Debentures in Accounting

A debenture is a document that acknowledges the debt. Debentures in accounting represent the medium to long term instrument of debt that the large companies use to borrow money. The term debenture is used interchangeably with terms bond, note, or loan stock.

The company issues the debentures under the seal of the company. The document of debenture contains the information regarding the rate of interest, repayment amount, and also the time when the company has to repay the debenture. The company can issue various types of debentures. They can be convertible or non-convertible, redeemable or non-redeemable, etc.

The transactions related to the debentures are very important for the company. Therefore, the company records these transactions in the books of the company. In this article, we will discuss the treatment of debentures in accounting.

There are two things that we need to keep in mind while treating debentures in accounting

  • Issue of debentures
  • Terms of issue of debentures

Issue of debentures

There are three methods for issuing debentures

  • Issue of debenture for cash
  • Issue of debenture for consideration other than cash
  • Issue of debentures as collateral security

Accounting for Debentures

Now, let us see the treatment of these methods

Issue of Debentures for Cash

The company can issue debentures at par, premium, or discount at the time of their issue. The amount that is due on the debenture can be paid in installments, for instance, Application, Allotments, and Calls. When the company issues the debenture at a premium, the amount of premium is credited to Debenture Premium Account which is a capital profit. Further, the company transfers the amount of Debenture premium Account to the capital reserve account.

In the same way, when the company issue debenture at discount the amount is debited to the discount on issue of debentures account. The amount is shown on the asset side of the balance sheet, under the head miscellaneous expenses, until written off.

Journal entries

Debentures Issue at Par
On receipt of application money

Bank A/c Dr.

To Debenture Application A/c

On allotment of debentures

Debentures Application A/c Dr

To Debenture A/c

On making allotment or call

Debenture Allotment/Call A/c Dr

To Debenture A/c

On receipt of money

Bank A/c Dr

To Debenture Allotment/Call A/c

Debenture issue at a premium

Debentures are issued at a premium means that the value of the debenture issued is more than its face value.

Generally, the premium is collected at the time of allotment, other entries remain the same. Therefore, the entry relating to the allotment will change. The new entry will be

When allotment money is due

Debenture Allotment A/c Dr

To Debenture A/c

To Debenture Premium A/c

When money received

Bank A/c

To Debenture Allotment A/c

Debenture issue at a discount

The debenture is issued at a discount when the amount of debenture received is less than its face value.

The discount on debenture is allowed at the time of allotment. Other entries remaining same the new allotment entry is

When allotment money is due

Debenture Allotment A/c Dr

Discount on Issue of Debenture A/c Dr

To Debenture A/c

When money is received

Bank A/c Dr

To Debenture Allotment A/c

Issue of debentures for consideration other than money

Sometimes the company issues the debentures to vendors for assets. The company purchases the assets from the vendor and issues the debentures as payment of purchase consideration.

The entries for this are as follows

For purchasing assets

Assets A/c Dr

To Vendors A/c

For the issue of debentures for consideration other than cash

Vendor A/c Dr

To Debenture A/c

Issue of debentures as collateral security

A company sometimes issue debentures to serve as the collateral security for a loan or for bank overdrafts. The collateral security comes into force only when the principal security fails to pay the given loan. When the loan is paid, such debentures revert back to the company.

We can deal with the issue of debentures as collateral security in the following two ways

No journal entry

The company does not make any journal entry in its books of accounts regarding the issue of debentures. Therefore, the only transaction that the company will record in its books will be of loan against which the company issues these debentures. These loans will be shown as a liability.

Bank A/c Dr

To Loan A/c

When  the company passes a journal entry  in its books

On taking loan

Bank A/c Dr

To Bank Loan A/c

On the issue of debentures as collateral security

Debenture Suspense A/c Dr

To Debentures A/c

Terms of issue of debenture

The company can issue the debentures at par, premium, and discount. Further, the company can also redeem or repay the debentures at par, premium or discount. The company specifies the terms of redemption when the debentures are first issued.

There are six different scenarios of the term of issue of debentures. The entries passed for issue of debentures for these different scenarios are:

Debentures issue at par and redeemable at par

Bank A/c Dr

To Debenture A/c

Debentures issue at par and redeemable at premium

Bank A/c Dr

Loss on Issue of Debenture A/c Dr

To Debenture A/c

To Premium on Redemption of Debenture A/c

Debentures issue at premium and redeemable at par

Bank A/c Dr

To Debenture A/c

To Premium on Issue of Debenture A/c

Debentures issue at premium and redeemable at premium

Bank A/c Dr

Loss on Issue of Debenture A/c Dr

To Debenture A/c

To Premium on Issue of Debenture A/c

To Premium on Redemption of Debenture A/c

Debentures issue at discount and redeemable at par

Bank A/c Dr

Discount on Issue of Debenture A/c Dr

To Debenture A/c

Debentures issue at discount and redeemable at premium

Bank A/c Dr

Discount on Issue of Debenture A/c Dr

Loss on Issue of Debenture A/c

To Debenture A/c

To Premium on Redemption of Debenture A/c

Last updated on : August 19th, 2019
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