Accounting For Share And Debenture Capital

Step 1: Essence.
Debentures are borrowings; redemption is the discharge of this liability.
Step 2: Modes.
(i) Lumpsum at maturity, (ii) by annual instalments/draw of lots, (iii) by \emph{purchase in the open market}, or (iv) by \emph{conversion} into shares/new debentures.
Step 3: Possible premium/discount.
Redemption may be at par or at premium as per the terms.
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Point 1: Nature.
\emph{Shares} represent owners’ capital; shareholders are owners. \emph{Debentures} represent loan capital; debenture holders are creditors. Point 2: Return and priority.
\emph{Dividend} on shares is paid only out of profits and is an \emph{appropriation}. \emph{Interest} on debentures is a \emph{charge} against profits—payable even if profits are inadequate; debenture holders have priority over shareholders. Point 3: Repayment.
\emph{Share capital} is normally not repayable during life of the company. \emph{Debentures} carry a fixed maturity (redeemable). Point 4: Security/voice.
Shareholders may vote; debenture holders do not. Debentures may be secured by charge on assets.
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Step 1: Define.
Under the \emph{lumpsum} (single payment) method, the company repays principal (plus any premium) in one go at maturity rather than through periodic instalments or purchase in the open market.
Step 2: Accounting idea.
No reduction in outstanding liability occurs until the redemption date; funds are usually accumulated (e.g., via Debenture Redemption Reserve/Investments as per law or policy) to meet the balloon payment.
Step 3: Contrast.
Differs from \emph{draw of lots/instalment} method (redeemed gradually) and \emph{conversion/open-market purchase}.
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Step 1: Meaning.
Premium on redemption of debentures = extra liability payable by company over and above face value at redemption.
Step 2: Account type.
It is treated as a liability towards debenture holders → hence classified as a Personal Account.
Step 3: Conclude.
Thus, Premium on Redemption of Debentures A/c is a Personal A/c.
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Step 1: Interest on debentures.
Debenture holders receive a fixed interest, irrespective of profits earned by the company.
Step 2: Nature.
This interest is treated as an expense of the company and must be paid before arriving at net profit.
Step 3: Conclude.
Therefore, interest on debentures is a charge against profit, not an appropriation of profit.
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Step 1: Nature of account.
Debenture application money is collected from applicants, and until allotment, it is considered as liability of the company towards applicants.
Step 2: Account type.
Personal Account → accounts related to persons or entities to whom the company owes money.
Step 3: Conclude.
Hence, Debenture Application A/c is a Personal A/c.
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Step 1: Nature of debenture.
Debentures are instruments of debt issued by a company to raise funds. They represent the liability of the company towards lenders.
Step 2: Classification.
- Share capital → Owners’ funds. - Debentures → Loan funds (borrowed capital).
Step 3: Term.
Debentures are normally repayable after a long period, hence they are classified as long-term borrowings.
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Step 1: Rights of debenture holders.
Debenture holders lend money to the company, and in return they receive fixed interest, irrespective of profits.
Step 2: Ownership vs. Creditorship.
- Shareholders = Owners. - Debenture holders = Creditors.
Step 3: Conclude.
Debenture holders are creditors, not owners or customers.
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