666 Rem% 100,000 pai! at the en! only
366'666
166'666

#he ratio of debenture is 7662766276623662166 ie.727272321

*ate #articulars
A&ount
*r.
*ate #articulars
A&ount
Cr.
122/
9an.01

To /0
De'enture

1/,000
122/
Dec.31

By . C @. A3c
By Balance c3!

",,00
13,,00
1/,000 1/,000
1222
9an 01

To 'alance '3!

13,,00

1222
Dec.31

By .C@ A3c
By Balance c3!

",,00
2,,00
13,,00 13,,00
)000
9an.01

To Balance '3!

2,,00
)000
Dec.31

By .C@ Account
By Balance '3!

",,00
",,00
2,,00 2,,00
)001
9an.01

To Balance '3!

",,00
)001
Dec.31

By .C@ Account
By Balance '3!

3,000
1,,00
",,00 ",,00
)00)
9an.01

To Balance '3!

1,,00
)00)
Dec.31

By .C@ Account

1,,00
1,,00 1,,00

Illustration ".'$
A company issued debentures of 0s.76'666 at a discount of 164' to be redeemed at the end of 7
years in lump sum. -ass Journal +ntries for the three years.

The !iscount on issue o& !e'enture Rs.3000 is !istri'ute! e;ually &or the three years, 'ecause the
!e'enture 'alances are same in all these three years.

#articulars A&ount
*r.
A&ount
Cr.
1
st
Aear
'e4in.
Bank Account Dr.
Discount on 6ssue o& De'. Dr.
(De'entures issue! at !iscount)
)-,000
3,000

30,000
1
st
year
:n!
.ro&it an! @oss Account Dr.
To Discount on 6ssue o&
De'.
(Discount on issue partly 1ritten
o&&)
1,000
1,000
)
n!
Aear
:n!
De'.
o&&)
1,000
1,000
3
r!
Aear
:n!
De'.
o&&)
1,000
1,000
3
r!
Aear
:n!
De'enture Account
Dr.
To Bank
(Re!emption o& !e'entures 'y
lump sum payment)
30,000
30,000

Suppose the same !e'entures are re!eeme! 'y the company in three years, startin4 ri4ht &rom the
en! o& &irst year, 1e cannot simply !i#i!e the !iscount into three years 'ecause the !e'enture
'alances are !i&&erent. 6n the &irst year the company hel! !e'entures o& Rs.30,000. They pai!
Rs.10,000 at the en! o& &irst year 1hich re!uces the !e'entures hel! in the secon! to Rs.)0,000. At
the en! o& secon! year another payment o& Rs.10,000 makes the !e'enture to 10,000 &or the last
year. Thus the ratio o& !e'entures hel! in the &irst, secon! an! three years 'ecomes
30,000%)0,000%10,000 ie.3%)%1.
;o$ look at the "ournal entries for the abo!e t$o cases.

When debentures are redeemed in three annual instalments

#articulars A&ount
*r.
A&ount
Cr.
1
st
Aear
Be4in.
Bank Account Dr.
Discount on 6ssue o& De'. Dr.
(De'entures issue! at !iscount)
)-,000
3,000

30,000
1
st
year
:n!
De'enture Account
Dr.
To Bank
lump sum payment)
10,000
10,000
1
st
year
:n!
De'.
o&&)
1,,00
1,,00
1
st
year
:n!
.ro&it an! @oss App.a3c Dr.
To De'enture Re!. reser#e
(Appropriation to compensate
re!emption o& !e'entures)
10,000
10,000
)
n!
Aear
:n!
De'enture Account
Dr.
To Bank
10,000
10,000
lump sum payment)
)
n!
Aear
:n!
De'.
o&&)
1,000
1,000
)
n!
Aear
:n!
10,000
10,000
3
r!
Aear
:n!
De'enture Account
Dr.
To Bank
lump sum payment)
10,000
10,000
3
r!
Aear
:n!
De'.
o&&)
,00
,00
3
r!
Aear
:n!
10,000
10,000
Issue of *eentures for Consideration other than Cash
)ebentures can be issued for purchase of assets. Accounting treatment is essentially the same.
,hen cash is recei!ed the cash account is debited and the debenture account credited. ,hen any
other asset is recei!ed in place of cash that asset account is debited. ,hen part payment for the
asset is made in cash or any other ad"ustments are done' it may be con!enient to credit the account
of the !endor $hile ac&uiring the asset. #he !endorCs account can be settled in due course
according to the arrangement agreed upon.
It is important to remember that the debentures can be issued at par' premium or discount in this
case also. 6& you un!erstan! the asset purchase! is in &act AS( in a !i&&erent &orm, the +ournal
entries 1ill 'e #ery easy.

