CORPORATE ACCOUNTING - 3 - DEBENTURES

Accounting treatment of Issue of debenture
For rendering the accounting treatment of issue of debenture, you should know debenture and what is use of debenture in any corporate. Debenture is just long term loan which is taken by company. For this company issue debentures. This is just like a paper on which company has written that company is taking loan from debenture holder with given term. Company has to decide the rate of interest and repayment amount and time of repayment of debenture. These terms must be written in debenture paper at the time of issue of debenture. There are many type of debenture which can be issued by company. It may convertible or non convertible. It means that company converts debenture in to share if company issued convertible debenture but if company issued non convertible, company has no right to convert debentures into shares. Company can also redeemable and non redeemable debenture .It means that company repays the full amount of debenture holder after some time if company has issued redeemable debentures but if company issued non redeemable debentures, company will not repay in his life time. These debentures only will redeem after the winding up of company.
Because of this is important transaction relating to company, so it is very necessary to record in the books of company. Let us start the accounting treatment of issue of debenture.
A – Issue of Debenture at Par
1st journal Entry
When company receives application money of debentures
Bank account Debit
Debenture Application Account Credit
2nd Journal Entry
When company accepts the applications
Debenture Application Account Debit
Debenture Account Credit
3rd Journal Entry
When Allotment money of debenture due
Debenture Allotment Account Debit
Debenture Account Credit
4th Journal Entry
When Allotment money of debenture received
Bank Account Debit
Debenture Allotment Account Credit
5th Journal Entry
When Call money of debenture is payable
Debenture Calls Account Debit
Debenture Account Credit
6th Journal Entry
When Call money of debenture is received
Bank Account Debit
Debenture Calls Account Credit
 

B- When Company issue of debenture at premium
If premium is receivable with application money
1st Journal Entry
When amount of application received with premium
Bank Account Debit
Debenture Application account Credit
2nd Journal Entry
Debenture Application Account Debit
Debenture Account Credit
Security premium Account credit
If premium receivable on allotment then
Debenture Allotment account debit
Debenture Account Credit
Security Premium Account Credit
And allotment money received with premium
Bank account Debit
Debenture Allotment Account Credit
When Debenture Issued At discount
Debenture Allotment Account Debit
Discount on Issue of Debenture Account Debit
Debenture Allotment Account Credit
When discounted amount of debenture is received
Bank Account Debit
Debenture Allotment Account Credit

Redemption of Debenture and method of redemption
Redemption of Debenture means repayment at the maturity of debenture. Because earlier we told that debentures are long term loan so it is very necessary to redeem the debentures.

1st Method
Lumbsum method
It means when company repay the Lumbsum amount to debenture holder . There following sub method of this method
A) Without Provision
According to Company law , if you have to redeem without any provision , it is necessary to make reserve of debenture redemption reserve with 50% of total amount of debenture so that company can easily repay the debenture without any provision at the time of redemption the following journal entry will pass.
Debenture Account Debit
Debenture holder Account Credit
1st journal Entry
Profit and loss Appropriation Account Debit
Debenture Redemption Reserve Account Credit
2nd Journal Entry
Debenture holder Account Debit
Bank Account Credit
3rd Journal Entry
Debenture redemption Reserve account Debit
General Reserve Account Credit

Sinking Fund – Method of redemption of Debenture
This is very important method of redemption of debenture. Sinking fund means take one part of profit for repayment of debenture. This is calculated with sinking fund table. This is invested in such scheme which gives us Lumbsum amount so that we can easily repay the debenture without any tension. This is very popular and scientific method of redemption of debenture. In this method we open the sinking fund and sinking fund investment account. Sinking fund’s other name is also Debenture Redemption Fund Account. The following accounting treatment is done by the accountant of company when the company follow this method .

In the end of first year

1st journal entry for taking reserve from profit
Profit and loss appropriation account Debit
Sinking Fund Account Credit

2nd Journal Entry for invest the sinking fund
Sinking fund investment Account Debit
Bank Account Credit
In the end of next years but not end last year

3rd Journal Entry for receiving interest on investment
Bank Account Debit
Interest on sinking fund investment Account Credit

4th Journal Entry for transferring interest to sinking fund
Interest on Sinking fund investment account Debit
Sinking fund Account Credit

5th Journal entry for taking reserve from profit
Profit and loss appropriation account Debit
Sinking Fund Account Credit

6th Journal Entry for invest the sinking fund
Sinking fund investment Account Debit
Bank Account Credit
At the end of last year
Bank Account Debit
Interest on sinking fund investment Account Credit

7th Journal Entry for transferring interest to sinking fund
Interest on Sinking fund investment account Debit
Sinking fund Account Credit

8th Journal entry for taking reserve from profit
Profit and loss appropriation account Debit
Sinking Fund Account Credit

9th Journal Entry for receiving the money from sale of investment
Bank account Debit
Sinking fund investment account Credit

10th journal entry for any profit on sale
Sinking Fund investment Account Debit
Sinking fund account Credit

11th journal entry for repayment to debenture holders
Debenture Account debit
Bank account credit

12th Journal entry for balance of sinking fund transferred to general reserve account
Sinking fund account debit
General reserve account credit

Accounting Treatment of Provision for Income Tax
Before writing this article , I have studied deeply several books of accounting . Actually this type of provision is needed in Corporate type business . Because in the sole trade and partnership firm there is no treatment of provision for income tax and income tax paid because above two type business level , it is the duty of business man to pay income tax personally . So in above situation if he take any fund from business for paying income tax , it is deemed as drawing or other words we can say that his capital will reduce if you pick some amount for paying any income tax . No other treatment is done in sole trade or partner ship

Now In Case of Company or Corporate
I am giving you full detail of accounting treatment , if you have to do this type of work in any company .

Ist Step
Understanding the meaning of Company . I have already read on it see .
2nd Step
Understanding the meaning of provision of Income tax

In India , we all company pay income tax of previous year income . Means what we earn in last year we have to pay tax on next year that is called assessment year. But Under the law of Income tax , all company have to pay tax in advance .
So without actual earning we starts to estimate earning .
For Example
Suppose company can guess that it will earn RS. 5 crore in this year .
So on this advance guess company make his reserve or provision of income , it may be the 5% or 10% or 15% or 30% on his estimated income. This is called provision for income tax .
Now company Make the voucher entry of this provision by providing amount from profit and loss account
Profit and loss account Debit
Provision for income tax account Credit
After provision or estimated income tax , company submit his advance income tax return to income tax department ,
then pass the following entry
Advance Income tax account debit
Bank Account credit
After one year when income tax department calculate the real income tax by providing the real income position of company in previous year .

•Adjustment of actual income tax with provision
Actual income tax will adjust with provision of income tax by passing following adjustment entry
Provision for income tax account Debit
Income tax Account ( Actual after assessment ) credit

•We must calculate the difference between actual paid tax and ( advance + tds )
If advance and tds is more than actual tax , then income tax department return your excess tax paid
At this time two general entries will pass
1st transfer advance tax and tds to income tax account
Income tax account debit
Advance tax account Credit
Tds account Credit
2nd journal entry will pass for return the amount
Bank account debit
Income tax account credit
If advance and tds is less than actual tax , then income tax department demand more tax from you , and you will pay by following journal entry
1st transfer advance tax and tds to income tax account
Income tax account debit
Advance tax account Credit
Tds account Credit
2nd journal entry will pass for return the amount