Redemption of Debentures in Class 12 Accounts

Redemption of debentures becomes much easier when you stop treating it as a set of separate entries and start seeing it as one promise being completed.

When a company issues debentures, it borrows money from debentureholders. When those debentures are redeemed, the company repays the amount due according to the terms of issue. The accounting is simply the story of how the company prepares for that repayment, makes the amount due, pays the debentureholders, and closes the reserve if one was created.

The confusing part is that this story has a few characters with similar names: Debentures Account, Debentureholders Account, Debenture Redemption Reserve, and Debenture Redemption Investment. Once you know the role of each one, the chapter becomes far less scary.

This guide explains the logic, the format, the common entries, and the mistakes students usually make in redemption of debentures questions.

What Redemption of Debentures Means

Redemption of debentures means repayment of debentures by the company.

If a company has issued 10% debentures of Rs. 5,00,000, the debentureholders are creditors of the company. On the redemption date, the company has to repay them as promised. The repayment may be at par, at premium, in one lump sum, or in instalments.

In simple words:

Term	Meaning
Debenture	A written acknowledgement of debt by a company
Debentureholder	The person or institution to whom the company owes money
Redemption	Repayment of the debenture amount
Redemption at par	Repayment at face value
Redemption at premium	Repayment at more than face value

The key point is that debentures are a liability. So, at redemption, the company has to remove that liability from its books.

The Three Questions to Ask First

Before writing any redemption entry, pause and ask three questions.

Question	Why it matters
At what price are debentures redeemable?	This tells you whether premium on redemption is involved.
Is Debenture Redemption Reserve required?	This tells you whether profits must be transferred to DRR.
Is Debenture Redemption Investment required?	This tells you whether money must be invested or deposited before redemption.

Most mistakes happen because students jump directly to the payment entry. But payment is only one part of the answer.

Debentures Account and Debentureholders Account

Two accounts appear again and again in redemption entries.

Debentures Account shows the liability created when the debentures were issued. It is credited at the time of issue and debited at the time of redemption.

Debentureholders Account is used when the amount becomes payable to debentureholders. It is a temporary personal account. First, the company transfers the amount due to debentureholders. Then it pays them through Bank Account.

Think of it like this:

Account	Role in redemption
Debentures A/c	Removes the debenture liability from the books
Debentureholders A/c	Shows the amount payable to debentureholders
Bank A/c	Shows the actual cash payment

The basic sequence is:

Step	Entry idea
1	Make the redemption amount due
2	Pay the debentureholders

Basic Entries When Debentures Are Redeemed at Par

When debentures are redeemed at par, the company pays exactly the face value.

Suppose a company redeems Rs. 2,00,000 debentures at par.

Amount Due on Redemption

Particulars	Debit	Credit
Debentures A/c Dr.	Rs. 2,00,000
To Debentureholders A/c		Rs. 2,00,000

This entry says that the debenture liability is now payable to debentureholders.

Payment to Debentureholders

Particulars	Debit	Credit
Debentureholders A/c Dr.	Rs. 2,00,000
To Bank A/c		Rs. 2,00,000

This entry records the actual payment.

What Changes When Debentures Are Redeemed at Premium

If debentures are redeemable at premium, the company pays more than the face value.

Suppose Rs. 2,00,000 debentures are redeemable at 5% premium.

Particular	Amount
Face value of debentures	Rs. 2,00,000
Premium on redemption at 5%	Rs. 10,000
Total amount payable	Rs. 2,10,000

The amount due entry will include both the debenture liability and the premium.

Particulars	Debit	Credit
Debentures A/c Dr.	Rs. 2,00,000
Premium on Redemption of Debentures A/c Dr.	Rs. 10,000
To Debentureholders A/c		Rs. 2,10,000

Then the payment entry is:

Particulars	Debit	Credit
Debentureholders A/c Dr.	Rs. 2,10,000
To Bank A/c		Rs. 2,10,000

This is a very common error. If you debit Debentures Account with Rs. 2,10,000, you are treating premium as part of the original debenture liability. It is not.

Debenture Redemption Reserve, or DRR

Debenture Redemption Reserve is a reserve created out of profits for redemption of debentures wherever it is required.

In student language, DRR means the company is not using all its profit freely. It keeps a part of profit aside so that redemption does not become careless or sudden.

