COMPANY ACCOUNTS
Unit - 1
Joint Stock Companies
A company is an association of persons who contribute money or money’s worth to a common stock and uses it for a common purpose. In the words of Justice James, “a company is an association of persons united for a common object”. Sec 3 (1) (i) of the Companies Act 1956 defines a company as “company formed and registered under this Act or an existing company”.
Characteristics of Company
1 It is a voluntary association of persons
2 It has a separate legal entity
3 It has a common seal
4 It has a perpetual succession.
Kinds of Companies
I. On the basis of formation
1 Chartered companies– Those companies which are incorporated under a special charter by the king or sovereign such as East India Company.
2 Statutory companies– These companies are formed by the special Act of legislature or parliament like RBI.
3 Registered companies– Such companies are incorporated under the Companies Act 1956 or were registered under any previous Companies Act.
On the basis of liability
1 Limited companies‐ In these companies, the liability of each member is limited to the extent of face value of shares held by him.
2 Guarantee companies– The liability of member of such companies are limited to the amount he has under taken to contribute to the assets of the company in the event of its winding up.
3 Unlimited Companies– In these companies, the liability of the members is unlimited and members are personally liable to the creditors of the company for making up the deficiency. Such companies are rare these days.
On the basis of public investment
1. Private Companies– These are companies by its Articles, (i) limits the number of members to 50,
2. (ii) prohibits the invitation to the public to subscribe their shares or debentures and
(iii) restricts the transferability of their shares.
2. Public companies– These are companies other than private companies.
SHARECAPITAL
Total capital of the company is divided into units of small denominations; each one is called a share. According to Sec 2(46) of the Companies Act 1956, share has been defined as a share in the share capital of the company; and includes stock except where a distinction between stock and share is expressed or implied.
Classes of Shares
A. Preference Shares
Shares which enjoy the preferential rights as to dividend and repayment of capital in the event of winding up of the company over the equity shares are called preference shares. The holder of preference shares will get a fixed rate of dividend.
Types of preference shares
1 Cumulative preference shares– In case of these shares, the arrears of dividend are carried forward and paid out of the profits of the subsequent years.
2 Non‐cumulative preference shares– If dividend not to accumulate and not to carried forward to next year, these are called non‐cumulative preference shares.
3 Participating preference shares– In addition to a fixed dividend, balance of profit (after meeting equity dividend) shared by some preference share holders. Such shares are participating preference shares.
4 Non‐participating preference shares– These shares get only a fixed rate of dividend. These do not get share in the surplus profit.
5 Redeemable preference shares– If preference shares are returned after a specified period to shareholders, these preference shares are called redeemable preference shares.
6 Convertible preference shares– These shares are given the right of conversion into equity shares within a specified period or at a specified date according to the terms of issue.
B. Equity Shares
Equity shares are those which are not preference shares. Equity shares do not carry any preferential gain in respect of dividend or repayment of capital. So these are known as ordinary shares. There will be no fixed rate of dividend to be paid to the equity share holders and this rate may vary from year to year. In winding up, the equity capital is repaid last. However, equity share holder gets full voting power.
Types of share capital
1 Authorized (Registered or Nominal) Capital– It is the maximum amount of capital which the company is authorized to raise by way of public subscription.
2 Issued Capital– The part of authorized capital which is offered to the public for subscription is called issued capital.
3 Subscribed Capital– That part of the issued capital for which applications are received from the public is called subscribed capital.
4 Called‐up Capital– That part of subscribed capital which has been called‐up or demanded by the company is called called‐up capital.
5 Paid‐up Capital– The part of called‐up capital which is offered and actually paid by the members is known as paid‐up capital. Any unpaid amount of balance on the called‐up capital is known as unpaid capital or calls in arrears.
6 Reserve Capital– It is that portion of the uncalled capital which is called‐up only at the event of company’s winding up.
Difference between equity shares and preference shares
Equity shares Preference shares
1 It is an ownership security 1. It is a hybrid security
2 Dividend rate is not fixed 2. Dividend rate is fixed
3 Capital is repaid only in winding 3. Capital is repaid after a stipulated
up period
4 These shares have voting rights 4 These shares generally do not have voting rights
5 Face value is lower
5 Face value is higher
Issue of Share Capital
The shares can be issued either at par, premium or at discount. Shares are said to be issued at par when a share holder is required to pay the face value of the shares to the company. Shares are said to be issued at premium when a shareholder is required to pay more than the face value to the company. Shares are said to be issued at discount when the shareholder is required to pay less amount than the face value to the company. For example, a company issues the shares having the face value of Rs.10 at Rs.10; it is the issue at par. If it is issued at Rs.12, the issue is at premium. If it is issued at Rs.8, the issue is at discount.
The issue price of the shares can be received in one instalment or it can be received in different instalments. If the issue is in different instalments, it may be paid on application, allotment and on one or more calls. The amount on application is called application money, the amount dues on allotment is called allotment money and the rest amount is called call money. As per SEBI guidelines the application money on issue must not be less than25% of issue price (as per Cos Act, it is 5%).
Allotment of shares
Allotment of shares means the acceptance of offer of the applicant for the purchase of shares. Directors have the discretionary power to reject or accept the applications. But the public company cannot allot its shares unless the minimum subscription has been subscribed by the public and the amount of application has been received. After the allotment of shares to the applicant they will become the shareholders of the company.
Journal Entries for Share Issue
1. On receipt of application money:
Bank A/c Dr
To Share Application A/c
2. On acceptance of application:
Share Application A/c Dr
To Share Capital A/c
3. On Allotment money due:
Share Allotment A/c Dr
To Share Capital A/c
4. On receipt of allotment money:
Bank A/c Dr
To Share allotment A/c
5. On making first call due:
Share first call A/c Dr
To Share capital A/c
On receipt of first call money:
Bank A/c Dr
To Share first call A/c
(Note: similar entries may be passed for second call, third call, if any.)
Issue of shares at premium
Shares are said to be issued at premium when a shareholder is required to pay more than the face value to the company. The excess amount received over the face value is called share premium. It is a capital receipt. The share premium shall be transferred to “Securities Premium A/c”. It should be shown on the liability side of balance sheet under the head “Reserves and Surplus”.
Journal entries:
(a) If premium is received with application money:
(i) Bank A/c Dr
To Share application A/c
(ii)Share application A/c Dr (with total)
To Share capital A/c (application money)
To Securities premium A/c (premium)
(b) If premium is received with allotment money:
(i)Share allotment A/c Dr (total)
To Share capital A/c (allotment money due)
To Securities premium A/c (premium)
(ii) Bank A/c Dr.
