What is Issue and Redemption of Debentures Class 12: Complete Guide
By ConceptScroll Team · Published on 18 June 2026 · 4 min read
What is Issue and Redemption of Debentures Class 12? In Accountancy, it refers to the process by which companies raise funds by issuing debentures and later repay or redeem them. This chapter is crucial for NCERT Class 12 students preparing for their exams.
Definition and Meaning of Debentures
Debentures are financial instruments issued by companies to borrow money from the public. They are a form of long-term debt where the company promises to pay interest and return the principal on maturity.
- Debenture Holder: An investor who lends money to the company by purchasing debentures.
- Purpose: To raise funds without diluting ownership.
Debentures differ from shares because they do not confer ownership rights but create a creditor relationship.
What is Issue of Debentures?
The issue of debentures refers to the process by which a company offers debentures to the public or investors to raise capital. It involves:
- Fixing the face value and interest rate.
- Deciding the issue price: at par, premium, or discount.
- Inviting applications and allotting debentures.
Types of Issue:
| Issue Type | Description |
|---|---|
| At Par | Issue price equals face value |
| At Premium | Issue price is above face value |
| At Discount | Issue price is below face value |
Formula for Amount Received:
$$ \text{Amount Received} = \text{No. of Debentures} \times \text{Issue Price} $$
Example: If 1,000 debentures of ₹100 each are issued at a premium of ₹10, amount received = $1000 \times 110 = ₹110,000$.
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Understanding Redemption of Debentures
Redemption of debentures means repaying the principal amount to debenture holders on or before maturity. It marks the end of the company's liability for those debentures.
Common Methods of Redemption:
- Lump Sum Payment: Full amount paid at maturity.
- Instalment Redemption: Paid in parts over a period.
- Conversion into Shares: Debentures converted into equity shares.
- Purchase in Open Market: Company buys back debentures before maturity.
Redemption can be done at par, premium, or discount, affecting the accounting treatment.
Accounting Treatment for Issue and Redemption
Proper accounting entries are essential for recording the issue and redemption of debentures.
Issue of Debentures at Par:
- Debit: Bank Account
- Credit: Debentures Account
Issue at Premium:
- Debit: Bank Account
- Credit: Debentures Account
- Credit: Securities Premium Account
Redemption of Debentures (Lump Sum):
- Debit: Debentures Account
- Credit: Bank Account
Worked Example:
A company issued 2,000 debentures of ₹100 each at a premium of ₹5. Pass journal entries for the issue.
- Bank A/c Dr ₹210,000
- To Debentures A/c ₹200,000
- To Securities Premium A/c ₹10,000
This reflects ₹200,000 face value plus ₹10,000 premium received.
Differences Between Issue and Redemption of Debentures
Understanding the key differences helps clarify the concepts:
| Aspect | Issue of Debentures | Redemption of Debentures |
|---|---|---|
| Purpose | To raise funds | To repay borrowed funds |
| Timing | At the start of the borrowing period | At maturity or before maturity |
| Accounting Effect | Increases liabilities | Decreases liabilities |
| Impact on Cash Flow | Cash inflow | Cash outflow |
| Relation to Debenture | Creates new debentures | Extinguishes existing debentures |
Importance of Issue and Redemption of Debentures in Class 12 Accountancy
For Class 12 NCERT Accountancy students, mastering this chapter is essential because:
- It forms a significant part of the Company Accounts syllabus.
- Helps understand how companies manage long-term borrowings.
- Develops skills in journal entries and ledger posting.
- Prepares students for practical financial scenarios.
Regular practice of problems on issue and redemption improves exam confidence and accuracy.
Frequently asked questions
What is the meaning of issue of debentures?
Issue of debentures means offering debentures to investors to raise funds for the company.
How are debentures redeemed?
Debentures are redeemed by paying back the principal amount in lump sum, instalments, or by conversion.
Can debentures be issued at a premium or discount?
Yes, debentures can be issued at par, premium (above face value), or discount (below face value).
What is the difference between issue and redemption of debentures?
Issue is raising money by selling debentures; redemption is repaying that money to debenture holders.
Why is the study of issue and redemption of debentures important for Class 12 students?
It helps students understand company financing and prepares them for exam questions on company accounts.
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