LECTURE 15, 16 and 17 ACCOUNTING AND AUDITING

PROVISION AND RESERVES

PROVISIONS
There are certain expenses/losses which are related to the current accounting period
but amount of which is not known with certainty because they are not yet incurred.
It is necessary to make provision for such items for ascertaining true net profit

For example, a trader who sells on credit basis knows that some of the debtors of the
current period would default and would not pay or would pay only partially. It is
necessary to take into account such an expected loss while calculating true and fair
profit/loss according to the principle of Prudence or Conservatism.
Therefore, the trader creates a Provision for Doubtful Debts

Examples of provisions are :

• Provision for bad and doubtful debts;
• Provision for taxation;
• Provision for discount on debtors; and
• Provision for repairs and renewals.

It must be noted that the amount of provision for expense and loss is a charge
against the revenue of the current period. Creation of provision ensures proper
matching of revenue and expenses and hence the calculation of true profits.
Provisions are created by debiting the profit and loss account. In the balance sheet,
the amount of provision may be shown either:
• By way of deduction from the concerned asset on the assets side.

For example, provision for doubtful debts is shown as deduction from the amount
of sundry debtors and provision for depreciation as deduction from the concerned
fixed assets;
• On the liabilities side of the balance sheet along with current liabilities

ACCOUNTING TREATMENT EXAMPLE (DEBTORS)

When business transaction takes place on credit basis, debtors account is created
and its balance is shown on the asset-side of the balance sheet. These debtors may
be of three types:
• Good Debtors are those from where collection of debt is certain.
• Bad Debts are those debtors from where collection of money is not possible and
the amount of credit given is a certain loss.

• Doubtful Debts are those debtors who may pay but business firm is not sure about
the collection of full amount from them. In fact, as a matter of business experience,
some percentage of such debtors are not likely to pay, hence treated as doubtful
debts.
RESERVES

A part of the profit may be set aside and retained in the business to provide for
certain future needs like growth and expansion to meet future contingencies such as
workmen compensation.

Unlike provisions, reserves are the appropriations of profit to strengthen the

financial position of the business. Reserve is not a charge against profit as it is
not meant to cover any known liability or expected loss in future.

However, retention of profits in the form of reserves reduces the amount of profits
available for distribution among the owners of the business. It is shown under the
head

Reserves and Surpluses on the liabilities side of the balance sheet after capital.
Examples of reserves are:

• General reserve
• Workmen compensation fund;
• Investment fluctuation fund;
• Capital reserve;
• Dividend equalization reserve;
• Reserve for redemption of debenture.

IMPORTANCE OF RESERVES

A business firm may consider it proper to set up some mechanism to protect itself
from the consequences of unknown expenses and losses, it may be required to bear
in future. It may also regard it as more appropriate in certain cases to reduce the
amount that can be drawn by the proprietors as profit in order to conserve business
resource to meet certain significant demands in future.
An example of such a demand is the much needed expansion in the scale of business
operations. This is presented as the justification for reserves in business activities
and in accounting. The amount so set aside may be meant for the purpose of :
• Meeting a future contingency
• Strengthening the general financial position of the business;
• Redeeming a long-term liability like debentures, etc.
TYPES OF RESERVES

A reserve is created by retention of profit of the business can be for either a

general or a specific purpose.
1. General reserve :

When the purpose for which reserve is created is not specified, it is called General
Reserve. It is also termed as free reserve because the management can freely utilize
it for any purpose. General reserve strengthens the financial position of the business.

2. Specific reserve : It is created for some specific purpose and can be utilised only
for that purpose.
Examples of specific reserves are given below :

(i) Dividend equalisation reserve: This reserve is created to stabilise or maintain

dividend rate. In the year of high profit, amount is transferred to Dividend
Equalisation reserve. In the year of low profit, this reserve amount is used to
maintain the rate of dividend.

(ii) Workmen compensation fund: It is created to provide for claims of the workers
due to accident, etc.

(iii) Investment fluctuation fund: It is created to make for decline in the value of
investment due to market fluctuations.

(iv) Debenture redemption reserve: It is created to provide funds for redemption of

debentures.

Reserves are also classified as revenue and capital reserves according to the nature
of the profit out of which they are created.