To Share allotment A/c
Issue of shares at discount
Shares are said to be issued at discount when the shareholder is required to pay less amount than the face value to the company. Discount on issue of shares is a capital loss and it should be debited to a separate account called “Discount on issue of shares A/c”. It is shown on the assets side of balance sheet under “Miscellaneous Expenditure”. The rate of discount should not exceed 10% of nominal value of shares. Generally the discount on issue is recorded at the time of allotment. It is also noted that a newly registered company cannot issue shares at discount. The journal entry is
Share allotment A/c
Discount on issue of shares A/c
To Share capital A/c Dr
Dr (allotment money due)
(discount)
(Total)
When both Preference and Equity Shares are issued
When a company issues both preference and equity shares the journal entries are written separately for each type of share capital.
Under subscription of shares
Sometimes the applications for shares received will be less than the number of shares issued. This is called under subscription. In such a case, the allotment will be equal to the number of shares subscribed and not to the shares issued.
Over subscription of shares
Sometimes the applications for shares received will be more than the number of shares issued. This is called over subscription. When there is over subscription, it is not possible to issue shares to all applicants. In such a situation company shall reject some applications altogether, allot in full on some applications and make a pro‐rata allotment on some applications. Pro‐rata allotment means that allotment one very application is made in the ratio which the number of shares allotted bears to number of shares applied. In case of applications fully rejected will be returned to the applicants. In pro‐rata allotment the excess application will be adjusted either on allotment and or on calls. Any surplus left even after the adjustment will be refunded to the applicants. Journal entries are
1.When application money is returned:
Share application A/c Dr
To Bank A/c
2.When excess application is adjusted towards allotment or call:
Share application A/c Dr (total)
To share allotment A/c (amount adjusted towards allotment)
To Call (if any) (amount adjusted towards call)
Calls in Arrears and Calls in Advance
Sometimes shareholders may fail to pay the allotment money and or call money. Such dues are called calls in arrears. It is shown in the balance sheet as a deduction from the called‐up capital. Directors are authorized to charge interest on calls in arrears at rate as per Articles. In its absence, the interest does not exceed 5% p.a. When a shareholder pays more money than called up, the excess money is called calls in advance. The company must pay interest on calls in advance at a rate prescribed by Articles. In its absence, the company is liable to pay interest @ 6% pa. But the shareholder is not entitled to any dividend on calls in advance.
Forfeiture of shares
The cancellation of shares due to non‐payment of allotment money or call money within a specified period is called forfeiture of shares. It is the compulsory termination of membership of the defaulting shareholders. He also losses whatever amount he has paid to the company so far. A company can forfeit the shares only if it is authorized by its Articles. The forfeiting is done only after giving 14 days notice to the defaulting shareholders. The balance of forfeited shares A/c should be shown by way of an addition to called up capital on the liability side of balance sheet till the shares are reissued.
Journal entries
1. Forfeiture of shares which were issued at par:
Share Capital A/c Dr (amount called up)
To share allotment A/c (allotment unpaid)
To share call A/c (call unpaid)
To forfeited shares A/c (total amount paid)
2. Forfeiture of shares which were issued at premium:
(a) When allotment money (incl. premium) and call money not paid
Share Capital A/c Dr (amount called up)
Security premium A/c Dr (premium unpaid)
To share allotment A/c (allotment unpaid)
To share call A/c (call unpaid)
To forfeited shares A/c (total amount paid)
(b) When call money not paid
Share Capital A/c Dr (amount called up)
To share call A/c (call unpaid)
To forfeited shares A/c (total amount paid)
3. Forfeiture of shares which were issued at discount:
Share Capital A/c Dr (amount called up)
To share allotment A/c (allotment unpaid)
To share call A/c (call unpaid)
To forfeited shares A/c (total amount paid)
To discount on issue of shares A/c (amount of discount)
Reissue of forfeited shares
Forfeited shares may be reissued by the company either at par, premium or discount. But the discount on reissue should not exceed the amount forfeited.
Journal entries
1. On reissue at par(issued at par or premium):
Bank A/c Dr(amount received on reissue)
To share capital A/c (amount paid up)
2. On reissue of at a discount (issued at par or premium) :
Bank A/c Dr (amount received on reissue) Forfeited shares A/c Dr (amount of discount on reissue)
To share capital A/c (amount paid up)
3. On reissue at a premium (issued at par or premium):
Bank A/c Dr (amount received on reissue)
To share capital A/c (amount paid up)
To security premium A/c (premium on reissue)
2 On reissue at a discount (issued at a discount) :
3 Bank A/c Dr (amount received on reissue)
Discount on issue of shares A/c Dr (amount of original discount)
Forfeited Shares A/c Dr (excess of discount on reissue over original issue)
To share capital A/c (amount paid up)
If all forfeited shares have been reissued, the credit balance in forfeited shares A/c (capital profit) shall be transferred to capital Reserve A/c by passing the following entry
Forfeited shares A/c Dr
To capital reserve A/c
(If all forfeited shares are not reissued, only the profit on shares which are issued is transferred to Capital reserve A/c.)
Surrender of shares
Sometimes a shareholder is not able to pay further calls and returns his shares to the company for cancellation. Such voluntary return of shares to the company by the shareholder himself is called surrender of shares. The accounting treatment of surrender of shares is the same as that off or feature of shares.
REDEMPTION OF PREFERENCE SHARES
When the preference shares are issued it is to be paid back by the company to such shareholders after the expiry of a stipulated period whether the company is to be wound up or not.
As per Sec 80 of the Companies Act, accompany limited by shares can redeem the preference shares, subject to the following conditions
1 The shares to be redeemed must be fully paid up.
2 Such shares can be redeemed either out of profit or out of the proceeds of fresh issue of shares. But these cannot be redeemed out of fresh issue of debentures or out of sale proceeds of any property of the company.
3 Premium payable on redemption must be provided out of profits of company or out of company’s security premium account.
4 When shares are redeemed out of profit, a sum equal to the nominal amount of shares so redeemed must be transferred out of profit to a reserve account namely Capital Redemption Reserve A/c.
5 The Capital Redemption reserve A/c can be utilized only for the issue of fully paid up bonus shares.
The preference shares can be redeemed either at par or at premium (but not at discount). Premium on redemption is provided out of existing security premium account or security premium on fresh issue. If they are not sufficient, the redemption premium should be provided out of P&LA/c or General Reserve.
