FINANCIAL ACCOUNTING (BBA)

Module I (Introduction to financial accounting)

Accounting
According to American Institute of Association “Accounting is the
process of identifying, measuring and communicating economic
information to permit informed judgments and decisions by the users
of information”
Branches of accounting
1. Financial accounting
2. Cost accounting
3. Management accounting
Financial accounting
It is a branch of accounting mainly concerned with preparation of
financial statements and communication of business information to
various users.
Nature/ Characteristics of financial accounting
 It provides historical data.
 It deals with all commercial transactions.
 These are the accounts of whole business.
 Transactions of financial characters are recorded.
 Transactions are recorded on the basis of concepts and conventions.
 These are subject to accounting standards.
Objects/ Functions of financial accounting
 To identify financial events and transactions.
 To provide information about financial position.
 To provide information about profit or loss.
 To keep books of accounts of the business.
 To provide information to stakeholders.
Scope of financial accounting
1. Book keeping
2. Financial statements
3. Analysis and interpretation of financial statements
4. Financial reporting
5. Segment reporting
6. Accounting principles
7. Accounting standards
Advantages of financial accounting
 It helps management in planning business activities.
 It helps management in controlling business activities.
 It helps management in taking timely decisions.
 It helps in the settlement of tax liability.
 It provide information about performance of the business.
 It provide information about financial position.
Limitations/ Disadvantages of financial accounting
 It provides only past data.
 It does not show profit or loss of each product, job process.
 It fails to exercise control over resources.
 It does not measure organization efficiency.
 It does not provide data for comparison cost.
 It provides limited information to management.
Accounting principles
Accounting principles are the general rules or principles adopted in
accounting.
Classification of accounting principles
1. Accounting concepts
2. Accounting conventions
3. Modifying accounting principles
Accounting principles (Basic assumptions)
 Business entity concept
According to this concept, there should be a separate legal entity
between owner and its business.
 Money measurement concept
According to this concept, only monetary transactions should be
recorded in books of accounts.
 Going concern concept
According to this concept, business will continue for an indefinite
period of time.
 Accounting period concept
According to this concept, the life of a business is divided into different
periods for preparing financial statements.
 Cost concept
According to this concept, all transactions are recorded in the books of
accounts at cost price.
 Dual aspect concept
According to this concept, every business transactions has two aspects
one debit aspect and one credit aspect.
 Realization concept
According to this concept, revenue is said to be realized when goods or
services to be sold to a customer.
 Matching concept
According to this concept, expenses of a particular period matched with
revenue of that period.
 Accrual concept
According to this concept, income earned and the total expense
incurred during the current period are taken into account.
 Objectivity concept
According to this concept, each transactions in the books of accounts
should have an adequate evidence to support.
Accounting conventions
 Convention of consistency
According to this convention, accounting policies or practices should
remain same year after year.
 Convention of conservatism (Prudence)
According to this convention, accountant should not anticipate income
but should make provision for all possible losses.
 Convention of materiality
According to this convention, only material facts should be disclosed in
the financial statements.
 Convention of full disclosure
According to this convention, all significant information should be
disclosed in the financial statements.
Modifying accounting principles
 Industry practice
 Substance over form
 Timeliness principle
 Cost benefit principle
Accounting standards
Accounting standards are a set of rules and guidelines for preparing
financial statements.
Accounting systems (Bases of accounting)
1. Cash system
Transactions relating to actual cash receipts and actual cash payments
are recorded.
2. Accrual system (Merchandise system)
All transaction relating to particular period are recorded.
3. Hybrid system (Mixed system)
Revenues and assets are recorded on cash basis and expenses and
liabilities recorded on accrual system
Important terms in Accountancy
Capital
The amount invested by the owner in business is called capital.
Liability
It is the debts owing by business to others.
Equity
it is the total claim against the assets of the business.
Assets
Assets are the valuable things or property owned by the business.
Expenditure
Money value paid or payable for acquiring an asset or service is called
expenditure.
Revenue
It is the amount realized or receivable from the sale of goods or assets
or both.