CAPITAL AND REVENUE RESERVE

(a) Revenue reserves : Revenue reserves are created from revenue profits which
arise out of the normal operating activities of the business and are otherwise freely
available for distribution as dividend.
Examples of revenue reserves are:
• General reserve
• Workmen compensation fund
• Investment fluctuation fund
• Dividend Equalization reserve
• Debenture redemption reserve
(b) Capital reserves: Capital reserves are created out of capital profits which do not
arise from the normal operating activities. Such reserves are not available for
distribution as dividend. These reserves can be used for writing off capital losses
or issue of bonus shares in case of a company. Examples of capital profits, which
are treated as capital reserves, whether transferred as such or not, are :
• Premium on issue of shares or debenture.
• Profit on sale of fixed assets.
• Profit on redemption of debentures.
• Profit on revaluation of fixed asset & liabilities.
• Profits prior to incorporation.
• Profit on reissue of forfeited shares

SECRET RESERVE
It is a reserve which does not appear in the balance sheet. It may also help to reduce
the disclosed profits and also the tax liability . The secret reserve can be merged
with the profits during the lean periods to show improved profits. Management may
resort to creation of secret reserve by charging higher depreciation than required.
It is termed as ̳Secret Reserve‘, as it is not known to outside stakeholders. Secret
reserve can also be created by way of :
• Undervaluation of inventories/stock
• Charging capital expenditure to profit and loss account
• Making excessive provision for doubtful debts
• Showing contingent liabilities as actual liabilities

Creation of secret reserves within reasonable limits is justifiable on grounds of

expediency, prudence and preventing competition from other firms

SHARE CAPITAL

INTRODUCTION
Funds provided by the owner(s) into a business are recorded as capital. Capital of the
business depends upon the form of business organisation. Proprietor provides capital in
a sole-proprietorship business. In case of a partnership, there is more than one proprietor,
called partners. Partners introduce capital in a partnership firm. As the maximum
number of members in a partnership firm is restricted, therefore only limited capital can
be provided in such form of businesses. Moreover, the liability of the proprietor(s) is
unlimited in case of non-corporate business, namely, sole-proprietorship and partnership.
 Capital funding process for different types of business forms can be summarised as follows:

Business Ownership Type of Capital Liability of Owners

Organisation
Sole - Proprietorship Proprietor- He alone is the Capital Unlimited
owner of business
Partnership Partners Partners' Capital Unlimited
Company Shareholders Share Capital Limited to issue price
of shares held

DEFINITION
Total capital of the company is divided into a number of small indivisible units of a
fixed amount and each such unit is called a share. At the time of issue of shares,
every Company is required to follow SEBI Regulations.

The fixed value of a share, printed on the share certificate, is called nominal/par/face
value of a share. However, a company can issue share at price different from face
value of share. The liability of holder of shares (called shareholders) is limited to the
issue price of shares acquired by them.

Share capital of a company is divided into following categories

(i) Authorised Share Capital or Nominal Capital: A company estimates its maximum capital
requirements. This amount of capital is mentioned in ‘Capital Clause’ of the
‘Memorandum of Association’ registered with the Registrar of Companies. It puts a limit
on the amount of capital, which a company is authorised to raise during its lifetime and is
called ‘Authorised Capital’. It is shown in the balance sheet at face value.
(ii) Issued Share Capital: A company need not issue total authorised capital. Whatever portion
of the share capital is issued by the company, it is called ‘Issued Capital’. Issued capital
means and includes the nominal value of shares issued by the company for:
1. Cash, and
2. Consideration other than cash to:
(i) Promoters of a company; and
(ii) Others.
It is also shown in the balance sheet at nominal value.
The remaining portion of the authorised capital which is not issued either in cash or
consideration may be termed as ‘Un-issued Capital’. It is not shown in the balance sheet.
(iii) Subscribed Share Capital: It is that part of the issued share capital, which is subscribed by
the public i.e., applied by the public and allotted by the company. It also includes the face
value of shares issued by the company for consideration other than cash.
(iv) Called-up Share Capital: Companies generally receive the issue price of shares in
installments. The portion of the issue price of shares which a company has demanded
or called from shareholders is known as ‘Called-up Capital’ and the balance, which the
 company has decided to demand in future may be referred to as Uncalled Capital.
(v) Paid-up Share Capital: It is the portion of called up capital which is paid by the
shareholders. Whenever a particular amount is called by the company and the
shareholder(s) fails to pay the amount fully or partially, it is known as ‘unpaid calls’ or
‘installments (or Calls) in Arrears’. Thus, installments in arrears mean the amount
not paid although it has been demanded by the company as payment towards the issue
price of shares. To calculate paid-up capital, the amount of installments in arrears is deducted
from called up capital.
Call-in-advance is that portion of capital which is yet to be called by the company but has
already been paid by shareholder. In balance sheet, called-up and paid-up capital are
shown together.
(vi) Reserve Share Capital: As per Section 65 of the Companies Act, 2013, a Company may
decide by passing a resolution that a certain portion of its subscribed uncalled capital shall
not be called up except in the event of winding up of the company. Portion of the uncalled
capital which a company has decided to call only in case of liquidation of the company is
called Reserve Capital.
Reserve Capital is different from Capital reserve, Capital reserves are part of ‘Reserves and
Surplus’ and refer to those reserves which are not available for declaration of dividend.
Thus, reserve capital which is portion of the uncalled capital to be called up in the event of
winding up of the company is entirely different in nature from capital reserve which is created
out of capital profits only.