Methods of Redemption
There are three methods for redemption of preference shares. They are:
(a) Redemption out of fresh issue of shares
(b) Redemption out of profits
(c) Redemption partly out of fresh issue and partly out of profit
Accounting Procedure for Redemption
1. Ensure that the redeemable preference shares are fully paid. If they are partly paid, the following entries are passed to make them fully paid.
(a) Preference Share Final Call A/c Dr
To Preference Share Capital A/c
(b) Bank A/c Dr
To Preference Share Final Call A/c
2. Entry for total amount due to preference shareholders
Preference Shares Capital A/c Dr (face value) Premium on Redemption A/c Dr(premium on redemption)
To Preference Share holders A/c (amount due on redemption)
3. Entry for issue of equity shares either with or without premium Bank A/c Dr(amount received)
Discount on issue of shares A/c Dr (if shares issued at discount)
To Equity share capital A/c (face value of shares issued)
To Security Premium A/c (if shares issued at premium)
4. Entry for providing premium on redemption
Security premium A/c
or P&L A/c
or General Reserve A/c Dr
To Premium on Redemption A/c
5.Entry for appropriation from divisible profits to meet deficiency of amount on redemption (or if redemption is out of profit)
P&L A/c or General Reserve A/c Dr
To Capital Redemption Reserve A/c
Entry for payment to preference shares
Preference Share holders A/c Dr
To Bank A/c
DEBENTURES
The term ‘debenture’ has been derived from the Latin word ‘debere’, which means ‘to borrow’. Debenture is an instrument in writing given by a company acknowledging debt received from the public.
The Companies Act defines debenture as “debenture includes debenture stock, bonds or any other securities of a company, whether constituting a charge on the assets of the company or not”.
Features of Debenture
1 It is an instrument of debt issued by company under its seal.
2 It carries fixed rate of interest.
3 Debenture is a part of borrowed capital.
4 It is repaid after a long period.
5 It is generally secured.
Difference between shares and debentures
Share Debenture
1. The person holding share is called shareholder. 1. The person having debenture is called debenture holder
2. It is part of owned capital 2. It is a part of borrowed capital
3. Dividend is paid on shares 3. Interest is paid on debenture
4. Rate of dividend varies year to year 4. Rate of interest is fixed
5. Shareholder has voting right 5.Debenture holder doesn’t have voting right
6.It can’t be converted into debenture 6. It can be converted into share
Issue of Debentures
Like shares, debentures may also be issued either,
(i) at par, or
(ii) at a premium,
or (iii) at a discount without any legal restriction.
Again debentures may be issued by a company in the following ways:
(1) For Cash,
(2) For Consideration other than Issue
(3) As Collateral Security
Classification of debentures
1. Secured or Mortgage debentures– These debentures are secured either on a particular asset or on the assets of the company in general.
2. Unsecured or Naked debentures– These debentures do not create any charge on the assets of the company.
3. Registered debentures– These debentures are payable to the persons recorded in the register of debenture holders of the company and these are transferable only with the knowledge of the company.
4. Bearer debentures– In these debentures company maintains no register of debenture holders and these are transferable by mere delivery.
5. Redeemable debentures– These debentures are repayable after a fixed period either in lump sum or in instalments.
6. Perpetual or Irredeemable debentures– These debentures are not repayable during the life time of the company.
7. Convertible debentures– These debentures can be converted into the shares within or after a Specified period, at the option of the holder.
8. Non‐Convertible debentures– These debentures can’t be converted into shares.
Issue of Debentures
1. From consideration point of view
For consideration in cash: Debentures can be issued either at par, at premium or at discount. The entry will be
a. Bank A/c Dr
Discount on issue of debentures A/c Dr (if issue at discount)
To Debentures A/c
To Security premium A/c (if issue at premium)
b. For consideration other than cash:
The entries are
i. For purchase of assets
Sundry Assets A/c Dr
To Vendor A/c
ii. For issuing debentures for payment of purchase consideration
Vendor A/c Dr
To Debentures A/c
c. As collateral security:
When debentures are issued as subsidiary or secondary security
in addition to the principal security against a loan or bank over draft such an issue of
debentures is called issue of debentures as collateral security.
2. From price point of view
From this point of view debentures can be issued either at par, at premium or at discount.
a. When debentures are issued at par
Bank A/c Dr (with face value)
To debentures A/c
b. When debentures are issued at discount
Bank A/c Dr (net amount received)
To Discount on issue of Debentures A/c (amount of discount)
To Debentures A/c (with face value)
c. When debentures are issued at premium
Bank A/c Dr (total amount)
To Debentures A/c (with face value)
To Security premium A/c (amount of premium)
3.From condition of redemption point of view
There are six cases on the basis of terms of issue and conditions of redemption of debentures. They are as follows:
a. Issued at par and redeemable at par.
b. Issued at premium and redeemable at par.
c. Issued at discount and redeemable at par.
d. Issued at par and redeemable at premium.
e. Issued at discount and redeemable at premium.
f. Issued at premium and redeemable at premium.
A. When issued at par and redeemable at par.
Bank A/c Dr
To Debentures A/c
B. When issued at premium and redeemable at par.
Bank A/c Dr (face value+ premium)
To Debentures A/c (face value)
To security premium A/c (premium)
C. When issued at discount and redeemable at par.
Bank A/c Dr (amount received)
Discount on issue of debentures A/c Dr (discount)
To Debentures A/c (face value)
D. When issued at par and redeemable at premium.
Bank A/c Dr (amount received)
Loss on issue of debentures A/c Dr (premium on redemption)
To debentures A/c (face value)
To premium on redemption A/c (premium on redemption)
E. When issued at discount and redeemable at premium.
Bank A/c Dr (amount received)
Loss on issue of debentures A/c Dr (issue discount+ redemption premium)
To debentures A/c (face value)
To premium on redemption A/c (redemption premium)
F. When issued at premium and redeemable at premium.
Bank A/c Dr (amount received)
Loss on issue of debentures A/c Dr (redemption premium)
To debentures A/c (face value)
To security premium A/c (issue premium)
To premium on redemption A/c (redemption premium)
Discount or Loss on issue of debentures
Discount or loss on issue of debentures and premium on redemption are capital losses. They are shown in the balance sheet under the head “Miscellaneous Expenditure”. Being the losses, they are to be written off against capital reserve or security premium A/c. In its absence it is written off to P& L A/c during the life of debentures.