Income
It is the excess of revenue over the expense.
Goods
These are the commodities, articles, products or things in which a
trader deals.
Purchase
It refers to purchase of goods in which business deals.
Sales
It refers to sale of goods for cash or on credit.
Turnover
It refers to speed with which goods are sold.
Stock
It refers to goods lying unsold on a particular date.
Debtors
Debtors are those persons who owes money to the business.
Creditors
Creditors are those person to whom the business owes money.
Drawings
It is the amount of cash or goods withdrawn by the owner from
business for his personal use.
Capital receipt
It is the income generated from investing and financing activities of the
business.
Revenue receipt
It is the income generated from the operating activities of the business.
Types of business transactions
 Cash transactions
Any business transaction which involves immediate payment or receipt
of cash is known as cash transactions.
 Credit transactions
Any business transaction which involves settlement of payment later is
known as credit transactions.
 Non cash transactions
Any transaction which does not involve any payment or receipt of cash
either immediately or later is called non-cash transactions.
Double entry system
Every business transactions should have two aspects on receiving
aspects called debit and one giving aspect called credit.
Debit
Receiving aspect of a transaction is called debit.
Credit
Giving aspect of a transaction is called credit.
Advantages/ Merits of double entry system
 It provide complete record of every transactions.
 It is a scientific system of accounting.
 It helpful in ascertaining financial position.
 Chances of frauds are minimized.
 It helps in preparing trail balance
 It is possible to judge progress of the business.
Account
An account is a summary of business transactions for a particular time.
Classification/ Types of accounts
 Real account
These are the accounts of assets or properties of the business
Examples; Furniture a/c, Cash a/c, Machinery a/c etc.
 Nominal account
These are the accounts related to income, gain, revenue, expenses,
losses etc.
Examples; Rent a/c, Salary a/c, Depreciation a/c etc.
 Personal account
These are the accounts relating to persons with whom business deals.
Accounting cycle/ Process
Starting from the transaction and ending with the preparation of
balance sheet is known as accounting cycle or process.
 Journalizing
 Posting
 Balancing
 Trail balance
 Trading and profit and loss account
 Balance sheet
Journal
Journal means daily record. It is the daily record of business
transactions in a chronological order.
Journalizing
The process of recording transactions in a journal is called journalizing
Journal entry
The record of each transaction in a journal is called journal entry.
Narration
A brief explanation of a transaction given in a bracket below the journal
entry in the particular column is called narration.
Steps in journalizing
1. Read transaction carefully and find out two accounts
2. Find out category of accounts (Real, nominal or personal)
3. Apply rule of debit and credit
4. Enter date of transaction in date column
5. In particular column write debit entry and next line credit entry
6. Give narration below the journal entry
7. Enter amount in debit and credit column
Objects of journal
 To simplify ledger
 To ensure observance of double entry system
 To helps in solving misunderstanding and disputes in business
 To provide adequate explanation of each entry
Ledger
Ledger means a book in which various accounts are kept.
Posting
The process of recording transactions from journal to ledger is called
posting.
Difference between journal and ledger
Journal Ledger
It is the primary entry It is the book of final entry
It is prepared on chronological It is prepared on analytical basis
order
The process of recording The process of recording
transactions in to journal is called transactions into ledger is called
journalizing posting
Special journals
The journal is subdivided into many subsidiary books called special
journals.
Advantages of special journals
1. Division of work
2. Specialization
3. Save in time
4. Facility in checking
5. Availability of information
Important special journals
Cash book- For recording all cash transactions.
Purchase book- For recording all credit purchases.
Sales book- For recording all credit sales.
Purchase return book- For record goods returne by trader to suppliers.
Sales return book- For record goods returned to trader by customers.
Bills receivable book- For recording all bills received by the trader.
Bills payable book- For recording all bills given to suppliers.
Trail balance
Trail balance is a statement showing various ledger balances on a
particular date.
Features of trail balance
 It is prepared on a specific date.
 It is not a part of double entry.
 It is not an account.
 Total debit and credit column of trail balance must be tally.
