Non-Cash Asset Purchases: Shares, Debentures and Cash Flow
Learn how assets bought with shares or debentures affect cash flow, with journal entries, part-cash examples, working notes and disclosure formats.
- 12th
- Accounts
A company gets a new machine. Its assets increase. Its share capital increases too. Surely something must go into the cash flow statement?
Pause before putting a figure under either heading. The company may have given the seller shares instead of money. The machine arrived, but the bank balance never moved.
That small distinction is the heart of this topic. Once you can follow what the seller actually received, even a long question with machinery accounts, share premium and debentures becomes much easier to untangle.
The rule: record the asset, exclude the non-cash exchange
When a company acquires an asset by issuing its own shares or debentures directly to the vendor, the exchange does not create a cash inflow or outflow. Exclude it from the cash totals and disclose the transaction separately in the financial statements. This is the treatment in AS 3, paragraphs 40 and 41.
The acquisition still belongs in the accounting records. Exclusion from the cash flow statement does not mean exclusion from the books.
The following examples assume a company acquiring long-term assets for its own use. Amounts are in rupees. Ignore taxes, issue expenses and other costs unless the question states them. The figures are original practice illustrations.
Three transactions that look similar but give different answers
Imagine a printing company acquiring a machine worth Rs. 4,00,000.
| How the machine is acquired | Investing cash flow | Financing cash flow |
|---|---|---|
| The vendor receives shares worth Rs. 4,00,000 directly | Nil | Nil |
| Investors pay Rs. 4,00,000 for shares, then the company pays the vendor | Rs. 4,00,000 outflow | Rs. 4,00,000 inflow |
| The vendor receives Rs. 1,00,000 cash and shares worth Rs. 3,00,000 | Rs. 1,00,000 outflow | Nil from the shares given to the vendor |
In the second row, the net change in cash from the two transactions is zero. But both cash movements happened. They must appear in their respective sections.
In the first row, neither movement happened. Inventing an equal receipt and payment would exaggerate both sections, even though the final cash balance would still reconcile.
Example 1: machinery purchased through shares issued at par
Meera Prints Ltd buys machinery for Rs. 3,00,000. It settles the vendor’s account by issuing 30,000 equity shares of Rs. 10 each, fully paid.
Step 1: record the purchase
| Particulars | Debit (Rs.) | Credit (Rs.) |
|---|---|---|
| Machinery A/c Dr. | 3,00,000 | |
| To Vendor A/c | 3,00,000 |
Step 2: record settlement through shares
| Particulars | Debit (Rs.) | Credit (Rs.) |
|---|---|---|
| Vendor A/c Dr. | 3,00,000 | |
| To Equity Share Capital A/c | 3,00,000 |
There is no Bank Account in either entry. Machinery rises by Rs. 3,00,000 and equity share capital rises by Rs. 3,00,000. The vendor’s account is settled.
For the cash flow statement:
- Do not show Rs. 3,00,000 as purchase of machinery paid in cash.
- Do not show Rs. 3,00,000 as cash proceeds from issuing shares.
- Add a separate explanatory note about the exchange.
A clear note would read: “Machinery costing Rs. 3,00,000 was acquired by issuing 30,000 fully paid equity shares of Rs. 10 each to the vendor. No cash consideration was paid.”
Example 2: shares issued at a premium
A company buys equipment for Rs. 6,00,000 and issues equity shares of Rs. 10 each at Rs. 15 per share to settle the full amount.
The issue price, rather than the face value, determines how many shares the vendor receives:
Number of shares = Rs. 6,00,000 / Rs. 15 = 40,000 shares
The credit is then divided:
- Share capital: 40,000 x Rs. 10 = Rs. 4,00,000.
- Securities premium: 40,000 x Rs. 5 = Rs. 2,00,000.
After recording Equipment A/c Dr. and Vendor A/c Cr. for Rs. 6,00,000, the settlement entry is:
| Particulars | Debit (Rs.) | Credit (Rs.) |
|---|---|---|
| Vendor A/c Dr. | 6,00,000 | |
| To Equity Share Capital A/c | 4,00,000 | |
| To Securities Premium A/c | 2,00,000 |
Cash flow from this exchange is nil. The premium is part of the non-cash consideration. It does not become a cash receipt merely because it sits in a different account.
This matters when you reconstruct cash proceeds from a comparative balance sheet. If total securities premium increased by Rs. 2,50,000, and Rs. 2,00,000 came from this vendor issue, only the remaining Rs. 50,000 could represent premium received in cash, assuming no other premium movements.