1. Authorised Capital = Issued Capital + Unissued Capital.

2. Subscribed Capital can be equal to or greater than or less than Issued Capital resulting in 3 situations
respectively: Fully Subscribed; Over Subscribed and Under Subscribed.
3. Called up Capital = Paid up Capital + Calls in arrears if any – Calls in advance if any

TYPES OF SHARES

1) Preference Shares : According to Section 43 of the Companies Act, 2013

persons holding preference shares, called preference shareholders, are
assured of a preferential dividend at a fixed rate during the life of the company.
They also carry a preferential right over other shareholders to be paid first in
case of winding up of the company. Thus, they enjoy preferential rights in the
matter of :
(a) Payment of dividend, and
(b) Repayment of capital

Generally, holders of these shares do not get voting rights. Companies use this mode
of financing as it is cheaper than raising debt. Dividend is generally cumulative in
nature and need not be paid every year in case of deficiency of profits.
The Companies Act, 2013 prohibits the issue of any preference share which is
irredeemable.

Types of Preference Shares

Preference shares can be of various types, which are as follows :
(a) Cumulative Preference Shares: A cumulative preference share is one that carries
the right to a fixed amount of dividend or dividend at a fixed rate. Such a dividend
is payable even out of future profit if current year’s profits are insufficient for the
purpose. This means that dividend on these shares accumulates unless it is paid
in full and, therefore, the shares are called Cumulative Preference Shares. The
arrears of dividend are then shown in the balance sheet as a contingent
liability. In India, a preference share is considered cumulative unless
otherwise stated. In case, the dividend remains in arrears for a period of not less
than two years, holders of such shares will be entitled to take part and vote on
every resolution on every matter in the general body meeting of the shareholders.

(b) Non-cumulative Preference Shares: A non-cumulative preference share carries

with it the right to a fixed amount of dividend. In case no dividend is declared in
a year due to any reason, the right to receive such dividend for that year expires.
It implies that holder of such a share is not entitled to arrears of dividend in future.

(c) Participating Preference Shares: Notwithstanding the right to a fixed dividend,

this category of preference share confers on the holder the right to participate in
the surplus profits, if any, after the equity shareholders have been paid dividend
at a stipulated rate. Similarly, in the event of winding up of the company, this type
of share carries the right to receive a pre-determined proportion of surplus as well
once the equity shareholders have been paid off.

(d) Non-participating Preference Shares : A share on which only a fixed rate of

dividend is paid every year, without any accompanying additional rights in profits
and in the surplus on winding-up called ‘Non-participating Preference Shares.’
Unless otherwise specified, the preference shares are generally non-participating.

(e) Redeemable Preference Shares : These are shares that a company may issue on
the condition that the company will repay after the fixed period or even earlier at
company’s discretion. The repayment on these shares is called redemption and is
governed by Section 55 of the Companies Act, 2013.

(f) Non-redeemable Preference Shares: The preference shares, which do not carry
with them the arrangement regarding redemption, are called Non-redeemable
Preference Shares. According to Section 55, no company limited by shares shall
issue irredeemable preference shares or preference shares redeemable after the
expiry of 20 years from the date of issue. However a Company may issue preference
shares redeemable after 20 years for such infrastructure projects as may be
specified, under the Companies Act, 2013.

