What is meant by 'Issue of debentures for consideration other than cash'?

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Q. What is meant by 'Issue of debentures for consideration other than cash'?

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Concept understanding — Debenture Definition

Debentures: The Company's Way of Borrowing Money

Think of a debenture like this: you need ₹5,00,000 to expand your business. Instead of asking a bank for a loan, you go to the public and say, "Lend me money, and I'll pay you interest every year. After 5 years, I'll return your full amount." Each person who lends you money gets a certificate — that certificate is a debenture.

The Precise Meaning

A debenture is a written instrument issued by a company under its common seal, acknowledging a debt. It contains a promise to repay the borrowed amount at a specified date (maturity) and to pay interest at a fixed rate at regular intervals (usually half-yearly or yearly).

Note

A debenture holder is a creditor of the company, not an owner. They have no voting rights and no share in profits — only a fixed interest payment.

Why Debentures Matter

Companies issue debentures because:

They raise large funds without diluting ownership (unlike shares)
Interest paid on debentures is a tax-deductible expense (reduces taxable profit)
Debentures are safer for investors than shares (fixed return, priority in repayment)

For investors, debentures offer:

Fixed, predictable income
Higher safety than equity shares
Priority over shareholders if the company is liquidated

Accounting Treatment

When a company issues debentures, the journal entry is:

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	[Amount received]
To Debentures A/c		[Face value]
To Securities Premium Reserve A/c (if issued at premium)		[Premium amount]
(Being debentures issued at premium)

Key points:

Debit Bank A/c with the actual amount received
Credit Debentures A/c with the face value (nominal value)
If issued at a premium (e.g., ₹100 debenture issued for ₹110), credit the extra ₹10 to Securities Premium Reserve A/c
If issued at a discount (e.g., ₹100 debenture issued for ₹95), debit the discount to Discount on Issue of Debentures A/c (a fictitious asset written off over the debenture's life)

Watch out

Never confuse debentures with shares. Debentures are liabilities (shown under "Non-Current Liabilities" in the Balance Sheet), while shares are equity (shown under "Shareholders' Funds").

Interest on Debentures

Interest is calculated as:

Interest = Face Value of Debentures × Rate of Interest × Time Period

For example, if a company issues ₹10,00,000 worth of 9% debentures, the annual interest is:

₹10,00,000 × 9% = ₹90,000 per year

The journal entry for interest payment:

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When a company acquires an asset (such as land, machinery, or a business) and pays the vendor by issuing debentures instead of cash, it is called an issue of debentures for consideration other than cash. The vendor receives debentures as full or part payment for the asset sold to the company.

The key accounting principle here is that the debentures must be recorded at the value of the asset acquired, not at the face value of the debentures issued. If the asset is undervalued or overvalued, the difference is adjusted through a capital reserve or goodwill account, as per the Companies Act.

The journal entry follows the golden rule: Debit what comes in (asset), Credit the source (debentures).

Particulars	Debit (₹)	Credit (₹)
Sundry Assets A/c (or specific asset name)	Dr.	(Value of asset)
To Vendor A/c		(Value of asset)
(Being asset purchased from vendor)
Vendor A/c	Dr.	(Value of asset)
To Debentures A/c		(Face value of debentures issued)
To Securities Premium Reserve A/c (if issued at premium)		(Premium amount)
(Being debentures issued to vendor for consideration other than cash)

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When a company issues debentures to vendors or suppliers in exchange for assets or services (not for cash), it is called an 'issue of debentures for consideration other than cash'. The vendor is paid by allotting debentures instead of paying cash.

Concept and Accounting Treatment

Debentures are long-term debt instruments issued by a company that acknowledge a loan taken from the public. The company promises to pay a fixed rate of interest and repay the principal on a specified date. Debentures are a form of borrowed capital, not ownership capital (unlike shares).

When a company purchases assets (like machinery, land, or buildings) or acquires services (like professional fees), it may not have sufficient cash to pay the vendor immediately. Instead of raising cash through a separate debenture issue and then paying the vendor, the company can directly issue debentures to the vendor as payment. This is the 'issue of debentures for consideration other than cash'.

The accounting rule here is simple: The asset or service being acquired is recorded at its purchase price (the consideration), and the debentures are issued at that same value. The journal entry debits the asset account (or expense account) and credits the vendor's account. When the debentures are actually allotted to the vendor, the vendor's account is debited and the Debentures account is credited.

Watch out

Common Mistake

Students often think the debentures are issued at face value (par) regardless of the asset's price. But the debentures can be issued at par, at a premium, or at a discount — depending on the agreement with the vendor. The asset is always recorded at its purchase price (the consideration agreed upon), and the difference between that price and the face value of debentures issued is adjusted through a Securities Premium Reserve (if issued at premium) or a Discount on Issue of Debentures account (if issued at discount).

Journal Entries

The journal entries depend on whether the debentures are issued at par, at a premium, or at a discount.

Case 1: Debentures issued at par (face value = issue price)

Particulars	Debit (₹)	Credit (₹)
Asset A/c (or Expense A/c) Dr.	XXX
To Vendor A/c		XXX
(Being asset purchased / services received from vendor)
Vendor A/c Dr.	XXX
To Debentures A/c		XXX
(Being debentures issued to vendor at par as consideration)

Case 2: Debentures issued at a premium

When debentures are issued at a premium, the vendor receives debentures whose face value is less than the purchase price. The premium is credited to Securities Premium Reserve.

Particulars	Debit (₹)	Credit (₹)
Asset A/c (or Expense A/c) Dr.	XXX
To Vendor A/c		XXX
(Being asset purchased / services received from vendor)
Vendor A/c Dr.	XXX
To Debentures A/c (face value)		XXX
To Securities Premium Reserve A/c		XXX
(Being debentures issued to vendor at a premium of ₹___ per debenture)

Case 3: Debentures issued at a discount

When debentures are issued at a discount, the vendor receives debentures whose face value is more than the purchase price. The discount is debited to Discount on Issue of Debentures A/c (which is a loss to the company).

Particulars	Debit (₹)	Credit (₹)
Asset A/c (or Expense A/c) Dr.	XXX
To Vendor A/c		XXX
(Being asset purchased / services received from vendor)
Vendor A/c Dr.	XXX
Discount on Issue of Debentures A/c Dr.	XXX
To Debentures A/c (face value)		XXX
(Being debentures issued to vendor at a discount of ₹___ per debenture)

Tip

Shortcut

Remember: The asset is always recorded at the purchase price (the consideration). The debentures are recorded at their face value. Any difference goes to Securities Premium (if premium) or Discount on Issue (if discount). The vendor's account is settled at the purchase price.

Working Notes

Working Note 1: Number of debentures to be issued

Number of debentures = (Purchase price) / (Issue price per debenture) …

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Q.What is meant by 'Issue of debentures for consideration other than cash'?

Concept and Accounting Treatment

Journal Entries

Case 1: Debentures issued at par (face value = issue price)

Case 2: Debentures issued at a premium

Case 3: Debentures issued at a discount

Working Notes

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