The matching non-cash addition to equipment is the full Rs. 6,00,000. Removing only the Rs. 4,00,000 face value from asset purchases would leave a false Rs. 2,00,000 cash outflow.
Example 3: an asset acquired by issuing debentures
A company acquires a delivery vehicle for Rs. 5,00,000. It issues 5,000 debentures of Rs. 100 each at par directly to the vendor.
The purchase entry debits Vehicle Account and credits Vendor Account by Rs. 5,00,000. Settlement debits Vendor Account and credits Debentures Account by the same amount.
The vehicle and the borrowing both increase, but cash does not change. Exclude the acquisition from investing cash payments and exclude the debenture issue from financing cash receipts. Explain the exchange in a note.
Now change one fact. Suppose the company sells those debentures to investors for cash and then pays Rs. 5,00,000 to the vehicle seller. There are two actual movements: a financing inflow of Rs. 5,00,000 and an investing outflow of Rs. 5,00,000.
The words “issued to the vendor” and “issued for cash” can therefore change the whole answer.
Example 4: part cash, part shares, plus installation
A machine’s agreed purchase price is Rs. 8,00,000. The company pays Rs. 2,00,000 through its bank and issues shares worth Rs. 6,00,000 to the vendor. It also pays Rs. 40,000 for installation, which the question says is capitalised as part of the machine’s cost.
Separate the three amounts before writing the statement:
| Component | Added to machinery (Rs.) | Cash paid (Rs.) | Non-cash consideration (Rs.) |
|---|---|---|---|
| Cash portion paid to vendor | 2,00,000 | 2,00,000 | Nil |
| Shares issued to vendor | 6,00,000 | Nil | 6,00,000 |
| Capitalised installation | 40,000 | 40,000 | Nil |
| Total | 8,40,000 | 2,40,000 | 6,00,000 |
The investing outflow is Rs. 2,40,000. The non-cash disclosure covers Rs. 6,00,000 settled through shares.
Do not exclude the entire Rs. 8,40,000 merely because shares appear in the question. Equally, do not treat the entire asset cost as cash expenditure.
Finding cash purchases from a machinery account
In a full question, the asset purchase may be hidden inside opening and closing balances. Work out total additions first, then identify how much was settled without cash.
When machinery is given at original cost
Suppose:
- Opening machinery at cost: Rs. 10,00,000.
- Closing machinery at cost: Rs. 15,00,000.
- Original cost of machinery sold: Rs. 2,00,000.
- Machinery acquired through shares: Rs. 3,00,000.
- All other additions were paid for immediately in cash.
- There was no revaluation or other change.
The cost reconciliation is:
Opening cost + additions - original cost of disposals = closing cost
So total additions are:
Rs. 15,00,000 - Rs. 10,00,000 + Rs. 2,00,000 = Rs. 7,00,000.
Of this amount, Rs. 3,00,000 was acquired through shares. Therefore:
Cash purchases = Rs. 7,00,000 - Rs. 3,00,000 = Rs. 4,00,000.
Do not add depreciation to this calculation. These balances are at original cost, with depreciation accounted for separately.
When machinery is given at net carrying amount
Now suppose the figures are:
- Opening net machinery: Rs. 8,00,000.
- Closing net machinery: Rs. 10,50,000.
- Depreciation for the year: Rs. 1,50,000.
- Carrying amount of machinery sold: Rs. 1,00,000.
- Machinery acquired through debentures: Rs. 2,00,000.
- All remaining additions were paid for in cash, with no other changes.
Here the reconciliation is:
Opening net amount + additions - depreciation - carrying amount disposed = closing net amount
Total additions = Rs. 10,50,000 - Rs. 8,00,000 + Rs. 1,50,000 + Rs. 1,00,000 = Rs. 5,00,000.
Cash purchases = Rs. 5,00,000 - Rs. 2,00,000 = Rs. 3,00,000.
The sale proceeds are a separate investing receipt. If the machine with carrying amount Rs. 1,00,000 sold for Rs. 1,20,000, record Rs. 1,20,000 as the receipt. Use Rs. 1,00,000 in the asset reconciliation, and remove the Rs. 20,000 profit on sale from operating profit under the indirect method if it was included in the starting profit.
A complete investing and financing illustration
Try this connected example. All amounts below are in Rs. lakh, so 1.00 means Rs. 1,00,000.
| Item | Opening balance | Closing balance |
|---|---|---|
| Machinery at cost | 12.00 | 20.00 |
| Equity share capital | 8.00 | 13.00 |
| Securities premium | 1.00 | 2.50 |
| Debentures | 4.00 | 7.00 |
Additional information:
- Machinery costing Rs. 2.00 lakh was sold for Rs. 1.30 lakh. Its accumulated depreciation was Rs. 0.90 lakh.