(g) Convertible Preference Shares : These shares give the right to the holder to get
them converted into equity shares at their option according to the terms and
conditions of their issue.

(h) Non-convertible Preference Shares : When the holder of a preference share has
not been conferred the right to get his holding converted into equity share, it is
called Non-convertible Preference Shares. Preference shares are non-convertible
unless otherwise stated.
 Note: Unless mentioned otherwise Preference Shares are Cumulative, Non
Participating, Non Convertible and Redeemable in nature.

2) Equity Shares : Equity shares are those shares, which are not preference shares.
It means that they do not enjoy any preferential rights in the matter of payment of
dividend or repayment of capital.
The rate of dividend on equity shares is recommended by the Board of Directors and
may vary from year to year.
Rate of dividend depends upon the dividend policy and the availability of profits after
satisfying the rights of preference shareholders. These shares carry voting rights.
Companies Act, 2013 permits issue of equity share capital with differential rights as
to dividend, voting or otherwise in accordance with prescribed rules. The shares can
be issued by a company either

(1) for cash or

(2) for consideration other than cash.

ISSUE OF SHARES FOR CASH

Minimum Subscription: A public limited company cannot make any

allotment of shares unless the amount of minimum subscription stated in the
prospectus has been subscribed and the sum payable as application money
for such shares has been paid to and received by the company.

As per guidelines of the Securities Exchange Board of India (SEBI), the

minimum subscription to be received in an issue shall not be less than ninety
per cent of the offer through offer document. If the Company does not receive
the minimum subscription of 90% of the issue, all application moneys
received shall be refunded to the applicants forthwith

As per Section 39 of the Companies Act, 2013, application money must be at

least 5% of the face value of shares. However, as per SEBI Regulations, the
minimum application moneys to be paid by an applicant along with the
application money shall not be less than 25% of the issue price.

First instalment …………. Application Money

Second Instalment ………….. Allotment Money
Third Instalment ………….. First Call Money
Fourth Instalment ………….. Second Call Money and so on.
Last Instalment Final Call Money
Journal Entries

Debit

Debit

Debit

Debit
SUBSCRIPTION OF SHARES

1) Under Subscription
2) Full Subscription

3) Over Subscription – Shares are issued by Pro rate Allotment

For example, a company offers to the public 10,000 shares for subscription.
The company receives applications for 12,000 shares. If the shares are to be
allotted on pro-rata basis, applicants for 12,000 shares are to be allotted
10,000 shares, i.e., on the 12,000 : 10,000 or 6:5 ratio. Any applicant who
has applied for shares will be allotted 5 shares.

SHARES ISSUED AT DISCOUNT

Shares are regarded to be issued at a discount, if issue is at an amount less

than the nominal or par value of shares. The excess of the nominal value over
the issue price represents discount on the issue of shares.
For example, when a share of the nominal value of 100 is issued at 98, it is
said to have been issued at a discount of 2 per cent.
According to Section 53 of the Companies Act, 2013, a Company cannot issue
shares at a discount except in the case of issue of sweat equity shares (issued
to employees and directors). Thus any issue of discount shall be void.

SHARES ISSUED AT PREMIUM

When a company issues its securities at a price more than the face value, it
is said to be an issue at a premium. Premium is the excess of issue price over
face value of the security. It is quite common for the financially strong, and
well-managed companies to issue their shares at a premium, i.e. at an
amount more than the nominal or par value of shares. Thus, where a share
of the nominal value of 100 is issued at 105, it is said to have been issued at
a premium of 5 per cent
When shares are issued at a premium, the premium amount is credited to a
separate account called “Securities Premium Account” because it is not a
part of share capital. Rather, it represents a gain of a capital nature to the
company.
Being a credit balance, Securities premium Account is shown under the
heading, “Reserves and Surplus”. However, ‘Reserves and Surplus’ is shown
as ‘shareholders’ funds in the Balance Sheet as per Schedule III. According to
Section 52 of the Companies Act, 2013, Securities Premium Account may be
used by the company:
(a) Towards issue of un-issued shares of the company to be issued to members
of the company as fully paid bonus securities.
(b) To write off preliminary expenses of the company.
(c) To write off the expenses of, or commission paid, or discount allowed on
any of the securities or debentures of the company.
(d) To provide for premium on the redemption of redeemable preference shares
or debentures of the company.
(e) For the purchase of own shares or other securities.
Note : It may be noted that certain class of Companies as prescribed
under Section 133 of the Companies Act, 2013, whose financial
statements comply with the accounting standards prescribed for them,
can’t apply the securities premium account for the purposes (b) and (d)
mentioned above.

