The procedure for the issue of debentures is as follows. One of the type of debentures are convertible debentures or just convertibles. A debenture is a debt security issued by a corporation or government entity that. Company why should issue debentures and shares, which one. Forfetire and reissue of shares 3 understand the concept and accounting treatment of callinarrears and callinadvance. Dividend are preferred by cautious investors who are reluctant. Equity shares are issued to meet long term financial requirements dividend. Issue of shares at a premium a company may issue shares at a price higher than face value. Notes on accounting treatment for debenture ii grade. Bond is also an instrument of acknowledgement of debt. The ideal method is to set aside every year a certain sum. Traditionally, the government issued bonds, but these days, bonds are also being issued by semigovernment and nongovernmental organisations.
Shares profit represented in selling the assets and dividends paid, which are subject as occasional gain for owner and it incurs in taxes payment. No default in payment of dividend, debentures, deposit, preference shares, loan from. The investor has the option to either convert these debentures into shares at price decided by the issueragreed upon at the time of issue. At a time of private limited company registration or public limited company registration, each company has to decide about its equity and debt structure. What are the guidelines and procedures for issue of. Approval of draft debenture trustee agreement and appointment of a debenture trustee.
Company accounts and analysis of financial statements it has certain special. Such an underwriting may be done by one underwriter or by a number of underwriters. The issue of debentures is very similar to the issue of shares by a company. The shares represent ownership of the shareholders in the company. Debentures are loan which company borrows from general public. Shares may be further subdivided into different types, as follows. Debenture interest is payable on 1 april and 1 october each year. The income earned on shares is the dividend, but the income earned on debentures is interest. Any share issued by the company at a discounted price shall be void. Issue of debentures accounting treatment and procedures. By creation of debenture redemption fund or sinking fund 2.
A debenture is a medium to longterm debt format that is used by large companies to borrow money. In case, the entire issue of shares or debentures of a company is undertaken, it is said to be full or complete underwriting. These typically carry higher interest rates than their convertible counterparts. This document is highly rated by b com students and has been viewed 59 times. How companies raises their capital through issuing shares. The issue of shares is done by the company to raise capital. Dividend are issued to meet long term and medium term financial requirements 2. Debenture interest is payable whether or not a company makes profits. Pass resolution to issue debentures, subject to approval of shareholders.
While shares refers to the share capital of the company. Company accounts redemption of debentures class 12 notes. Thus, opening up of the capital market in the 1990s brought a large section of investors into the nim and triggered an equity boom. The capital is contributed by the shareholders through the subscription of shares. Share capital is the backbone of the company without it the company cannot achieve its goals. Now a company cannot issue irredeemable preference shares. Definition,type and issue of debentures caclubindia. If in 20, when the redemption is due, debentureholders are allowed to convert the debentures into shares, the relevant amount will be.
Thus, creditors and others cannot sue the shareholders of the company but must take. If the issuer of a debenture were to default, investors would be placed at the level of general creditors in terms of their ability to recover funds from the issuer. Types of debentures basis redemption, convertibility. Issue of shares to the promoters a company may allot fully paid shares to the promoters or any other person for providing technical.
Difference between shares and debentures difference between. Companies need to follow certain procedures for issue of debentures to raise money. In this case accounting entries will be same as at the time of issue of shares in instalments with small change in the name of term likethe share capital word replaced with the x% debentures ac, and share word replaced with debentures e. As per thomas evelyn, a debenture is a document under the companys seal which. Such shares are transferable by its members except in case of a private limited company, which may have certain restrictions on such transferability. The companies share capital and debenture amendment rules, 2016 enable startups to offer more incentives in terms of sweat equity and esop issue by relaxing the rules to an extent. The advantages of issuing debentures over shares sapling. As result of debentures is a passive for the firm and impact in balanced sheet as an expense, it reduce the total amount of taxes paid after discount debt, being a deduction for.
By issuing debentures means issue of a certificate by the company under its seal which is an acknowledgment of debt taken by the compan y. An agreement to undertake the shares or debentures of a company are of the following types. The company has debenture redemption reserve of rs. Generally equity shares are preferred by adventurous investors with risk bearing capacity dividend. Convertible debenture holders have an option of converting their holdings into equity shares. The rate of conversion and the period after which the conversion will take effect are declared in the terms and conditions of the agreement of. Ncert solutions for class 12 accountancy part ii chapter 1. Online invoicing and accounting software makes it easy to stay on top of your companys cash flow. By creation of debenture redemption fund or sinking fund. The accounting treatment of the two is also quite similar.
On the other hand, debentures represent indebtedness of the company. Payment flow of convertible debenture remunerations. The amount of premium collected is to be credited to. Business purchase and underwriting, profit prior and post incorporation. No default in filing accounts and annual return in 5 immediate last fys. It describes the right of the holder to the specified amount of the share. Also prepare discount on issue of debentures account. Shares of stock represent proportional ownership in a company. Substituted by the companies share capital and debentures amendment rules, 2015.