- New machinery worth Rs. 3.00 lakh was acquired through shares: Rs. 2.00 lakh share capital and Rs. 1.00 lakh securities premium.
- New machinery worth Rs. 2.00 lakh was acquired through debentures issued at par.
- Debentures of Rs. 1.00 lakh were redeemed in cash at par.
- All other machinery additions were paid for in cash. All remaining increases in capital, premium and debentures came from cash issues. There were no other movements or issue costs.
Working 1: machinery paid for in cash
Total additions = 20.00 - 12.00 + 2.00 = 10.00.
Non-cash additions = 3.00 + 2.00 = 5.00.
Cash purchases = 10.00 - 5.00 = 5.00.
Check the cost account: 12.00 + 10.00 - 2.00 = 20.00.
Working 2: cash received from issuing shares
Increase in share capital = 13.00 - 8.00 = 5.00.
Subtract capital issued to the vendor: 5.00 - 2.00 = 3.00.
Increase in securities premium = 2.50 - 1.00 = 1.50.
Subtract premium on the vendor issue: 1.50 - 1.00 = 0.50.
Total cash share proceeds = 3.00 + 0.50 = 3.50.
Working 3: cash received from issuing debentures
First restore the redemption when finding total issues:
Total debenture issues = 7.00 - 4.00 + 1.00 = 4.00.
Subtract debentures given to the machinery vendor:
Cash debenture proceeds = 4.00 - 2.00 = 2.00.
Check the account: 4.00 + 2.00 non-cash issue + 2.00 cash issue - 1.00 redemption = 7.00.
Cash flow extracts
| Particulars | Rs. lakh |
|---|---|
| Investing activities | |
| Cash payment for machinery | (5.00) |
| Cash proceeds from sale of machinery | 1.30 |
| Net cash used in investing activities | (3.70) |
| Financing activities | |
| Cash proceeds from shares, including premium | 3.50 |
| Cash proceeds from debentures | 2.00 |
| Redemption of debentures | (1.00) |
| Net cash from financing activities | 4.50 |
The combined net cash increase from these two sections is Rs. 0.80 lakh. This is not the company’s total cash change because operating activities have not been supplied.
The separate note explains machinery of Rs. 5.00 lakh acquired without cash: Rs. 3.00 lakh through shares, including Rs. 1.00 lakh premium, and Rs. 2.00 lakh through debentures.
For completeness, the machinery sold had a carrying amount of 2.00 - 0.90 = Rs. 1.10 lakh. Its sale profit was 1.30 - 1.10 = Rs. 0.20 lakh. That profit needs an operating adjustment if included in the starting profit. The investing receipt remains Rs. 1.30 lakh.
Why this is different from adding back depreciation
Students sometimes reason: “Both depreciation and a share-financed purchase are non-cash, so should I add both back to profit?”
Look at whether the item reduced the starting profit.
Depreciation is an expense. If Rs. 50,000 depreciation reduced the profit used in the indirect method, adding it back reverses that non-cash deduction.
Buying a machine by issuing shares normally debits an asset and credits capital, directly or through a vendor account. The purchase itself did not reduce profit. There is no purchase expense to add back.
For a wider worked explanation, see our guide to the indirect method of cash flow.
Two extra details that can change your working
An unpaid machinery supplier is not an operating creditor
Suppose total machinery additions are Rs. 5,00,000, of which Rs. 2,00,000 was settled through shares. An ordinary machinery supplier payable rises from Rs. 40,000 to Rs. 90,000. There are no other settlements, adjustments or advances.
Cash paid for machinery = 5,00,000 - 2,00,000 + 40,000 - 90,000 = Rs. 2,50,000.
The closing unpaid amount reduces this year’s payment, while paying an opening balance increases it. Keep this capital supplier balance out of operating trade-payable adjustments. This illustration concerns an ordinary asset supplier payable, not a separate borrowing arrangement.
Debt converted into shares is also non-cash
If Rs. 2,00,000 debentures are converted into shares without cash settlement, do not present a cash redemption and a cash share issue. When reconstructing both accounts, identify the conversion so it does not become a false financing flow on either side.
A short answer you can use in an exam
For “Explain the cash flow treatment of machinery purchased by issuing shares”, a complete response is:
Machinery acquired by issuing shares directly to the vendor is a non-cash investing and financing transaction. It is excluded from the cash flow statement because no cash or cash equivalents are exchanged. Its nature and amount are disclosed separately in the financial statements.