Illustration ".'2
Ara!ind .ills 5imited ac&uired ne$ machinery costing 0s.566'666 for $hich 0s.35'666 $as paid in
cash. #he balance amount due to the seller $as settled by issue of A4 debentures. -ass "ournal
entries assuming that2
a. the debentures ha!e been issued at par and redeemable at par
b. the debentures ha!e been issued at a discount of 54 and redeemable at par
c. the debentures ha!e been issued at a premium of 354
(ournal )ntries
#articulars A&ount *r.A&ount Cr.
8achinery Account Dr.
To Gen!or Account
(8achinery purchase! &rom Gen!or)
,00,000
,00,000
Gen!or Dr.
To ash
),,000
),,000
(.art payment ma!e &or the purchase o&
machinery)
Casea!
Gen!or Dr.
(The amount !ue to #en!or settle! 'y issue o&
!e'enture at par)

"-,,000

"-,,000
Case b.
Gen!or Dr.
To /0 De'entures
(De'entures are issue! at ,0 !iscount to
settle the 'alance !ue to #en!or &or machinery
purchase)

"-,,000
),,000

,00,000
Case c.
Gen!or Dr.
To .remium on 6ssue
(De'entures are issue! at ),0 premium to
settle the 'alance !ue to the #en!or)

"-,,000

3/0,000
2,,000

$ote%
Case .
#he amount due to !endor P 0s.9H5'666
;o of debentures to be issued P 9H5'666 D 95 P 5666

Case c.
#he amount due to the !endor P 0s.9H5'666
;o of debentures to be issued P 9H5666 D 135 P 7A66

Issue of *eentures as Collateral Security
Collateral security is additional security' or an e%tra security to a loan. ,hen the loan is paid off' the
debentures also $ill be cancelled. #hese debentures $ill not become an actual liability' unless the
company fails to pay the loan' and the creditor e%ercises his option to reco!er the money from the
debenture.

(ournal )ntries

5irst Method< *ere the debenture is not recorded in the books as liability' because the original loan
is already appearing in the books as liability. #here cannot be t$o liabilities for one loan. A note $ill
be gi!en in the balance sheet stating that loan is secured by debentures issued as collateral
security as sho$n belo$2

1alance Sheet
Aiailities A&ount
Rs.
Assets A&ount
Rs.
Secured Aoans<
(ank 5oan
Fsecure! 'y1)0
De'entures o&
Rs.,,0,000, issue! as
collateral security

566'666
Current Assets<
Cash At (ank

566'666

Second Method< )ebenture is recorded in the books as brought in as liability by creating a fictitious
asset named Edebenture suspense accountC' by passing the follo$ing "ournal entry.
De'enture Suspense Account Dr.
De'enture Account

#hus debenture $ill appear as a liability' and the debenture suspense account $ill appear as an
asset. #hese items $ill be sho$n in the balance sheet as follo$s2

1alance Sheet
Aiailities A&ount
Rs.
Assets A&ount
Rs.
Secured Aoan<
(ank 5oan

134 )ebentures Fissue!
as collateral security

566'666

556'666
Current Assets
Cash at (ank
Miscellaneous
)8penditure
)ebenture Suspense ADc

566'666

556'666

,hen the original loan is paid off' the debenture is simply cancelled by re!ersing the abo!e entry.
Interest on Debentures
)ebenture interest is an e%pense for the company. #he company pays interest at the prescribed
rate to debenture holders irrespecti!e of the profit or loss made by the company. #he interest
account is closed by debiting it in profit and loss account like e!ery other e%pense. ,hen interest is
due and paid the interest on debenture account is debited and bank account credited.

$otice the +ournal entries &or the &ollo1in4 simple illustration.

Illustration ".'3
A(C Company 5td.' had 4 debentures of 0s.166'666 on 1
st
January 3669 on $hich interest is paid
on 76 June and 71
st
)ecember. -ass necessary "ournal entries for the payment of interest for the
year 3669. 164 ta% is deducted at source <#)S= from interest and remitted immediately. (ooks are
closed on 71
st
)ecember.