CALLS IN ARREARS AND CALLS IN ADVANCE

Sometimes shareholders fail to pay the amount due on allotment or calls. The
total unpaid amount on one or more instalments is known as Calls-in-Arrears
or Unpaid Calls.
Some shareholders may sometimes pay a part, or whole, of the amount not
yet called up, such amount is known as Calls-in-advance.

received
 INTEREST IN CALLS IN ARREARS AND CALLS IN ADVANCE

Interest on Calls in Arrears Interest on Calls in Advance

It is payable by shareholders to company It is payable by the Company to Shareholders
on the calls due but remaining unpaid. on the call money received in advance but not
yet due.
As per Table F maximum prescribed rate is 10%.
As per Table F maximum prescribed rate is 12%.
Period considered : From the date call money
was due to the date money is finally received. Period considered: From the date money
was received to the day call was finally made
Directors have a right to waive off such due.
interest in individual cases at their own
discretion. Shareholders are not entitled for any
dividend on calls in advance.
It is a nominal account in nature and is
credited to statement of profit and loss as an It is a nominal account in nature with interest
income. being an expense for the company.

FOREFEITURE OF SHARES

The term ‘forfeit’ actually means taking away of property on breach of a

condition.
It is very common that one or more shareholders fail to pay their allotment
and/or calls on the due dates. Failure to pay call money results in forfeiture
of shares. Forfeiture of shares is the action taken by a company to cancel the
shares. The directors are usually empowered by the Articles of Association to
forfeit those shares by serving proper notice to the defaulting shareholder(s).
When shares are forfeited, the title of such shareholder is extinguished but
the amount paid to date is not refunded to him. The shareholder then has
no further claim on the company.
The power of forfeiture must be exercised strictly having regard to the rules
and regulations provided in the Articles of Association and it should be
bonafide in the interests of the company.

ISSUE OF SHARES FOR CONSIDERATION OTHER THAN CASH

Public limited companies, generally, issue their shares for cash and use such
cash to buy the various types of assets needed in the business. Sometimes,
however, a company may issue shares in a direct exchange for land, buildings
or other assets. These shares should be shown separately under the heading
‘Share Capital’.
DEBENTURES

A debenture is a bond issued by a company under its seal, acknowledging a

debt and containing provisions as regards repayment of the principal and
interest. If a charge* has been created on any or on the entire assets of the
company, the nature of the charge and the assets charged are described
therein. Since the charge is not valid unless registered with the Registrar, and
the certificate registering the charge is printed on the bond. It is also
customary to create a trusteeship in favour of one or more persons in the case
of mortgage debentures. The trustees of debenture holders have all powers of
a mortgage of a property and can act in whatever way they think necessary to
safeguard the interest of debenture holders.

Section 2 (30) of the Companies Act, 2013 defines debentures as “Debenture”

includes debenture stock, bonds or any other instrument of a company
evidencing a debt, whether constituting a charge on the assets of the company
or not.
Thus, It is clear from definition that debenture may be Secured Debenture or
Unsecured Debenture.
Note: No company shall issue any debentures carrying any voting rights.

FEATURES OF DEBENTURES

1. It is a document which evidences a loan made to a company.

2. It is a fixed interest-bearing security where interest falls due on specific
dates.
3. Interest is payable at a predetermined fixed rate, regardless of the level of
profit.
4. The original sum is repaid at a specified future date or it is converted into
shares or other debentures.
5. It may or may not create a charge on the assets of a company as security.
6. It can generally be bought or sold through the stock exchange at a price
above or below its face value