The entry is:
Capital reserve/ Security premium A/c/ P & L A/c Dr
To Discount / Loss on issue of debentures A/c
REDEMPTION OF DEBENTURES
Redemption of debentures refers to the discharge of liability on account of debentures. It simply means repayment of debentures. As per Companies Act, the debentures should be redeemed in accordance with the terms and conditions of issue.
The following entries are passed for redemption of debentures.
a. When debentures are redeemed at par
i. Debentures A/c Dr
To debenture holders A/c
ii. Debenture holders A/c Dr
To Bank A/c
b. When debentures are redeemed at premium
i. Debentures A/c Dr
Premium on redemption A/c Dr
To debenture holders A/c
ii. Security premium/General reserve/P&LA/c Dr
To Premium on redemption A/c
iii. Debenture holders A/c Dr
To Bank A/c
Sources of redemption of debentures
Debentures can be redeemed out of the following sources
1. Redemption out of fresh issue.
A company may issue new shares or debentures or both for redeeming the existing debentures.
Redemption out of Capital
If debentures are redeemed out of capital, no amount of divisible profit is kept aside for
redeeming debentures. Redemption out of Capital reduces the liquid resources available to the company. As per the guidelines issued by SEBI, a company has to create Debenture
Redemption Reserve (DRR) equivalent to 50% o the amount of debenture issue before
redemption of debentures commences. But the creation of DRR is not required in the
following cases
a. Debentures with maturity of 18 months or less
b. Fully convertible debentures.
3. Redemption out of profit
When sufficient profits are transferred from P & L Appropriation A/c to the Debenture
Redemption Reserve A/c at the time of redemption of debentures, such redemption is said to be out of profits. It reduces the profits available for dividend. The following entry is passed for transfer of profit
P & L Appropriation A/c Dr
To Debenture Redemption Reserve A/c
As per guidelines of SEBI, creation of DRR (50% of amount of debentures issued) is
compulsory for debentures with maturity period of more than 18 months. On the
completion of redemption of all debentures, the DRR A/c is close by transferring it to
general reserve. The entry is as follows
Debenture Redemption Reserve A/c Dr
To General Reserve A/c
Redemption by Sinking Fund
Under this method of redemption, every year a part of the profit (fixed amount) is set aside and sinking fund (Debenture Redemption Fund) is created. Sinking fund I invested in outside securities. The interest received o such investments along with the amount set aside from profit will again be invested as usual. It continues till the date of redemption of debenture. The investment will be sold and the cash thus realized will b used to repay the debentures. Under this method, sinking fund A/c (Debenture Redemption Fund A/c) and sinking fund investment A/c (Debenture Redemption Fund Investment A/c) will be opened. After the redemption, balance of sinking fund A/c is transferred to general reserve. The following entries are required under this method.
At the end of first year:
i. For the amount set aside every year
P & L Appropriation A/c Dr
To Sinking Fund A/c
ii. For investment of sinking fund
Sinking Fund Investment A/c Dr
To Bank A/c
At the end of second and subsequent years:
i. For interest received on investment
Bank A/c Dr
To Interest on Sinking Fund Investment A/c
ii. For transferring interest to sinking fund
Interest on Sinking Fund Investment A/c Dr
To Sinking Fund A/c
iii. For annual amount set aside
P & L Appropriation A/c Dr
To Sinking Fund A/c
iv. For investment of annual installment and interest
Sinking Fund Investment A/c Dr
To Bank A/c
At the end of last year:
All the entries except entry (iv) in second and subsequent year should be passed.
i. For amount realized on sale of investment
Bank A/c Dr
To Sinking Fund Investment A/c
ii. For profit on sale of investment
Sinking Fund Investment A/c Dr
To Sinking Fund A/c
(Note: if loss the above entry is reversed)
iii. For amount due to debenture holders
Debentures A/c Dr
Premium on redemption A/c Dr (if redemption at premium)
To Debenture holders A/c
iv. For amount paid to debenture holders
Debenture holders A/c Dr
To Bank A/c
v. For transfer of balance in sinking fund A/c
Sinking Fund A/c Dr
To General Reserve A/c
Redemption by Insurance Policy
This is an alternative to sinking fund method. Under this method, an insurance policy is purchased by paying annual premium. Such policy will mature on the date of redemption. This method provides funds for redemption and covers the risk involved in the transactions. Under this method the following entries are passed. During all the years till the policy maturity:
i. For amount of premium paid at the beginning of the year
Debenture Redemption Policy A/c Dr
To Bank A/c
ii. For setting aside the profit at the end of the year
P & L Appropriation A/c Dr
To Debenture Redemption Fund A/c
During the last year in addition to the above two entries
i. For realizing the insurance policy
Bank A/c Dr
To Debenture Redemption Policy A/c
ii. For the transfer of profit on realization
Debenture Redemption Policy A/c Dr
To Debenture Redemption Fund A/c
(Note: if loss the entry is reversed)
iii. For amount due to debenture holders
Debentures A/c Dr
Premium on redemption A/c Dr (if redemption at premium)
To Debenture holders A/c
iv. For amount paid to debenture holders
Debenture holders A/c Dr
To Bank A/c
v. For transfer of balance in Debenture Redemption Fund A/c
Debenture Redemption Fund A/c Dr
To General Reserve A/c
6. Redemption by Conversion
Sometimes the debenture holders of a company are given the option to convert their debentures into the shares or new debentures within a stipulated period. The new shares or debentures can be issued either at par or at premium or at discount. The following entry will be made for the purpose.
Old Debentures A/c Dr
Discount on issue of shares/debentures A/c Dr (if issue at discount)
To New Share Capital/ Debenture A/c
To Premium on issue of shares/ debentures A/c (if issue at premium)
Own Debentures
The directors can purchase debentures whenever they find the market price favorable to the company. Such purchased debentures can be either cancelled by the company or may be kept as an investment called own debentures and may be utilized for reissue when needed afterwards.
Purchase of own debentures are to be treated in account in the same way as an ordinary investment. The entry will be:
Own Debentures A/c Dr (with purchase price)
To Bank A/c
The own debentures A/c will appear on the assets side of B/S (under “investments”) until it is cancelled or reissued
As and when the company wants to cancel investment in own debentures the following entry will be passed
Debentures A/c Dr (with face value)
Loss on redemption of debentures A/c Dr (for loss)
To own debentures A/c (with purchase price)
To Profit on redemption of debentures A/c (for profit)
For transfer of profit on redemption:
Profit on redemption of debentures A/c Dr
To Capital Reserve
Unit - 1
Joint Stock Companies
A company is an association of persons who contribute money or money’s worth to a common stock and uses it for a common purpose. In the words of Justice James, “a company is an association of persons united for a common object”. Sec 3 (1) (i) of the Companies Act 1956 defines a company as “company formed and registered under this Act or an existing company”.