)00"
9une 30
6nterest on De'enture a3c
Dr.
6nterest Accrue!
TDS paya'le
(6nterest accrue! less TDS paya'le)
3,000
),-00
300
9une 30 6nterest Accrue!
Dr.
TDS paya'le
),-00
300

3,000
Dr.
To Bank
(6nterest an! TDS pai!)
Dec. 31
6nterest on De'enture a3c
Dr.
To 6nterest Accrue!
To TDS paya'le
(6nterest in accrue! less TDS
paya'le)
3,000
),-00
300
Dec. 31
6nterest Accrue!
Dr.
TDS paya'le
Dr.
To Bank
(6nterest an! TDS pai!)
),-00
300

3,000
Dec.31
.C@ Account
Dr.
To 6nterest on De'enture
(6nterest on !e'entures trans&erre! to
.C@ account)
*,000
*,000

(.lease note% 6nterest accrue! account is opene! &or con#eniently a!+ustin4 TDS. $otice the a'o#e
entries closely. <e 1ant the interest to 'e 3000 each time, 'ut to split the payment 'et1een 6nterest
an! TDS. By openin4 accrue! interest account 1e 4et these thin4s ;uite clear in the 'ooks)
Redemption of Debentures:
Meaning of Rede&ption
0edemption of debenture is the discharge of debenture liability. It can be done either by repaying
the money to debenture holders or con!erting the debenture into shares. #he conditions of
redemption are clearly stated at the time of issue of debenture in the prospectus. )ebentures can
be redeemed at par' premium or discount as per the terms of issue. #he period of maturity'
redemption amount' yield on redemption etc. $ill be mentioned in the prospectus. In case the non
con!ertible debentures proposed to be rolled o!er <repayment e%tended for an additional period=' a
compulsory option should be gi!en to the debenture holders $ho $ish to $ithdra$ from the
debenture programme' as per the guidelines issued by S+(I.
Sources of 5unds for Rede&ption of *eentures
0edemption of debentures is an important commitment to be fulfilled by a "oint stock company.
1ailure to redeem debentures $ill dis&ualify the directors of the company. .oreo!er' such a default
$ill in!ite strict penalties and loss of reputation. As the redemption of debentures drains a large
amount of resources' companies $ill make ad!ance preparations to meet this need.
i. Redemption of Debentures - from the proceeds of fresh issue of share capital and
debentures
1resh issue of debentures does not actually reduce the liability of a company. It is as good as the
rene$al of debentures. Issue of shares for redemption of debentures has the effect of con!ersion of
debentures into shares. Interest on debentures is an e%pense. Changing debentures into shares $ill
eliminate this burden. (ut there is no big ad!antage to e%isting shareholders. #he profit $ill appear
bigger because there is no more interest e%pense in the profit and loss account. (ut there $ill be
more shareholders to claim di!idend.
-lease study the follo$ing illustration2
Illustration ".'4
>n 1
st
January 3667' a limited company had 134 debentures of 0s.56'666 due for redemption at a
premium of 54. #he company issued e&uity shares of 0s.6'666 at par and redeemed the
debentures. -ass necessary "ournal entries.
(ournal )ntries

#articulars A&ount *r.A&ount Cr.
Bank Account Dr.
To Share apital
(Shares issue! at par)

*0,000
*0,000
1)0 De'enture Account Dr.
.remium on Re!emption Dr.
To De'enture (ol!ers7 Account
(Trans&er o& !e'entures an! premium to
De'enture hol!ers &or re!emption)

,0,000
),,00

,),,00
De'enture (ol!ers7 Account Dr.
To Bank
(.ayment to De'enture hol!ers in re!emption
o& !e'entures)

,),,00
,),,00
ii. 0edemption of )ebentures : out of accumulated profits
Accor!in4 to AD )00- re#elation 'y BS:, you ha#e to stu!y re!emption out o& capital only. But the
sample paper contains ;uestions 'ase! on re!emption reser#es. A lar4e portion &rom this section is
remo#e! an! kept asi!e. $e1 re#elations are likely to appear ne5t year.