Objectives / Functions of trail balance
1. To ascertain arithmetical accuracy of ledger accounts
2. To helps in locating errors
3. To helps in preparation of final accounts
4. To helps in comparison
5. To serve as an aid to management in decision making
Methods for preparing trail balance
1. Total method
2. Balance method
3. Total and balance method
Module II (Final accounts of proprietary concern)
Final account
Final account means accounts which are prepared at the final stage to
give the financial positon of the business.
Trading account
Trading account are those account which is prepared to show the trade
results of the business. It may be gross profit or gross loss.
Profit and loss account
Profit and loss account are those account which is prepared to
ascertain net profit or net loss of the business for an accounting period.
Manufacturing account
Manufacturing account are those account which is prepared by
manufacturing concerns to ascertain cost of goods manufactured
during a period.
Balance sheet
Balance sheet is statement showing assets and liabilities of business on
a particular date. It reveal the financial position of the business. It is
also called position statement.
Outstanding expenses
Outstanding expenses are those expenses which remain unpaid at the
end of the accounting period.
Prepaid expenses
Expenses paid in advance or unexpired expenses are called prepaid
expenses.
Accrued income
Income earned but not received at the end of an accounting period is
called accrued income.
Depreciation
Decrease in the value of fixed assets due to obsolescence, wear and
tear, passage of time etc is called depreciation.
Partnership
Partnership is an agreement between two or more people to oversee
business operations and share its profit and losses.
Features of partnership
 Association of two or more person
 Agreement
 Lawful business
 Sharing of profits
 No separate legal existence
 Unlimited liability
Partnership deed
It is a written legal document that contains an agreement made
between two or more persons who have an intention of doing
partnership business.
Content of a partnership deed
 Name of the firm
 Nature of the partnership business
 Duration of the business
 Amount of capital contributed by each partners
 Profit sharing ratio
 Salary given to the partners
 Procedure for dissolution of partnership
 Valuation of goodwill
Profit and loss appropriation account
It is an account prepared by partnership firm to distribute the net profit
among the partners in accordance with the partnership deed.
Goodwill
Goodwill is the good name or reputation created by the company.
Methods for goodwill valuation
 Average profit method
 Super profit method
 Annuity method
 Capitalization method
Module III (Hire purchase and instalment system)
Hire purchase
It is a system of purchase under which the buyer enter into an
agreement with the seller to pay the price in installment.
Features of hire purchase agreement
1. It is a credit purchase.
2. Payment is made in installment.
3. Each instalment is treated as hire charges.
4. Goods transferred to the buyer on agreement.
5. Buyer get ownership after paying last installment.
Difference between hire purchase and sales
Hire purchase Sales
Ownership is transferred only Ownership is transferred at the
after last instalment payment. time of purchase
Payment of price is always made Payment of price is generally
in instalment. made in lump sum.
Buyer cannot dispose goods. Buyer can dispose goods in any
way.
Hire purchase instalment includes Immediate cash sales does not
interest. include interest.
Seller can take back in case of any In case of credit sales seller can
default in payment. sue buyer for the payment of the
outstanding.
Hirer
Hirer is the buyer of goods according to hire purchase agreement.
Hire vendor
Hire vendor is the owner or seller of goods according to hire purchase
agreement.
Cash price
Cash price means price at which goods can be purchased by the hirer
for ready cash.
Down payment
It is the initial payment made at the time of signing the hire purchase
agreement.
Hire purchase price
It is the total amount payable by the hirer to the hire vendor
Hire purchase charges
This is the difference between Hire purchase price and cash price.
Repossession
Under hire purchase agreement, hire vendor has the right to recover
goods if hire purchaser failed to pay installment. Such act is called
repossession.
Complete repossession
In this case hire vendor has the right to get back all the goods sold.
Partial repossession
In this case hire vendor does not repossess all the goods sold but take a
part of the goods with the hire purchaser.
Installment system
It is a system of sale in which the price of the article is paid installment
along with interest on unpaid balances.