The entry for creating DRR is:

Particulars	Debit	Credit
Surplus, i.e., Balance in Statement of Profit and Loss A/c Dr.	Amount
To Debenture Redemption Reserve A/c		Amount

Some books may write Statement of Profit and Loss Account instead of Surplus. Follow the format your school expects, but keep the meaning the same: profit is being transferred to DRR.

For many school-level questions, the question itself gives the company type or tells you whether DRR is applicable. Do not assume one treatment for every question. If DRR is required, calculate it carefully and pass the reserve entry before redemption.

Debenture Redemption Investment, or DRI

Debenture Redemption Investment is different from DRR.

DRR is a reserve created out of profits. DRI is an investment or deposit made so that money is earmarked for debentures maturing during the year.

The usual school-level rule is to invest or deposit 15% of the amount of debentures maturing during the year, where DRI is applicable.

The entry for making the investment is:

Particulars	Debit	Credit
Debenture Redemption Investment A/c Dr.	Amount
To Bank A/c		Amount

At the time of redemption, this investment is encashed:

Particulars	Debit	Credit
Bank A/c Dr.	Amount
To Debenture Redemption Investment A/c		Amount

This distinction is extremely important. Students often write only one of them, or treat both as the same. They are not the same.

Redemption Out of Profits and Out of Capital

Redemption out of profits means the company uses profits to support redemption. In accounting questions, this usually involves transferring profit to Debenture Redemption Reserve where required.

Redemption out of capital means redemption happens without setting aside profits for that purpose, except where a legal or question-based requirement says otherwise.

Here is the simple way to remember it:

Source	Main idea
Out of profits	Profit is transferred to DRR before redemption.
Out of capital	No profit reserve is created for that redemption, unless the question requires it.

Do not turn this into a memorised sentence only. In the answer, show it through entries. If redemption is out of profits, the DRR entry should be visible. If it is out of capital, the redemption entries may go directly to amount due and payment.

Full Solved Example With DRR and DRI

Let us solve a complete example in a clean format.

Anmol Ltd. has 2,000, 10% debentures of Rs. 100 each. The debentures are redeemable at par on 31 March 2026. Assume DRR is required at 10% of outstanding debentures and DRI is required at 15% of debentures maturing during the year.

Working Notes

Particular	Calculation	Amount
Face value of debentures	2,000 x Rs. 100	Rs. 2,00,000
DRR	10% of Rs. 2,00,000	Rs. 20,000
DRI	15% of Rs. 2,00,000	Rs. 30,000
Redemption amount	At par	Rs. 2,00,000

Journal Entries

Date	Particulars	Debit	Credit
31 Mar 2025	Surplus, i.e., Balance in Statement of Profit and Loss A/c Dr.	Rs. 20,000
	To Debenture Redemption Reserve A/c		Rs. 20,000
30 Apr 2025	Debenture Redemption Investment A/c Dr.	Rs. 30,000
	To Bank A/c		Rs. 30,000
31 Mar 2026	Bank A/c Dr.	Rs. 30,000
	To Debenture Redemption Investment A/c		Rs. 30,000
31 Mar 2026	10% Debentures A/c Dr.	Rs. 2,00,000
	To Debentureholders A/c		Rs. 2,00,000
31 Mar 2026	Debentureholders A/c Dr.	Rs. 2,00,000
	To Bank A/c		Rs. 2,00,000
31 Mar 2026	Debenture Redemption Reserve A/c Dr.	Rs. 20,000
	To General Reserve A/c		Rs. 20,000

Read the entries as a story:

First, profit is transferred to DRR. Then money is invested in DRI. At redemption, DRI is encashed. After that, debentures become due, debentureholders are paid, and DRR is transferred to General Reserve.

Redemption in Instalments

Sometimes debentures are redeemed in instalments. That means the company does not repay all debentures on one date. It repays a part of them each year.

For example, if Rs. 4,00,000 debentures are redeemable in four equal annual instalments, the company redeems Rs. 1,00,000 each year.

In many questions, the debentures to be redeemed are selected by draw of lots. This simply means that the company chooses which debentureholders will be repaid in that instalment.