Characteristics of Company
1 It is a voluntary association of persons
2 It has a separate legal entity
3 It has a common seal
4 It has a perpetual succession.
Kinds of Companies
I. On the basis of formation
1 Chartered companies– Those companies which are incorporated under a special charter by the king or sovereign such as East India Company.
2 Statutory companies– These companies are formed by the special Act of legislature or parliament like RBI.
3 Registered companies– Such companies are incorporated under the Companies Act 1956 or were registered under any previous Companies Act.
On the basis of liability
1 Limited companies‐ In these companies, the liability of each member is limited to the extent of face value of shares held by him.
2 Guarantee companies– The liability of member of such companies are limited to the amount he has under taken to contribute to the assets of the company in the event of its winding up.
3 Unlimited Companies– In these companies, the liability of the members is unlimited and members are personally liable to the creditors of the company for making up the deficiency. Such companies are rare these days.
On the basis of public investment
1. Private Companies– These are companies by its Articles, (i) limits the number of members to 50,
2. (ii) prohibits the invitation to the public to subscribe their shares or debentures and
(iii) restricts the transferability of their shares.
2. Public companies– These are companies other than private companies.
SHARECAPITAL
Total capital of the company is divided into units of small denominations; each one is called a share. According to Sec 2(46) of the Companies Act 1956, share has been defined as a share in the share capital of the company; and includes stock except where a distinction between stock and share is expressed or implied.
Classes of Shares
A. Preference Shares
Shares which enjoy the preferential rights as to dividend and repayment of capital in the event of winding up of the company over the equity shares are called preference shares. The holder of preference shares will get a fixed rate of dividend.
Types of preference shares
1 Cumulative preference shares– In case of these shares, the arrears of dividend are carried forward and paid out of the profits of the subsequent years.
2 Non‐cumulative preference shares– If dividend not to accumulate and not to carried forward to next year, these are called non‐cumulative preference shares.
3 Participating preference shares– In addition to a fixed dividend, balance of profit (after meeting equity dividend) shared by some preference share holders. Such shares are participating preference shares.
4 Non‐participating preference shares– These shares get only a fixed rate of dividend. These do not get share in the surplus profit.
5 Redeemable preference shares– If preference shares are returned after a specified period to shareholders, these preference shares are called redeemable preference shares.
6 Convertible preference shares– These shares are given the right of conversion into equity shares within a specified period or at a specified date according to the terms of issue.
B. Equity Shares
Equity shares are those which are not preference shares. Equity shares do not carry any preferential gain in respect of dividend or repayment of capital. So these are known as ordinary shares. There will be no fixed rate of dividend to be paid to the equity share holders and this rate may vary from year to year. In winding up, the equity capital is repaid last. However, equity share holder gets full voting power.
Types of share capital
1 Authorized (Registered or Nominal) Capital– It is the maximum amount of capital which the company is authorized to raise by way of public subscription.
2 Issued Capital– The part of authorized capital which is offered to the public for subscription is called issued capital.
3 Subscribed Capital– That part of the issued capital for which applications are received from the public is called subscribed capital.
4 Called‐up Capital– That part of subscribed capital which has been called‐up or demanded by the company is called called‐up capital.
5 Paid‐up Capital– The part of called‐up capital which is offered and actually paid by the members is known as paid‐up capital. Any unpaid amount of balance on the called‐up capital is known as unpaid capital or calls in arrears.
6 Reserve Capital– It is that portion of the uncalled capital which is called‐up only at the event of company’s winding up.
Difference between equity shares and preference shares
Equity shares Preference shares
1 It is an ownership security 1. It is a hybrid security
2 Dividend rate is not fixed 2. Dividend rate is fixed
3 Capital is repaid only in winding 3. Capital is repaid after a stipulated
up period
4 These shares have voting rights 4 These shares generally do not have voting rights
5 Face value is lower
5 Face value is higher
Issue of Share Capital
The shares can be issued either at par, premium or at discount. Shares are said to be issued at par when a share holder is required to pay the face value of the shares to the company. Shares are said to be issued at premium when a shareholder is required to pay more than the face value to the company. Shares are said to be issued at discount when the shareholder is required to pay less amount than the face value to the company. For example, a company issues the shares having the face value of Rs.10 at Rs.10; it is the issue at par. If it is issued at Rs.12, the issue is at premium. If it is issued at Rs.8, the issue is at discount.
The issue price of the shares can be received in one instalment or it can be received in different instalments. If the issue is in different instalments, it may be paid on application, allotment and on one or more calls. The amount on application is called application money, the amount dues on allotment is called allotment money and the rest amount is called call money. As per SEBI guidelines the application money on issue must not be less than25% of issue price (as per Cos Act, it is 5%).
Allotment of shares
Allotment of shares means the acceptance of offer of the applicant for the purchase of shares. Directors have the discretionary power to reject or accept the applications. But the public company cannot allot its shares unless the minimum subscription has been subscribed by the public and the amount of application has been received. After the allotment of shares to the applicant they will become the shareholders of the company.
Journal Entries for Share Issue
1. On receipt of application money:
Bank A/c Dr
To Share Application A/c
2. On acceptance of application:
Share Application A/c Dr
To Share Capital A/c
3. On Allotment money due:
Share Allotment A/c Dr
To Share Capital A/c
4. On receipt of allotment money:
Bank A/c Dr
To Share allotment A/c
5. On making first call due:
Share first call A/c Dr
To Share capital A/c
On receipt of first call money:
Bank A/c Dr
To Share first call A/c
(Note: similar entries may be passed for second call, third call, if any.)
Issue of shares at premium
Shares are said to be issued at premium when a shareholder is required to pay more than the face value to the company. The excess amount received over the face value is called share premium. It is a capital receipt. The share premium shall be transferred to “Securities Premium A/c”. It should be shown on the liability side of balance sheet under the head “Reserves and Surplus”.
Journal entries:
(a) If premium is received with application money:
(i) Bank A/c Dr
To Share application A/c
(ii)Share application A/c Dr (with total)
To Share capital A/c (application money)
To Securities premium A/c (premium)
(b) If premium is received with allotment money:
(i)Share allotment A/c Dr (total)
To Share capital A/c (allotment money due)
To Securities premium A/c (premium)
(ii) Bank A/c Dr.