Features of instalment payment system
1. It is a contract of sale.
2. Payment is made on instalment.
3. The buyer cannot return the goods.
4. Ownership is transferred to the buyer very beginning of the contract.
5. Buyer can transfer the goods.
6. Parties to the contract are called buyers and sellers
Difference between hire purchase and installment system
Hire purchase Instalment
It is an agreement of hiring. It is an agreement of sale.
Buyer is like a bailee. Buyer is not like a bailee.
Risk of bad debt is less. Risk of bad debt is more.
Buyer gets only possession of Buyer get both possession and
goods immediately. ownership of goods immediately.
Goods sold can be returned by Goods once sold cannot be
the buyer. returned by the buyer.
Buyer cannot hire out or sell Buyer can hire out or sell goods
goods before last instalment. before last instalment.
 Module IV (Branch accounts)
Branch
A branch is a subdivision of a large business. It is a chain of shops in
different localities under the control of head office.
Branch accounting
It is an accounting system in which separate accounts are kept for each
branch or operating location of an organisation.
Need or objectives of branch accounts
 To ascertain profit or loss
 To ascertain financial position
 To help in control branches
 To assess progress of each branches
 To ascertain requirement of stock for each branches
 To ascertain requirement of cash for each branches
 To ascertain quantity of stock held by each branch
Types of branches
1. Dependent branches
2. Independent branches
3. Foreign branches
1. Dependent branches
The branch which does not maintain a complete record of its
transaction is said to be dependent branches.
Characteristics of dependent branches
 They mainly sell goods supplied by the head office
 They sell goods for cash
 They do not maintain accounts. Maintain memorandum records.
 All major expenses are paid by the head office
 Cash collected transfer daily to the head office
Methods of maintaining accounts of dependent branches
a) Debtors system
b) Stock and debtors system
c) Final account system
d) Wholesale branch system
a) Debtors system
Under this method the head office prepares branch accounts for each
branches. Its purposes is to ascertain profit or loss made by each
branch.
b) Stock and debtors system
Under stock and debtors system instead of only one branch account,
several accounts relating to the transaction of a branch maintained in
the books of head office. It is also called analytical system.
2. Independent branches
Under this system of branch accounting branches are treated as
separate independent units. An independent branch receive goods
from head office.
Features of independent branches
 It maintains complete records under double entry system
 It prepare its own trail balance, P&L account and balance sheet
 It has its own bank accounts
 It receive goods from head office
 It does not transfer cash to head office
Goods in transit
Goods in transit is the difference between goods sent by the head
office and received by the branch.
Inter branch transfer
Goods or cash maybe sent by one branch on behalf of another or
expenses maybe incurred by one branch on behalf of another is called
inter branch transfer.
Invoice price
Invoice price is the initial price that the manufacturer charges the
dealer.
Branch stock account
Branch stock account are those account, which is prepared to have a
strict control over branch stock. It is always prepared at invoice price.
Branch adjustment account
Branch adjustment account are those account, which is prepared to
ascertain the gross profit of the branch.
Branch debtors account
Branch debtors account are those account, which is maintained when
the branch is allowed to sell goods on credit. This account is prepared
to ascertain closing balance of debtors or credit sales.
Branch profit and loss account
Branch profit and loss account are those account which is prepared to
find out net profit or net loss of the branch.
Goods sent to branch account
This account is credited with value of goods sent load on goods
returned and debited with goods returned to H.O and load on goods
sent to branch.
Module V (Issue of shares and debentures)
Company
According to Lord Justice “Company is an artificial person created by
law with a perpetual success and a common seal.”
Characteristics of a company
1. It is a voluntary association of persons.
2. It has a separate legal entity.
3. It has perpetual succession.
4. It is an artificial person created by law.
5. It has a common seal.
6. It is managed by board of directors.
7. Shares are freely transferable.
Share capital
The capital of a company is called share capital.
Share
The share capital of a company is divided in to small and equal units.
Each unit is called a share.
Shareholder
A person who buys a share is called shareholder or member of the
company.
Types of share capital
1. Registered Capital
The capital with which a company is registered is called registered
capital. It is also known as nominal or authorized capital.
2. Issued Capital
It is a part of authorized capital which is issued to the public for
subscription.