If asked for a numerical statement, show the non-cash addition in your working notes, exclude it from the cash totals, and give the explanatory disclosure. Do not quietly drop it from every part of your answer.
Quick practice with answers
1. Shares at premium
Equipment costs Rs. 2,40,000. It is acquired by issuing Rs. 10 shares at Rs. 12 each. Find the number of shares, capital, premium and cash flow.
Answer: 20,000 shares; capital Rs. 2,00,000; premium Rs. 40,000; no cash flow. Disclose the Rs. 2,40,000 non-cash acquisition.
2. Mixed payment
A vehicle costs Rs. 7,50,000. The vendor receives debentures worth Rs. 5,00,000 and the balance in cash.
Answer: Investing outflow Rs. 2,50,000; non-cash acquisition Rs. 5,00,000. The vendor debentures produce no financing cash receipt.
3. Original-cost balances
Opening plant is Rs. 6,00,000 and closing plant is Rs. 9,00,000, both at cost. Plant costing Rs. 1,00,000 was sold. Additions include Rs. 1,50,000 acquired through shares. All remaining additions were paid for immediately, with no other changes.
Answer: Total additions Rs. 4,00,000; cash purchases Rs. 2,50,000.
4. Reconstruct debenture proceeds
Opening debentures are Rs. 3,00,000; closing debentures are Rs. 6,00,000. Debentures of Rs. 1,00,000 were redeemed at par and Rs. 1,50,000 were issued to an asset vendor. All other issues were for cash at par, with no other movements.
Answer: Total issues Rs. 4,00,000; cash proceeds Rs. 2,50,000. Show the Rs. 1,00,000 cash redemption separately.
5. Two genuine bank transactions
Shares are issued for Rs. 3,00,000 cash, and that money is used immediately to buy equipment. Can both be omitted because cash ends where it started?
Answer: No. Show a financing inflow and an investing outflow of Rs. 3,00,000 each.
6. Check an incorrect add-back
A student adds Rs. 4,00,000 to operating profit because machinery of that amount was acquired through shares. The purchase was correctly capitalised.
Answer: Remove that add-back. The purchase did not reduce profit. Exclude it from investing and financing cash totals and disclose the exchange separately.
Reading behind this lesson
The non-cash rule and separate disclosure requirement can be checked in NCERT’s Cash Flow Statement chapter, under Non-cash Transactions. ICAI’s text of AS 3, particularly paragraphs 21 and 40 to 41, explains gross cash reporting and the exclusion of non-cash investing and financing transactions. The practice figures above are constructed to help you apply those principles.
Frequently asked questions
Is machinery purchased by issuing shares an investing or financing activity?
It has both an investing aspect, acquiring machinery, and a financing aspect, issuing capital. If shares go directly to the vendor without cash changing hands, it creates no cash flow under either heading.
Where should I disclose a non-cash purchase?
Give its nature and amount separately in the financial statements, such as in an explanatory note. In a classroom answer, a clearly labelled note outside the cash totals makes the treatment explicit.
Are debentures issued to a vendor a financing cash inflow?
No. They create a borrowing, but the vendor supplies an asset rather than cash. A cash issue of debentures is a different transaction.
Does securities premium count as cash received?
Only when it is actually received in cash. Premium on shares issued directly for an asset is part of the non-cash consideration.
How do I handle a purchase partly paid in cash?
Include the amount actually paid for the asset in investing cash outflows. Exclude and separately explain the portion settled through shares or debentures.
Should I add a non-cash asset purchase back to net profit?
No, assuming the asset was correctly capitalised. The purchase itself was not deducted in arriving at profit, so there is nothing to reverse through an add-back.
Why is the increase in machinery not always the cash purchase amount?
The movement can include non-cash additions, disposals, depreciation in net balances, revaluations and unpaid purchases. Reconcile the asset account and payment details before calculating cash paid.
Can I show equal investing and financing amounts for a non-cash exchange?
No. That would report cash movements that never occurred. Equal amounts are appropriate when there really was a cash financing receipt followed by a cash purchase.
What if debentures issued for an asset are repaid later?
The original exchange remains non-cash. A later cash repayment is considered separately in the repayment period as a financing outflow.
What is the fastest final check?
Trace the transaction to the bank or cash account, separate any mixed consideration, and reconcile the asset and financing accounts. Then confirm that the non-cash amount has been excluded from both cash totals and explained in a note.
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