DISTINCTION BETWEEN DEBENTURES AND SHARES

Debentures Shares
1. Debenture holders are the creditors of 1. Shareholders are the owners of the
the company. company.
2. Debenture holders have no voting 2. Shareholders have voting rights and
rights and consequently do not pose consequently control the total affairs of
any threat to the existing control of the the company.
company.
3. Debenture interest is paid at a pre- 3. Dividend on equity shares is paid at a
determined fixed rate. It is payable, variable rate which is vastly affected by
whether there is any profit or not. the profits of the company (however,
Debentures rank ahead of all types of dividend on preference shares is paid at
shares for payment of the interest due on a fixed rate).
them.
4. Interest on debentures are the charges 4. Dividends are appropriation of profits and
against profits and they are deductible these are not deductible in determining
as an expense in determining taxable taxable profit of the company.
profit of the company.
5. There are different kinds of 5. There are only two kinds of shares–
debentures, such as Equity Shares and Preference Shares.
Secured/Unsecured; Redeemable/
Irredeemable; Registered/Bearer;
Convertible / Non-convertible, etc.
6. In the Company’s Balance Sheet, 6. In the Company’s Balance Sheet, shares
Debentures are shown under “Long Term are shown under “Shareholder’s Fund”
Borrowings”. detailed in ‘Share Capital’ of Notes to
Accounts.
7. Debentures can be converted into other 7. Shares cannot be converted into other
debentures or shares as per the terms of shares in any circumstances.
issue of debentures.
8. Debentures cannot be forfeited for non- 8. Shares can be forfeited for non-
payment of call moneys. payment of allotment and call moneys.
9. At maturity, debenture holders get back 9. Equity shareholders cannot get back
their money as per the terms and their money before the liquidation of the
conditions of redemption. company (however, preference
shareholders can get back their money
before liquidation).
10. At the time of liquidation, debenture 10. At the time of liquidation shareholders
holders are paid-out before the are paid at last, after paying debenture
shareholders. holders, Trade payable, etc.
Debentures and Shares both can also be issued for consideration other
than for cash, such as for purchase of land, machinery, etc

TYPES OF DEBENTURES

The following are the types of debentures issued by a company. They can
be classified on the basis of:
(1) Security; (2) Convertibility; (3) Permanence; (4) Negotiability; and
(5) Priority.
1. Security
(a) Secured Debentures : These debentures are secured by a charge upon
some or all assets of the company. There are two types of charges: (i) Fixed
charge; and (ii) Floating charge. A fixed charge is a mortgage on specific
assets. These assets cannot be sold without the consent of the debenture
holders. The sale proceeds of these assets are utilized first for repaying
debenture holders. A floating charge generally covers all the assets of the
company including future one.
(b) Unsecured or “Naked” Debentures : These debentures are not secured
by any charge upon any assets. A company merely promises to pay interest
on due dates and to repay the amount due on maturity date. These types of
debentures are very risky from the view point of investors.
2. Convertibility
(a)Convertible Debentures : These are debentures which will be converted
into equity shares (either at par or premium or discount) after a certain period
of time from the date of its issue. These debentures may be fully or partly
convertible. In future, these debenture holders get a chance to become the
shareholders of the company.
(b) Non-Convertible Debentures : These are debentures which cannot be
converted into shares in future. As per the terms of issue, these debentures
are repaid.

3. Permanence
(a)Redeemable Debentures : These debentures are repayable as per the
terms of issue, for example, after 8 years from the date of issue.
(b) Irredeemable Debentures : These debentures are not repayable during
the life time of the company. These are also called perpetual debentures.
These are repaid only at the time of liquidation.

4. Negotiability
(a)Registered Debentures : These debentures are payable to a registered
holder whose name, address and particulars of holding is recorded in the
Register of Debenture holders. They are not easily transferable. The provisions
of the Companies Act, 2013 are to be complied with for effecting transfer of
these debentures. Debenture interest is paid either to the order of registered
holder as expressed in the warrant issued by the company or the bearer of
the interest coupons.
(b)Bearer Debentures : These debentures are transferable by delivery. These
are negotiable instruments payable to the bearer. No kind of record is kept by
the company in respect of the holders of such debentures. Therefore, the
interest on it is paid to the holder irrespective of any identity. No transfer deed
is required for transfer of such debentures.

5. Priority
(a) First Mortgage Debentures : These debentures are payable first out of
the property charged.
(b) Second Mortgage Debentures: These debentures are payable after
satisfying the first mortgage debentures.