To Share allotment A/c
Issue of shares at discount
Shares are said to be issued at discount when the shareholder is required to pay less amount than the face value to the company. Discount on issue of shares is a capital loss and it should be debited to a separate account called “Discount on issue of shares A/c”. It is shown on the assets side of balance sheet under “Miscellaneous Expenditure”. The rate of discount should not exceed 10% of nominal value of shares. Generally the discount on issue is recorded at the time of allotment. It is also noted that a newly registered company cannot issue shares at discount. The journal entry is
Share allotment A/c
Discount on issue of shares A/c
To Share capital A/c Dr
Dr (allotment money due)
(discount)
(Total)
When both Preference and Equity Shares are issued
When a company issues both preference and equity shares the journal entries are written separately for each type of share capital.
Under subscription of shares
Sometimes the applications for shares received will be less than the number of shares issued. This is called under subscription. In such a case, the allotment will be equal to the number of shares subscribed and not to the shares issued.
Over subscription of shares
Sometimes the applications for shares received will be more than the number of shares issued. This is called over subscription. When there is over subscription, it is not possible to issue shares to all applicants. In such a situation company shall reject some applications altogether, allot in full on some applications and make a pro‐rata allotment on some applications. Pro‐rata allotment means that allotment one very application is made in the ratio which the number of shares allotted bears to number of shares applied. In case of applications fully rejected will be returned to the applicants. In pro‐rata allotment the excess application will be adjusted either on allotment and or on calls. Any surplus left even after the adjustment will be refunded to the applicants. Journal entries are
1.When application money is returned:
Share application A/c Dr
To Bank A/c
2.When excess application is adjusted towards allotment or call:
Share application A/c Dr (total)
To share allotment A/c (amount adjusted towards allotment)
To Call (if any) (amount adjusted towards call)
Calls in Arrears and Calls in Advance
Sometimes shareholders may fail to pay the allotment money and or call money. Such dues are called calls in arrears. It is shown in the balance sheet as a deduction from the called‐up capital. Directors are authorized to charge interest on calls in arrears at rate as per Articles. In its absence, the interest does not exceed 5% p.a. When a shareholder pays more money than called up, the excess money is called calls in advance. The company must pay interest on calls in advance at a rate prescribed by Articles. In its absence, the company is liable to pay interest @ 6% pa. But the shareholder is not entitled to any dividend on calls in advance.
Forfeiture of shares
The cancellation of shares due to non‐payment of allotment money or call money within a specified period is called forfeiture of shares. It is the compulsory termination of membership of the defaulting shareholders. He also losses whatever amount he has paid to the company so far. A company can forfeit the shares only if it is authorized by its Articles. The forfeiting is done only after giving 14 days notice to the defaulting shareholders. The balance of forfeited shares A/c should be shown by way of an addition to called up capital on the liability side of balance sheet till the shares are reissued.
Journal entries
1. Forfeiture of shares which were issued at par:
Share Capital A/c Dr (amount called up)
To share allotment A/c (allotment unpaid)
To share call A/c (call unpaid)
To forfeited shares A/c (total amount paid)
2. Forfeiture of shares which were issued at premium:
(a) When allotment money (incl. premium) and call money not paid
Share Capital A/c Dr (amount called up)
Security premium A/c Dr (premium unpaid)
To share allotment A/c (allotment unpaid)
To share call A/c (call unpaid)
To forfeited shares A/c (total amount paid)
(b) When call money not paid
Share Capital A/c Dr (amount called up)
To share call A/c (call unpaid)
To forfeited shares A/c (total amount paid)
3. Forfeiture of shares which were issued at discount:
Share Capital A/c Dr (amount called up)
To share allotment A/c (allotment unpaid)
To share call A/c (call unpaid)
To forfeited shares A/c (total amount paid)
To discount on issue of shares A/c (amount of discount)
Reissue of forfeited shares
Forfeited shares may be reissued by the company either at par, premium or discount. But the discount on reissue should not exceed the amount forfeited.
Journal entries
1. On reissue at par(issued at par or premium):
Bank A/c Dr(amount received on reissue)
To share capital A/c (amount paid up)
2. On reissue of at a discount (issued at par or premium) :
Bank A/c Dr (amount received on reissue) Forfeited shares A/c Dr (amount of discount on reissue)
To share capital A/c (amount paid up)
3. On reissue at a premium (issued at par or premium):
Bank A/c Dr (amount received on reissue)
To share capital A/c (amount paid up)
To security premium A/c (premium on reissue)
2 On reissue at a discount (issued at a discount) :
3 Bank A/c Dr (amount received on reissue)
Discount on issue of shares A/c Dr (amount of original discount)
Forfeited Shares A/c Dr (excess of discount on reissue over original issue)
To share capital A/c (amount paid up)
If all forfeited shares have been reissued, the credit balance in forfeited shares A/c (capital profit) shall be transferred to capital Reserve A/c by passing the following entry
Forfeited shares A/c Dr
To capital reserve A/c
(If all forfeited shares are not reissued, only the profit on shares which are issued is transferred to Capital reserve A/c.)
Surrender of shares
Sometimes a shareholder is not able to pay further calls and returns his shares to the company for cancellation. Such voluntary return of shares to the company by the shareholder himself is called surrender of shares. The accounting treatment of surrender of shares is the same as that off or feature of shares.
REDEMPTION OF PREFERENCE SHARES
When the preference shares are issued it is to be paid back by the company to such shareholders after the expiry of a stipulated period whether the company is to be wound up or not.
As per Sec 80 of the Companies Act, accompany limited by shares can redeem the preference shares, subject to the following conditions
1 The shares to be redeemed must be fully paid up.
2 Such shares can be redeemed either out of profit or out of the proceeds of fresh issue of shares. But these cannot be redeemed out of fresh issue of debentures or out of sale proceeds of any property of the company.
3 Premium payable on redemption must be provided out of profits of company or out of company’s security premium account.
4 When shares are redeemed out of profit, a sum equal to the nominal amount of shares so redeemed must be transferred out of profit to a reserve account namely Capital Redemption Reserve A/c.
5 The Capital Redemption reserve A/c can be utilized only for the issue of fully paid up bonus shares.
The preference shares can be redeemed either at par or at premium (but not at discount). Premium on redemption is provided out of existing security premium account or security premium on fresh issue. If they are not sufficient, the redemption premium should be provided out of P&LA/c or General Reserve.