#he best preparation a company can make for the redemption of its debentures is to set aside
enough profit for the redemption. -rior to the amendment in the companies Act in 3666 the decision
to set aside profit for redemption of debenture $as left to the discretion of the directors of the
company. #he Companies <Amendment= Act' 3666 has added three sections to the e%isting Section
11H on debentures. #his amendment came into force $ith effect from )ecember 17' 3666.
According Section 11H C of the amendment' the companies ha!e to create Eade&uate reser!eC for
the redemption of debentures. #he !ague term Eade&uate reser!eC created confusion. #he
)epartment of Company Affairs issued a circular $hich clarified that the ade&uacy of )ebenture
0edemption 0eser!e $ill be 564 of the debentures issued through public issue. Nref. Beneral Circular
;o.9D3663' Bo!ernment of India' .inistry of 5a$' Justice Q Company Affairs F )epartment of Company Affairs' dated 1A.9.3663O.
S+(I also incorporated these clarifications in their guidelines. #here are certain e%ceptions to this
general rule.

)ffect of creating *RR< )ebenture 0edemption 0eser!e is set aside from the profit and loss
appropriation. #his pre!ents the outflo$ of funds by $ay of di!idends to e&uity shareholders. #hus
the aim of creating reser!es is to retain funds for the redemption of debentures. (y retaining profits
the company accumulates funds $ithout putting pressure on the resources for its routine acti!ities.
+!en though the e&uity shareholders seem to sacrifice due to lesser di!idends' the market !alue of
their shares $ill increase because of accumulated reser!es in the company. >nce the debenture
holders are paid off the shareholders $ill get better di!idends. #hey also get bonus shares by
con!ersion of the reser!es.

#he follo$ing illustration sho$s ho$ a company accumulates )00 $ithout in!esting it in securities2

Illustration ".1'
>n 1
st
January' 3667' a limited company issued 366' A4 debentures of 0s.1'666 each to be
redeemed on 71
st
)ecember 3669. #he debentures ha!e been fully subscribed and the full amount
$as recei!ed $ith application. )ebenture interests ha!e been paid on 76
th
June and 71
st
)ecember
each year. #he company created minimum reser!e re&uired by S.11H C of the Companies
Amendment Act' 3666. -ass "ournal entries for all transactions related to debentures for t$o years'
considering that the books are closed on 71
st
)ecember.

(ournal )ntries
)003
9an 01
Bank Account Dr.
To /0 De'enture Application
(De'enture application money recei#e!)
)00,000
)00,000
)003
9an 01
/0 De'enture Application account
Dr.
To /0 De'enture account
(De'enture allotte! to applicants)
)00,000
)00,000
)003
9un 30
6nterest on De'entures account
Dr.
To 'ank
(6nterest pai! &or the 1
st
hal& year)
/,000
/,000
)003
Dec 31
Dr.
To 'ank
(6nterest pai! &or the )
n!
hal& year)
/,000
/,000
)003
Dec.31
.ro&it an! @oss Account
Dr.
6nterest on De'enture
(6nterest &or the year char4e! to .C@)
1*,000
1*,000
)003
Dec 31
.ro&it an! @oss Appropriation
Dr.
To /0 De'enture Re!emption
Reser#e
(De'enture Re!emption Reser#e
create!)
,0,000
,0,000
)00"
9un 30
Dr.
To 'ank
(6nterest pai! &or the 1
st
hal& year)
/,000
/,000
)00"
Dec 31
Dr.
To 'ank
(6nterest pai! &or the )
n!
hal& year)
/,000
/,000
)00"
Dec.31
.ro&it an! @oss Account
Dr.
6nterest on De'enture
(6nterest &or the year char4e! to .C@)
1*,000
1*,000
)00"
Dec 31
.ro&it an! @oss Appropriation
Dr.
To /0 De'enture Re!emption
Reser#e
,0,000
,0,000
(De'enture Re!emption Reser#e
create!)
)00"
Dec 31
/0 De'enture Account
Dr.
To De'enture (ol!ers
(De'entures trans&erre! &or re!emption)
)00,000
)00,000
)00"
Dec 31
De'enture (ol!ers a3c Dr.
To Bank
(De'entures pai! o&&)
)00,000
)00,000
)00"
Dec 31
De'enture Re!emption Reser#e
Dr.
To Ieneral Reser#e
(De'enture Re!emption reser#e
trans&erre! to 4eneral reser#e)
100,000
100,000

. *RR :ith In%est&ent in Securities /*eleted0
Methods of Rede&ption of *eentures
i0 Rede&ption In lu&p,su&, at the end of stipulated period
/nder this method the entire debentures are redeemed at the stipulated date stated in the
prospectus for the issue of debentures. #he dra$back of this method is that the company has to
arrange a large amount at the time of redemption. /sually companies prepare $ell ad!ance for the
redemption of debentures.
ii0 1y *ra: of Aots
/nder this method the company does not redeem all the debentures at the same time. Instead it $ill
call back only a portion of its debentures in the market for redemption each year. #he company
select the debentures of a predetermined !alue' by dra$ing lot and they are redeemed that year.
#his method of redemption reduces the burden of redemption. -lanning is relati!ely easy and the
impact of redemption on the finance of the company is limited.