The premium is a capital gain for company so it is to be credited to securities premium reserve ac. It has the qualities of both equity shares and debentures. What conditions must a company comply with before the issue of such shares. Although companies can borrow money from bank many companies go to bank as a last resort of funding. The terms debentures and bonds ar e now being used inter changeably. When bank lend money they generally place restriction on how that money can be used. Accounting for share capital transactions issue of shares at par, at premium and at discount. Assuming that no interest is due, record the necessary journal entries at the time of redemption of debentures. Rd sharma class 12 solutions rd sharma class 11 solutions free pdf download. A limited company may raise finance either by issuing shares or by raising loans.
At times issue of debentures is also done as a collateral security. With household savings having a high share in total savings, this boosted the growth of nim in the 1990s, both indirectly and directly. Instead, investors rely upon the general creditworthiness and reputation of the issuing entity to obtain a return of their investment plus interest income. Equity share capital into 8% debentures, equity share application into debentures application and. Problem 1 issue of shares at parjournal, cash book and balance sheet. A holder of 120 debentures, informed the company in the beginning of the third year that he wanted to exercise the option of conversion of debentures into equity shares. The amount of premium on debentures should not be transferred to profit and loss account because it is not a profit arising from the normal oper.
Whether debentures were issued at discount or at premium becomes irrelevant if conversion into shares takes place at the time of redemption of debenture is due. The new debentures or shares can be issued either at par or at a premium or at a. This chapter deals with the accounting for share capital of companies. Holders of convertible debentures enjoy the option of having their debentures converted either into shares of new debentures according to the term and condition of the issue. A limited company issued 25,000 ordinary shares of rs. Amendments to the companies share capital and debenture. The resulting proceeds will be utilized to finance investments in the companys. Journalise the entry for re issue of shares whether at discount or at premium. The best app for cbse students now provides accounting for partnership firms fundamentals class 12 notes latest chapter wise notes for quick preparation of cbse board exams and schoolbased annual examinations. Debentures are a companys unsecured debt obligations backed by the general credit of the issuer. These debentures are redeemed after the redemption of first debentures. The companies share capital and debentures rules, 2014.
However, where a companys shares are listed on the stock. The payment of dividend can be made only out of current profits of the business and not otherwise. Approval of draft offer letter pas4 for issue of debentures. What is the accounting treatment for premium on issue of. Company accounts redemption of debentures class 12 notes accountancy in pdf are available for free download in mycbseguide mobile app. As in case of debentures, fixed rate of dividends is paid to the preference shareholder, despite the profits earned by the company it is liable to pay interest to the preference shareholders. Convertible debentures usually have a lower interest rate compared to non.
In such a case, it is known as issue of shares at a premium. The procedure of issue of debentures by a company is similar to that of the issue of shares. Its a presentation i made for my class in iipm on shares, capital and debentures, as a part of the subject company law. Final accounts of companies including managerial remuneration, disposal of profits and issue of bonus shares.
Deal with the forfeiture of shares issued with different conditions. Company debenture is one of the important sources of finance for large companies, in addition to equity stocks, bank loans, and bonds. Company accounts section 284 of the companies act, 20 defines share as a share in the. Here is a compilation of top six accounting problems on issue of shares with its relevant solutions. Nowadays, investment in shares and debentures has taken a dominant position in the society, as people of different ages, religion, sex, and race invest their hard earned money, with an aim of getting better returns. For example, power to close the register of debenture holders section 311, registration of transfer or refusal of registration section 321, duties of companies with respect to issue of debentures or certificates for debenture stock on transfer section 323 and the courts power to order such issue.
Convertible debentures are redeemed by converting them into new debentures or into shares. Nonconvertible debentures, which are simply regular debentures, cannot be converted into equity shares of the liable company. Debenture is a written instrument acknowledging a debt under the common seal of the company. Depending upon its requirement, it may issue share capital but in any. Discount on issue of debentures will appear under the heading miscellaneous expenditure. Suppose in 2008 10,00,000 debentures were issued at a discount of 5% with a term of 6 years. A company may acquire long term finance through public borrowings. Here to the money can be collected lump sum or in installments. Pass the necessary journal entry to record the conversion of debentures into shares.
Issue the notice of general meeting along with explanatory statement. The company accepted his request and converted his debentures into shares. The word debenture has been derived from a latin word debere which means to borrow. Now debentures can be issued for cash or some other consideration. A shareholder gets dividend, which shall be payable out of undistributed profits. To provide necessary funds for the discharge of debentures, the company may adopt any of the following courses. These debentures like any other pays coupon at stipulated time say one year or at 6 months as mentioned at time of issue. State with what amount the share capital account will be debited. Issue of shares at discount is prohibited except by issue of sweat equity shares. The upcoming discussion will update you about the difference between shares and debentures. In other words, a debenture is a bond without a lien on specific assets owned by the issuing corporation. Preference shares are shares of a companys stock issued to. Shares can be either equity share capital or preference share capital whereas, under debt, one of the option company has to issue debentures.
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