For journal entries, the main redemption entries remain familiar:

Particulars	Debit	Credit
Debentures A/c Dr.	Amount redeemed
To Debentureholders A/c		Amount redeemed

Particulars	Debit	Credit
Debentureholders A/c Dr.	Amount paid
To Bank A/c		Amount paid

When DRI is involved, remember that it relates to the debentures maturing during the relevant year. In equal instalment questions, your teacher may also expect the DRR transfer to General Reserve in proportion to the debentures redeemed.

Where Students Lose Marks

Redemption of debentures questions are usually not lost because the topic is impossible. They are lost because of small sequence errors.

Mistake	Correct approach
Writing only the Bank payment entry	First make the amount due to debentureholders.
Treating DRR as cash	DRR is a reserve, not a bank balance.
Treating DRI as a reserve	DRI is an investment or deposit, not a profit transfer.
Calculating DRI on redemption premium	DRI is normally based on the amount of debentures maturing.
Debiting Debentures A/c with premium	Debit Debentures A/c with face value and Premium on Redemption separately.
Forgetting to encash DRI	Bring the investment back into Bank before showing redemption payment.
Forgetting DRR transfer	After redemption, transfer DRR to General Reserve where applicable.

A Simple Answer-Writing Order

Use this order in exam questions:

1. Write working notes for face value, redemption premium, DRR, and DRI.
2. Create DRR if required.
3. Invest in DRI if required.
4. Encash DRI near the redemption date.
5. Make the redemption amount due.
6. Pay debentureholders.
7. Transfer DRR to General Reserve where applicable.

This order keeps your answer neat and reduces the chance of missing an entry.

Final Revision Table

Use this table for quick revision before solving practice questions.

Situation	Entry
DRR created	Surplus in Statement of Profit and Loss A/c Dr. To Debenture Redemption Reserve A/c
DRI made	Debenture Redemption Investment A/c Dr. To Bank A/c
DRI encashed	Bank A/c Dr. To Debenture Redemption Investment A/c
Debentures due at par	Debentures A/c Dr. To Debentureholders A/c
Debentures due at premium	Debentures A/c Dr. and Premium on Redemption A/c Dr. To Debentureholders A/c
Payment made	Debentureholders A/c Dr. To Bank A/c
DRR closed	Debenture Redemption Reserve A/c Dr. To General Reserve A/c

If you can explain why each entry appears, you are ready to solve most redemption of debentures questions.

Frequently Asked Questions

What is redemption of debentures?

Redemption of debentures means repayment of debentures by the company according to the terms of issue. It removes the debenture liability from the books.

Is redemption of debentures the same as paying debenture interest?

No. Interest is the regular cost of borrowing. Redemption is repayment of the debenture amount itself. A company may pay interest every year and redeem the debentures later.

What is the difference between DRR and DRI?

DRR is Debenture Redemption Reserve. It is created out of profits. DRI is Debenture Redemption Investment. It is an investment or deposit made for debentures maturing during the year. DRR is about profit reserve. DRI is about earmarked funds.

Is DRR always required?

No. DRR depends on the type of company and the requirement given in the question. In school-level questions, read the question carefully and apply the stated rule. If DRR is required, show the transfer from profit to Debenture Redemption Reserve.

How is DRI calculated?

Where DRI is applicable, it is usually calculated as 15% of the amount of debentures maturing during the year. It is not usually calculated on the redemption premium.

What is the entry when debentures are due for redemption at par?

The entry is Debentures A/c Dr. To Debentureholders A/c. This transfers the liability from Debentures Account to Debentureholders Account.

What is the entry when debentures are due for redemption at premium?

The entry is Debentures A/c Dr., Premium on Redemption of Debentures A/c Dr., To Debentureholders A/c. Debentures Account is debited with face value, and premium is debited separately.

When is DRR transferred to General Reserve?

DRR is transferred to General Reserve after redemption, where applicable. If debentures are redeemed in instalments, the transfer may be made in proportion to the debentures redeemed, depending on the question format.

Why do we use Debentureholders Account?

Debentureholders Account shows the amount payable to debentureholders. It helps separate the amount due entry from the actual payment entry.

What is the safest way to revise this chapter?

Revise it in sequence: DRR, DRI, amount due, payment, and transfer of DRR. Then practise one question at par, one at premium, and one in instalments.