Accountancy · Ch 6 — Issue and Redemption of Debentures
Accounting Treatment
Accounting Treatment
Interest on debentures is not a distribution of profit — it is a charge against profit. That means the company must pay it regardless of whether it has earned a profit or incurred a loss. The rate of interest is always calculated on the nominal (face) value of the debentures, not on the issue price. For example, if ₹1,00,000 of 10% debentures are issued at a discount, the interest is still 10% of ₹1,00,000 = ₹10,000 per year.
Under the Income Tax Act, 1961, the company is required to deduct income tax at a prescribed rate from the interest payable to debentureholders, provided the interest amount exceeds the prescribed limit. This deducted amount is called Tax Deducted at Source (TDS). The company deposits this TDS with the government, and the debentureholder can later adjust it against their own tax liability.
Journal Entries for Interest on Debentures
Four distinct journal entries are needed in the accounting cycle for debenture interest:
1. When interest becomes due
The company recognises the interest expense, the amount payable to debentureholders (net of tax), and the liability for TDS.
Debenture Interest A/c Dr. (Gross interest for the period)
To Income Tax Payable A/c (Tax deducted at source)
To Debentureholders A/c (Net interest payable)
2. When interest is paid to debentureholders
Debentureholders A/c Dr.
To Bank A/c
3. Transfer of debenture interest to Statement of Profit and Loss
At the end of the accounting period, the debenture interest account is closed by transferring its balance to the debit side of the Statement of Profit and Loss.
Statement of Profit and Loss Dr.
To Debenture Interest A/c
4. Payment of TDS to the government
Income Tax Payable A/c Dr.
To Bank A/c
Key Points to Remember
- Interest is always calculated on the face value of debentures, regardless of the issue price (par, discount, or premium).
- TDS is deducted at the time interest becomes due, not at the time of payment.
- The Debenture Interest account is a nominal account — it is closed by transfer to the Statement of Profit and Loss at the end of the year. …