3. Subscribed Capital
It is a part of issued capital which is subscribed by the public.
4. Called up Capital
It is a part of subscribed capital which the directors have called from
the shareholders.
5. Paid up capital
It is a part of called up capital which is actually paid up by the
shareholders.
6. Reserve capital
It is the amount of the capital which is not called by the company
except in the event of winding up.
Difference between reserve capital and capital reserve
Reserve capital Capital Reserve
It is created out of uncalled capital. It is created out of capital
profit.
It is not compulsory. It is compulsory.
It is used only at the time of It is used at any time during
winding up. the life of the company.
It is not disclosed in the balance It is disclosed in the balance
sheet. sheet.
Special resolution is required. No special resolution is
required.
Kinds / Types of shares
1. Equity Share capital
2. Preference Share capital
Equity Share
Shares which are not preference shares are called equity shares. These
are ordinary shares.
Preference shares
Preference shares are those shares which carries preferential right with
respect to payment of dividend and repayment of capital.
Types of preference shares
1. Cumulative preference share.
2. Non-cumulative preference shares.
3. Participating preference shares.
4. Non-participating preference shares.
5. Convertible preference shares.
6. Non-convertible preference shares.
7. Redeemable preference shares.
8. Irredeemable preference shares.
Difference between equity shares and preference shares
Equity Shares Preference Shares
It is an ownership security. It is a hybrid security.
Dividend rate is not fixed. Dividend rate is fixed.
Nominal value is lower. Nominal value is higher.
Expenses on issue are lower. Expenses on issue are higher.
Dividend is paid last. Dividend is before paying equity
dividend.
Sweat equity shares
Sweat equity shares are those shares issued by the company to its
directors and employees at a discount or for consideration other than
cash for providing know how or making available rights in the nature of
intellectual property rights or value additions.
Employees Stock Option Scheme (ESOS)
Under this scheme, the company grands an option to the employees to
acquire shares at a future date with predetermined price.
Objectives of ESOS
1. To develop the feeling of participation among employees.
2. To attract efficient and skilled employees of the company.
3. To motivate efficient and skilled employees of the company.
4. To encourage to serve the company.
5. To provide long term resources to the employees.
Stock
A set of shares put together in a bundle is called stock.
Difference between Shares and Stock
Shares Stock
It has nominal value It has no nominal value
It has distinctive numbers It has no such number
It is partly or fully paid up It is always fully paid up
It can be issued directly It cannot be issued directly
It transferred in multiple of one It transferred in fractions
Raising of capital/ Issue of shares
1. Private placement
2. Right issue
3. Public offer
1. Private placement
Private placement is the issue of securities of a company direct to one
investor or small group of investors.
2. Right issue
It is an issue of shares to the existing shareholders in proportion to their
existing shareholding.
3. Public issue
Public issue means selling of shares or securities to public by issue of
prospectus.
Types of public issue
a) Initial public offer (IPO)
This is a method of raising securities in which a company sells shares or
stocks to general public for first time.
b) Offer for sales
In this method shares are offered to public through the intermediaries.
Procedure for issuing new shares
1. Approval and filing of prospectus.
2. Issue of prospectus.
3. Receiving of application.
4. Scrutiny of application.
5. Sorting of application.
6. Closure of application list.
7. Record of application.
Terms of issue of shares
1. Issue of shares at par
When shares are issued at a price equal to their face value is called
issue of shares at par.
2. Issue of shares at premium
When shares are issued at a price higher than their face value is called
issue of shares at premium.
3. Issue of shares at discount
When shares are issued at a price lower than their face value is called
issue of shares at discount.
Minimum subscription
It is the minimum amount of capital fixed by the directors to be raised
from the members by way of subscription.
Under subscription
Sometimes, the application for shares will be less than the number of
shares issued. This is called under subscription of shares.
Over subscription
Sometimes, the application for shares will be more than the number of
shares issued, this is called over subscription of shares.
Calls in arrears
Some shareholders may fail to pay allotment money or call money. The
unpaid allotment or call money is called calls in arrears.
