Q.What is discount on issue of debentures?

Discount on issue of debentures is the difference between the face value (nominal value) of a debenture and its lower issue price. When a company issues a ₹100 debenture at ₹95, the ₹5 difference is the discount.

This discount is not an expense of one year. It is a capital loss that the company incurs to attract investors when the market rate of interest is higher than the coupon rate on the debentures. Because the company receives less cash than the liability it promises to repay, the discount is treated as a fictitious asset (or a deferred revenue expenditure) under the head "Other Non-Current Assets" in the Balance Sheet.

The discount is written off over the life of the debentures, typically by debiting the Statement of Profit and Loss each year. The journal entry to record the issue at a discount is:

| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |

|------|-------------|------|-----------|------------| …

Concept and Accounting Treatment

When a company issues debentures at a price lower than their face value (e.g., ₹100 debenture issued at ₹95), the difference of ₹5 is called discount on issue of debentures. This discount is not an expense in the usual sense — it is a capital loss incurred to raise long-term finance.

Why does this happen? Companies offer debentures at a discount to make them attractive to investors, especially when the market interest rate is higher than the coupon rate on the debentures. The investor effectively gets a higher yield because they pay less than the face value but receive full face value at maturity.

Accounting rule: The discount is recorded as a debit balance in a separate account called "Discount on Issue of Debentures Account". This is a fictitious asset (or a deferred revenue expenditure) shown on the assets side of the Balance Sheet under "Miscellaneous Expenditure" (to the extent not written off).

Treatment over time: The discount must be written off gradually over the life of the debentures. The most common method is to write it off in equal instalments each year (straight-line method) or in proportion to the amount of debentures outstanding (if redeemed in instalments). The journal entry each year is:

Key point: Discount on issue of debentures is not a charge against profit — it is an appropriation of profit (written off from the Statement of Profit and Loss). It reduces the profit available for dividends.

Journal Entry for Issue at Discount

When debentures are issued at a discount, the entry is:

Example

Suppose XYZ Ltd. issues 1,000, 10% debentures of ₹100 each at a discount of 5%, redeemable after 5 years at par.

Calculation:

• Face value = 1,000 × ₹100 = ₹1,00,000
• Issue price = ₹95 per debenture (₹100 - ₹5 discount)
• Amount received = 1,000 × ₹95 = ₹95,000
• Discount = 1,000 × ₹5 = ₹5,000

Journal entry:

| Date | Particulars | L.F. | Debit (₹) | Credit (₹) | …