Methods of Redemption
There are three methods for redemption of preference shares. They are:
(a) Redemption out of fresh issue of shares
(b) Redemption out of profits
(c) Redemption partly out of fresh issue and partly out of profit
Accounting Procedure for Redemption
1. Ensure that the redeemable preference shares are fully paid. If they are partly paid, the following entries are passed to make them fully paid.
(a) Preference Share Final Call A/c Dr
To Preference Share Capital A/c
(b) Bank A/c Dr
To Preference Share Final Call A/c
2. Entry for total amount due to preference shareholders
Preference Shares Capital A/c Dr (face value) Premium on Redemption A/c Dr(premium on redemption)
To Preference Share holders A/c (amount due on redemption)
3. Entry for issue of equity shares either with or without premium Bank A/c Dr(amount received)
Discount on issue of shares A/c Dr (if shares issued at discount)
To Equity share capital A/c (face value of shares issued)
To Security Premium A/c (if shares issued at premium)
4. Entry for providing premium on redemption
Security premium A/c
or P&L A/c
or General Reserve A/c Dr
To Premium on Redemption A/c
5.Entry for appropriation from divisible profits to meet deficiency of amount on redemption (or if redemption is out of profit)
P&L A/c or General Reserve A/c Dr
To Capital Redemption Reserve A/c
Entry for payment to preference shares
Preference Share holders A/c Dr
To Bank A/c
DEBENTURES
The term ‘debenture’ has been derived from the Latin word ‘debere’, which means ‘to borrow’. Debenture is an instrument in writing given by a company acknowledging debt received from the public.
The Companies Act defines debenture as “debenture includes debenture stock, bonds or any other securities of a company, whether constituting a charge on the assets of the company or not”.
Features of Debenture
1 It is an instrument of debt issued by company under its seal.
2 It carries fixed rate of interest.
3 Debenture is a part of borrowed capital.
4 It is repaid after a long period.
5 It is generally secured.
Difference between shares and debentures
Share Debenture
1. The person holding share is called shareholder. 1. The person having debenture is called debenture holder
2. It is part of owned capital 2. It is a part of borrowed capital
3. Dividend is paid on shares 3. Interest is paid on debenture
4. Rate of dividend varies year to year 4. Rate of interest is fixed
5. Shareholder has voting right 5.Debenture holder doesn’t have voting right
6.It can’t be converted into debenture 6. It can be converted into share
Issue of Debentures
Like shares, debentures may also be issued either,
(i) at par, or
(ii) at a premium,
or (iii) at a discount without any legal restriction.
Again debentures may be issued by a company in the following ways:
(1) For Cash,
(2) For Consideration other than Issue
(3) As Collateral Security
Classification of debentures
1. Secured or Mortgage debentures– These debentures are secured either on a particular asset or on the assets of the company in general.
2. Unsecured or Naked debentures– These debentures do not create any charge on the assets of the company.
3. Registered debentures– These debentures are payable to the persons recorded in the register of debenture holders of the company and these are transferable only with the knowledge of the company.
4. Bearer debentures– In these debentures company maintains no register of debenture holders and these are transferable by mere delivery.
5. Redeemable debentures– These debentures are repayable after a fixed period either in lump sum or in instalments.
6. Perpetual or Irredeemable debentures– These debentures are not repayable during the life time of the company.
7. Convertible debentures– These debentures can be converted into the shares within or after a Specified period, at the option of the holder.
8. Non‐Convertible debentures– These debentures can’t be converted into shares.
Issue of Debentures
1. From consideration point of view
For consideration in cash: Debentures can be issued either at par, at premium or at discount. The entry will be
a. Bank A/c Dr
Discount on issue of debentures A/c Dr (if issue at discount)
To Debentures A/c
To Security premium A/c (if issue at premium)
b. For consideration other than cash:
The entries are
i. For purchase of assets
Sundry Assets A/c Dr
To Vendor A/c
ii. For issuing debentures for payment of purchase consideration
Vendor A/c Dr
To Debentures A/c
c. As collateral security:
When debentures are issued as subsidiary or secondary security
in addition to the principal security against a loan or bank over draft such an issue of
debentures is called issue of debentures as collateral security.
2. From price point of view
From this point of view debentures can be issued either at par, at premium or at discount.
a. When debentures are issued at par
Bank A/c Dr (with face value)
To debentures A/c
b. When debentures are issued at discount
Bank A/c Dr (net amount received)
To Discount on issue of Debentures A/c (amount of discount)
To Debentures A/c (with face value)
c. When debentures are issued at premium
Bank A/c Dr (total amount)
To Debentures A/c (with face value)
To Security premium A/c (amount of premium)
3.From condition of redemption point of view
There are six cases on the basis of terms of issue and conditions of redemption of debentures. They are as follows:
a. Issued at par and redeemable at par.
b. Issued at premium and redeemable at par.
c. Issued at discount and redeemable at par.
d. Issued at par and redeemable at premium.
e. Issued at discount and redeemable at premium.
f. Issued at premium and redeemable at premium.
A. When issued at par and redeemable at par.
Bank A/c Dr
To Debentures A/c
B. When issued at premium and redeemable at par.
Bank A/c Dr (face value+ premium)
To Debentures A/c (face value)
To security premium A/c (premium)
C. When issued at discount and redeemable at par.
Bank A/c Dr (amount received)
Discount on issue of debentures A/c Dr (discount)
To Debentures A/c (face value)
D. When issued at par and redeemable at premium.
Bank A/c Dr (amount received)
Loss on issue of debentures A/c Dr (premium on redemption)
To debentures A/c (face value)
To premium on redemption A/c (premium on redemption)
E. When issued at discount and redeemable at premium.
Bank A/c Dr (amount received)
Loss on issue of debentures A/c Dr (issue discount+ redemption premium)
To debentures A/c (face value)
To premium on redemption A/c (redemption premium)
F. When issued at premium and redeemable at premium.
Bank A/c Dr (amount received)
Loss on issue of debentures A/c Dr (redemption premium)
To debentures A/c (face value)
To security premium A/c (issue premium)
To premium on redemption A/c (redemption premium)
Discount or Loss on issue of debentures
Discount or loss on issue of debentures and premium on redemption are capital losses. They are shown in the balance sheet under the head “Miscellaneous Expenditure”. Being the losses, they are to be written off against capital reserve or security premium A/c. In its absence it is written off to P& L A/c during the life of debentures.