Illustration ".11
>n 71
st
)ecember' 3661 A(C 5td. had 134 debentures of 0s.156'666' 1D7
rd
of $hich $ere selected
by lot to be redeemed. -ass Journal +ntries for the redemption.

*ate #articulars A&ount
*r.
A&ount
Cr.
)001
Dec 31
1)0 De'enture Account Dr.
To Bank
(133
r!
De'entures re!eeme! 'y !ra1 o&
lots)
,0,000
,0,000
)001
Dec 31
.ro&it an! @oss Appropriation a3c Dr
To De'enture Re!emption Reser#e
(De'enture re!emption reser#e Jcreate!
to su'stitute re!eeme! !e'entures)D
,0,000
,0,000

$ote% De'enture re!emption reser#e shoul! 'e create! e#en 1hen the ;uestion is silent a'out it.

iii0 1y #urchasing in the +pen Mar.et
)ebentures can be redeemed by purchasing them from the open market. If a company finds its
debentures are a!ailable in the open market at cheap rate it $ill purchase those debentures and
cancel them.

Illustration ".12
>n 1
st
January 3667 a limited company purchased its A4 debentures of 0s.56'666 at 964 from the
open market for cancellation. -ass necessary "ournal entries.

(ournal )ntries

*r.
A&ount
Cr.
)003
9an 01
/0 De'enture Account Dr.
To Bank
To .ro&it on re!emption
(.urchase o& De'entures &rom open market
&or cancellation)
,0,000
",,000
,,000
)003
9an 01
.ro&it on Re!emption o& De'entures Dr.
To apital Reser#e
(.ro&it on Re!emption trans&erre! to capital
reser#e)
,,000
,,000
)003
9an 01
.ro&it an! @oss Appropriation a3c Dr.
a3c
(Reser#e create! &or re!emption o&
!e'entures)
",,000
",,000

i%0 1y Con%ersion into Ne: *eentures or Shares.
Con!ersion of debentures into shares is another method of redemption. ,hen debentures are
con!erted to shares' the company does not pay money to debenture holders. Instead the company
issues share certificates in place of debentures. It may look good for the company because there is
no need of cash payment. (ut the company is selling its shares. Selling shares is actually selling
part of the o$nership. )ebenture holders become shareholders. Creditors become o$ners. It is
better to pay off creditors rather than selling them part of the company. (ut sometimes company
agree to gi!e some shares to make the issue of debentures more attracti!e to buyers.

,hen the company con!erts debentures into shares it may issue shares at par premium of
discount. Mou kno$ $hen the company issue shares at par it is selling shares at e%act face !alue of
the shares. If the company co!erts debentures of 0s.7666 in shares issued at par means the
company cancels debentures of 0s.7'666 and issues share of the same !alue. )ebentures become
share capital of e&ual !alue. #here is no problem in understanding this. ,hen they con!ert
debentures at premium or discount you need to look at it more closely.

,hen the company issues shares at a premium it is selling shares at a higher price than the face
!alue. *ere the debenture holders get less in the form of shares than $hat they $ere holding as
debentures. <hy 1oul! anyone accept such a !ealB Shares mi4ht 'e ha#in4 more #alue in the
market, or it is more attracti#e in the lon4 run.

;o$ see this e%ample2

Illustration ".13
JJ ltd. had debentures of 0s.7'666. In redemption of these debentures the company offered2
a. cash or
b. e&uity shares issued at a premium of 564.

*alf the debenture holders opted for cash and remaining half opted for shares. -ass "ournal entries.

(ere the company is rea!y to pay Rs.3000. But i& the !e'enture hol!ers like to 'uy some shares,
they can 'uy them at ,00 premium, 1hich means i& they 1ant a share o& Rs.10 they must pay
Rs.1,. 6 !i! not mention the #alue o& one share simply 'ecause it !oes not matter. There are &our
separate entries sho1n 'elo1 to make it clear. Knce you un!erstan! the picture, you can pass
compoun! entries &or con#ersion.