Calls in advance
Amount received by a company before calls are made is called calls in
advance
Difference between calls in arrears and calls in advance
Calls in arrears Calls in advance
It is the amount called up by the It is the amount not called up by
company. the company.
It shows a debit balance. It shows a credit balance.
It is the amount due to the It is the amount due from the
company from the shareholders. company to the shareholders.
The maximum rate of interest is The maximum rate of interest is
10% p.a. 12% p.a.
It is the liability of the It is the liability of the company.
shareholders.
Forfeiture of shares
It means cancellation of shares due to non-payment of allotment
money or call money within a specified period.
Procedure of forfeiture of shares
1. Memorandum to each defaulter.
2. List of defaulters.
3. Notice to the defaulters.
4. Resolution for forfeitures.
5. Information of forfeitures.
6. Removal of names.
7. Transfer of forfeited amount.
Pro rata allotment
It refers to the allotment of shares in proportion of the shares applied
for.
 Annulment of forfeiture
The cancellation of forfeited shares is known as annulment of
forfeiture.
Surrender of shares
The voluntary return of shares to the company by the shareholder is
called surrender of shares.
Difference between and forfeiture and surrender of shares
Forfeiture of shares Surrender of shares
It is made by the company. It is made by the shareholders.
It is carried out by directors. It is depend on the shareholders will.
When the shareholders fail to pay Not compulsory.
allotment or call money, then
forfeiture compulsory.
The directors forfeit the share of The shares are returned to the
shareholders. company by the shareholders.
Forfeiture rules are mentioned in No rules are mentioned in table A.
table A.
Lien on shares
Lien on shares means that the member would not be permitted to
transfer his shares unless he pays debt to the company.
Security premium reserve
It is the additional amount charged on the face value of any shares
when the shares are issued, redeemed, and forfeited.
Bonus shares
Bonus shares are those shares which are issued by a company free of
Cost to the existing shareholders of a company.
Advantages of Bonus shares
A) To the shareholders
1. Shareholders get additional shares for free
2. Not required to pay income tax on bonus shares
3. Shareholders will get increased dividend in future
4. When market price of shares increases shareholders can earn
more profit.
B) To the company
1. It does not affect working capital of the company.
2. The cost of issue of bonus shares are less.
3. It increases goodwill of the company.
4. No tax payment related to bonus shares.
Disadvantages of Bonus shares
A) To the share holders
1. It encourages speculation.
2. Market value of shares sometimes fall
3. Sometimes dividend per shares reduced.
4. EPS will fall.
B) To the company
1. It encourages undesirable speculation.
2. It reduces accumulated profits earned in past years.
3. Company's reputation may suffer.
4. Some expenses like stamp duty, printing etc. will incurred.
SEBI guidelines for issue of bonus shares
1. Reserves created by revaluation of fixed assets are not capitalized
2. Company has not defaulted in payment of interest or principle of
fixed deposits.
3. Approval of board of directors is must.
4. The bonus shares shall not be issued in lieu of dividend.
5. Once bonus issue announced, it cannot be withdrawn
Conditions for issue of bonus shares
1. It should be authorized by articles.
2. Approval of Board of directors.
3. Company should have sufficient profit and reserves.
4. It must follow SEBI guidelines.
Sources of bonus shares
Revenue reserve/Profit Capital Reserve/profit
Credit balance in P&L A/c. Profit on sale of fixed asset.
General Reserve. Profit prior to incorporation.
Dividend equalisation reserve. Security premium reserve.
Capital redemption reserve.
Stock split
Stock split is the process of reducing the face value of shares of a
Company by dividing one share into two or more parts.
Difference between Bonus shares and Stock Split
Bonus shares Stock split
Face value of shares does not The face value of shares is
change reduced.
It reduces reserves. Reserves remain as before.
It increases total number of Paid up capital does not change
shares. with stock split.
It is issued when the company has It is generally split when it has a
large accumulated reserves. high price.
Right shares/ Right issue
When a company offer additional shares to the existing shareholders
for a reduced price is called right issue.