ISSUE OF DEBENTURES

Issue of redeemable debentures can be categorized into the following:

1. Debenture issued at par and redeemable at par or at a discount;
2. Debenture issued at a discount and redeemable at par or at discount;
3. Debenture issued at premium and redeemable at par or at discount;
4. Debenture issued at par and redeemable at premium;
5. Debenture issued at a discount and redeemable at premium.
6. Debenture issued at premium and redeemable at premium.
Note: In practical life redemption at a discount is rare,

JOURNAL
(a) For receipt of application money
Bank A/c Debit
To Debenture Application A/c

For transfer of application of money at the time of allotment

Debenture application A/c Debit

To Debentures A/c
To Securities Premium A/c

INTEREST AND DISCOUNT ON DEBENTURES

The discount on issue of debentures is amortised over a period between the
issuance date and redemption date. Loss on issue of debentures is also a
capital loss and should be written off in a similar manner as discount on
debentures issued.
In the balance sheet both the items (Discount / Loss) are shown as Non-
current/current assets depending upon the period for which it has to be
written off.
Interest payable on debentures is treated as a charge against the profits of
the company. Interest on debenture is paid periodically and is calculated at
coupon rate on the nominal value of debentures.

REDEMPTION OF DEBENTURES
Redemption of debentures refers to extinguishing or discharging the liability
on account of debentures in accordance with the terms of issue. In other
words redemption of debentures means repayment of the amount of
debentures by the company.
There are four ways by which the debentures can be redeemed. These
are:
Payment in lump sum : The company redeems the debentures by paying the
amount in lump sum to the debenture holders at the maturity thereof as per
terms of issue.
Payment in instalments : Under this method, normally redemption of
debentures is made in instalments on the specified date during the tenure of
the debentures. The total amount of debenture liability is divided by the
number of years. It is to note that the actual debentures redeemable are
identified by means of drawing the requisite number of lots out of the
debentures outstanding for payment.
Purchase in open market: When a company purchases its own debentures
for the purposes of cancellation, such an act of purchasing and cancelling the
debentures constitutes redemption of debentures by purchase in the open
market.
Conversion into shares or new debentures : A company can redeem its
debentures by converting them into shares or new class of debentures. If
Debenture holders find that the offer is beneficial to them, they can exercise
their right of converting their debentures into shares or new class of
debentures.

FACTORS OF REDEMPTION
1. Time of redemption of debentures :- Generally, debentures are redeemed
on due date but a company may redeem its debentures before maturity date,
if its articles provides for such.
2. Sources of Redemption of debentures :- A company may source its
redemption of debentures either out of capital or out of profits.

DRR AND DRI

DRR - A debenture redemption reserve (DRR) is a provision stating that any
Indian corporation that issues debentures must create a debenture
redemption service in an effort to protect investors from the possibility of a
company defaulting.
DRI - In the last year or at the time of redemption of debentures, Debenture
Redemption Investments are encashed and the amount so obtained is used
for redemption of debentures

CRUX
DRI is created on or before 30th april of the financial year in which the
debentures are due for redemption and DRR is created any time before the
redemption of debentures. that means DRR cam be created any time before
or after the creation of DRI.

DRR (Debenture Redemption Reserve)

As per the Act, all India financial institutions registered by Reserve Bank of
India, banking companies, NFBCs registered with Reserve bank of India,
Housing Finance companies registered to the National Housing bank and the
companies listed on stock exchange and unlisted companies are exempted
from creating Debenture Redemption Reserve and may redeem debentures
out of capital. Whereas for "other unlisted companies", the adequacy of
Debenture Redemption Reserve shall be ten percent of the value of the
outstanding debentures.

DRI (Debenture Redemption Investment)

However companies are required to invest or deposit a sum on or before April
30 which shall not be less than 15% of the amount of debentures maturing
during the year ending on March 31 of the next year in anyone or more
methods of investments or deposits given below:
(i) Deposit with any scheduled bank, free from any charge or line;
(ii) Securities of the Central Government or of any State Government;
(iii) Securities mentioned in sub clauses (a) to (d) and (ee) of section 20 of the
Indian Trusts Act, 1982;
(iv) Bonds issued by any other company which is notified under sub-clause (f)
of section 20 of the Indian Trusts Act, 1982;
(v) The amount invested or deposited as above shall not be used for any
purpose other than for redemption of debentures maturing during the year
referred above;
In case the debentures are redeemed in lump sum a company will invest
15% of the of the value of debentures.