*r.
A&ount
Cr.
L55 1. L0 De'enture Account a3c
Dr.
To De'enture hol!ers a3c
(De'entures trans&erre! &or
con#ersion))
3,000
3,000
L55 ). De'enture (ol!ers a3c Dr.
To Bank a3c
(De'entures re!eeme! 'y cash
payment)
1,,00
1,,00
L55 3 .C@ Appropriation a3c
DRR
(Appropriation o& pro&it &or the
!e'entures re!eeme!)
1,,00
1,,00

L55 3. De'enture (ol!ers a3c Dr.
To Share capital
To Securities premium
(De'entures re!eeme! 'y con#ersion)
1,,00
1,000
,00

are&ully notice 1hat happene! a'o#e. The company 4a#e t1o options. :ither the !e'enture
hol!ers can take &ull money an! say 4oo! 'ye or they can take shares an! continue as o1ners.
$o1 i& they 1ant shares, the company 1ill not 4i#e shares o& the same #alue. The shares are price!
,00 a'o#e &ace #alue.

(al& the !e'enture hol!ers took their money an! le&t (secon! entry).There is another entry
re4ar!in4 the reser#e, 1hich 6 i4nore no1 to keep you &ocuse! on the concept o& con#ersion, 1hich
is the thir! entry.

The remainin4 hal& sai!, MNeep our money, an! 4i#e us sharesO. The company sai! &ine, 'ut the
shares are price! ,00 a'o#e &ace #alue. 6& you ha#e Rs.1,0 here, you 1ill 4et shares o& Rs.100
only. Ri4htB Aes. That7s the !eal.

Illustration ".1!
>n 71
st
)ecember 3667' a limited company redeemed its 4 debentures of the total !alue of
0s.166'666 by con!erting debentures of 0s.7'666 into e&uity shares of 0s.166 each and paying
cash for the balance.
-ass Journal +ntries assuming that2
a. +&uity shares ha!e been issued at a premium of 354
b. +&uity shares ha!e been issued at a discount of 164

a. );uity shares issued at pre&iu&<
$o o& e;uity shares issue! P *3,000 3 1), P,0"

(ournal )ntries

*r.
A&ount
Cr.
)003
Dec 31
*0 De'enture Account a3c
Dr.
100,000
100,000
)003
Dec 31
*0 De'enture hol!ers a3c Dr.
To Bank a3c
(De'entures re!emption 'y payment)
3-,000
3-,000
)003
Dec 31
To Share capital
(De'entures re!emption 'y
con#ersion))
*3,000
,0,"00
1),*00
)003
Dec.31
(Reser#e create! &or the re!emption 'y
cash payment)
3-,000
3-,000

. );uity shares issued at *iscount

;o of e&uity shares issued P 0s.7'666 D 96 P H66

*ate

#articulars A&ount
*r.
A&ount
Cr.
)003
Dec 31
*0 De'enture Account a3c
Dr.
100,000
100,000
)003
Dec 31
To Bank a3c
(De'entures re!emption 'y payment)
3-,000
3-,000
)003
Dec 31
Discount on issue o& Shares Dr
To Share capital
(De'entures re!emption 'y con#ersion)
*3,000
-,000

-0,000
)003
Dec.31
3-,000
3-,000
(Reser#e create! &or the re!emption 'y
cash payment)

Illustration ".1"
>n 1
st
January' 3666 a company issued 566' 154 debentures of 0s.1666 each at 0s.9A6. *olders
of these debentures had an option to con!ert their debentures into 164 preference shares of
0s.166 each at a premium of 0s'36 per share at any time $ithin 3 years. >n 71
st
)ecember' 3666 a
holder of 136 debentures notified his intention to e%ercise his option. -ass necessary Journal
entries. NC(S+ 3663 compt.O

*r.
A&ount
Cr.
)000
9an 1
Bank a3c
Dr.
Discount a3c
Dr.
To 1,0 De'enture a3c
(6ssue o& !e'entures at !iscount)
"20,000
10,000

,00,000
)000
Dec 31
1,0 De'enture a3c
Dr.
1)0,000
1)0,000
)003
Dec 31
1,0 De'enture hol!ers a3c
Dr.
To 100 .re&erence share capital Dr
(De'entures re!emption 'y con#ersion)
1)0,000
100,000
)0,000

Company Accounts Notes

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Chapter:1 Company Accounts - Shares

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