The entry is:
Capital reserve/ Security premium A/c/ P & L A/c Dr
To Discount / Loss on issue of debentures A/c
REDEMPTION OF DEBENTURES
Redemption of debentures refers to the discharge of liability on account of debentures. It simply means repayment of debentures. As per Companies Act, the debentures should be redeemed in accordance with the terms and conditions of issue.
The following entries are passed for redemption of debentures.
a. When debentures are redeemed at par
i. Debentures A/c Dr
To debenture holders A/c
ii. Debenture holders A/c Dr
To Bank A/c
b. When debentures are redeemed at premium
i. Debentures A/c Dr
Premium on redemption A/c Dr
To debenture holders A/c
ii. Security premium/General reserve/P&LA/c Dr
To Premium on redemption A/c
iii. Debenture holders A/c Dr
To Bank A/c
Sources of redemption of debentures
Debentures can be redeemed out of the following sources
1. Redemption out of fresh issue.
A company may issue new shares or debentures or both for redeeming the existing debentures.
Redemption out of Capital
If debentures are redeemed out of capital, no amount of divisible profit is kept aside for
redeeming debentures. Redemption out of Capital reduces the liquid resources available to the company. As per the guidelines issued by SEBI, a company has to create Debenture
Redemption Reserve (DRR) equivalent to 50% o the amount of debenture issue before
redemption of debentures commences. But the creation of DRR is not required in the
following cases
a. Debentures with maturity of 18 months or less
b. Fully convertible debentures.
3. Redemption out of profit
When sufficient profits are transferred from P & L Appropriation A/c to the Debenture
Redemption Reserve A/c at the time of redemption of debentures, such redemption is said to be out of profits. It reduces the profits available for dividend. The following entry is passed for transfer of profit
P & L Appropriation A/c Dr
To Debenture Redemption Reserve A/c
As per guidelines of SEBI, creation of DRR (50% of amount of debentures issued) is
compulsory for debentures with maturity period of more than 18 months. On the
completion of redemption of all debentures, the DRR A/c is close by transferring it to
general reserve. The entry is as follows
Debenture Redemption Reserve A/c Dr
To General Reserve A/c
Redemption by Sinking Fund
Under this method of redemption, every year a part of the profit (fixed amount) is set aside and sinking fund (Debenture Redemption Fund) is created. Sinking fund I invested in outside securities. The interest received o such investments along with the amount set aside from profit will again be invested as usual. It continues till the date of redemption of debenture. The investment will be sold and the cash thus realized will b used to repay the debentures. Under this method, sinking fund A/c (Debenture Redemption Fund A/c) and sinking fund investment A/c (Debenture Redemption Fund Investment A/c) will be opened. After the redemption, balance of sinking fund A/c is transferred to general reserve. The following entries are required under this method.
At the end of first year:
i. For the amount set aside every year
P & L Appropriation A/c Dr
To Sinking Fund A/c
ii. For investment of sinking fund
Sinking Fund Investment A/c Dr
To Bank A/c
At the end of second and subsequent years:
i. For interest received on investment
Bank A/c Dr
To Interest on Sinking Fund Investment A/c
ii. For transferring interest to sinking fund
Interest on Sinking Fund Investment A/c Dr
To Sinking Fund A/c
iii. For annual amount set aside
P & L Appropriation A/c Dr
To Sinking Fund A/c
iv. For investment of annual installment and interest
Sinking Fund Investment A/c Dr
To Bank A/c
At the end of last year:
All the entries except entry (iv) in second and subsequent year should be passed.
i. For amount realized on sale of investment
Bank A/c Dr
To Sinking Fund Investment A/c
ii. For profit on sale of investment
Sinking Fund Investment A/c Dr
To Sinking Fund A/c
(Note: if loss the above entry is reversed)
iii. For amount due to debenture holders
Debentures A/c Dr
Premium on redemption A/c Dr (if redemption at premium)
To Debenture holders A/c
iv. For amount paid to debenture holders
Debenture holders A/c Dr
To Bank A/c
v. For transfer of balance in sinking fund A/c
Sinking Fund A/c Dr
To General Reserve A/c
Redemption by Insurance Policy
This is an alternative to sinking fund method. Under this method, an insurance policy is purchased by paying annual premium. Such policy will mature on the date of redemption. This method provides funds for redemption and covers the risk involved in the transactions. Under this method the following entries are passed. During all the years till the policy maturity:
i. For amount of premium paid at the beginning of the year
Debenture Redemption Policy A/c Dr
To Bank A/c
ii. For setting aside the profit at the end of the year
P & L Appropriation A/c Dr
To Debenture Redemption Fund A/c
During the last year in addition to the above two entries
i. For realizing the insurance policy
Bank A/c Dr
To Debenture Redemption Policy A/c
ii. For the transfer of profit on realization
Debenture Redemption Policy A/c Dr
To Debenture Redemption Fund A/c
(Note: if loss the entry is reversed)
iii. For amount due to debenture holders
Debentures A/c Dr
Premium on redemption A/c Dr (if redemption at premium)
To Debenture holders A/c
iv. For amount paid to debenture holders
Debenture holders A/c Dr
To Bank A/c
v. For transfer of balance in Debenture Redemption Fund A/c
Debenture Redemption Fund A/c Dr
To General Reserve A/c
6. Redemption by Conversion
Sometimes the debenture holders of a company are given the option to convert their debentures into the shares or new debentures within a stipulated period. The new shares or debentures can be issued either at par or at premium or at discount. The following entry will be made for the purpose.
Old Debentures A/c Dr
Discount on issue of shares/debentures A/c Dr (if issue at discount)
To New Share Capital/ Debenture A/c
To Premium on issue of shares/ debentures A/c (if issue at premium)
Own Debentures
The directors can purchase debentures whenever they find the market price favorable to the company. Such purchased debentures can be either cancelled by the company or may be kept as an investment called own debentures and may be utilized for reissue when needed afterwards.
Purchase of own debentures are to be treated in account in the same way as an ordinary investment. The entry will be:
Own Debentures A/c Dr (with purchase price)
To Bank A/c
The own debentures A/c will appear on the assets side of B/S (under “investments”) until it is cancelled or reissued
As and when the company wants to cancel investment in own debentures the following entry will be passed
Debentures A/c Dr (with face value)
Loss on redemption of debentures A/c Dr (for loss)
To own debentures A/c (with purchase price)
To Profit on redemption of debentures A/c (for profit)
For transfer of profit on redemption:
Profit on redemption of debentures A/c Dr
To Capital Reserve
