Meaning of Writing off Discount :
The loss or discount on issue of debentures is typically a capital loss or a fictitious asset and, hence, has to be written-off during the debentures’ lifetime. The amount of loss or discount on issue of debentures has to be not be written-off during the year of issue since, the benefit of the debentures would accumulate to the enterprise till their restitution or redemption. The loss or discount, hence, considered as a capital loss. The discount might be charged to either Securities Premium A/c or might be written-off over 3 to 5 years via statement of Profit and Loss as per guidance circulated by ICAI (The Institute of Chartered Accountants of India). If there are no capital profits or if the capital profits are insufficient, the amount of such loss or discount can be written-off against the revenue profits each year by passing the below mentioned journal entry :
Statement of Profit and Loss Dr.
To Discount/Loss on Issue of Debentures A/c
(Discount/loss on issue of debentures written-off)
There are 2 procedures, which can be accepted to write off loss or discount on issue of debentures against the revenue profits. They are as follows :
- Fixed Instalment Method: When the debentures are recovered during the end of a particular period, the amount of the discount must be written off in equivalent instalments of fixed amount over that time frame.
- Fluctuating Instalment Method: When debentures are paid back in instalments or by annual drawings, the discount must be written-off in the ratio of debentures that is outstanding as during the closure of each accounting financial year. The amount of the discount, goes on reducing year, under this method. Hence, this method is referred to as Reducing Instalment Method.
The above mentioned is the concept, that is elucidated in detail about the Writing off Discount/Loss on Issue of Debentures for the class 12 Commerce students. To know more, stay tuned to BYJU’S.