Advantages of right issue
1. Issue cost is lower.
2. It improves the image of the company.
3. Issue made at the directions of directors.
4. Existing shareholders get additional shares.
Value of right
It is a gain an existing shareholders makes while exercising his rights.
Distinction between Bonus Shares and Right Shares
Bonus shares Right shares
Bonus shares are issued existing Right shares are issue against
members free of cost. payment.
Bonus shares are always fully Right shares may be fully paid or
paid. partly paid.
There is no requirement of Right is subject to minimum
minimum subscription. subscription.
 Bonus issue must be authorised For the right issue, specific
by the Articles. provision in the Articles is not
required.
Bonus issue increases share Right issue increases share
capital but reduces accumulated capital with simultaneous
profits without any increase in increase in cash (no effect on
cash. accumulated profits).
It is regulated by Section 63 of It is regulated by Section 62 of
the Companies Act, 2013. the Companies Act, 2013.
Debenture
Debenture is an acknowledgement of debt issued by a company under
its common seal.
Bond
It is a fixed obligation to pay that is issued by a corporation or
government entity to investors.
Difference between bond and debenture
Bond Debenture
It is issued without predetermined It is issued at predetermined rate
rate of interest. of interest.
It is issued at maximum discount. It is issued at lesser discount.
Bonds are less risky. Debentures are at high risk.
It is secured by collateral. It is not secured by collateral.
It is mostly issued by government. It is mostly issued by private
companies.
Charge
It simply refers to mortgage. There are two types of charge- fixed
charge and floating charge.
Nature of debentures
1. It is a debt instrument
2. It represents loan capital
3. It carries fixed rate of interest.
4. It carries no voting right.
 5. It is a long-term finance.
6. It is generally secured.
7. It is issued under a common seal of the company.
Difference between shares and debentures
Shares Debentures
Owned capital Borrowed capital
Dividend is paid on shares. Interest is paid on debentures.
The rate of dividend varies The rate of dividend is fixed.
Unsecured Secured
Shareholder enjoy voting rights Debenture holder has no voting
right
Shareholder is proprietor. Debenture holder is creditor.
Shares cannot be issued at discount. Debentures can be issued at
discount.
Kinds of debentures (Classification)
A. On the basis of registration
Registered Debenture Bearer Debenture
When the name of debenture These debentures do not have
holder is mentioned on the any name on the certificate and
debenture certificate is called are negotiable instrument.
registered debenture.
B. On the basis of security
Secured Debenture Unsecured Debenture
These debentures are secured by These debentures are not secured
the assets of the company. Also on any assets. Also known as
called mortgage debenture. naked debentures.
C. On the basis of redemption
Redeemable Debenture Irredeemable Debenture
These debentures are repayable These are not redeemable during
after a fixed period. the lifetime of the company.
D. On the basis of convertibility
Convertible Debenture Non-convertible Debenture
 These debentures are convertible These debentures do not give any
into shares within or after a options to convert into shares.
certain period.
Debentures with Pari passu clause
This means all debentures of a particular series to be paid ratably and
proportionately in case of short fall.
Issue of debentures
From consideration point of view
 Issued for cash
 Issued for consideration other than cash
 Issued as collateral security
From price point of view
 Issued at par
 Issued at premium
 Issued at discount
Terms of issue of debentures
1. Issue of debentures at par
When debentures are issued at a price equal to their face value is called
issue of debentures at par.
2. Issue of debentures at premium
When debentures are issued at a price higher than their face value is
called issue of debentures at premium.
3. Issue of debentures at discount
When debentures are issued at a price lower than their face value is
called issue of debentures at discount.
Collateral security
It means additional or secondary security in addition to the main or
principal security.
Redemption of debentures
It simply refers to repayment of debentures to the debenture holders.
Issue of debentures and conditions of redemption
1. Issued at par and redeemable at par
2. Issued at premium and redeemable at par
3. Issued at discount and redeemable at par
4. Issued at premium and redeemable at premium
5. Issued at premium and redeemable at premium
6. Issued at discount and redeemable at premium

PREPARED BY
JUBAIR MAJEED

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