State the meaning of 'Debentures issued as a collateral security'.

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Q. State the meaning of 'Debentures issued as a collateral security'.

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Concept understanding — Debenture Definition

Debentures: The Company's Way of Borrowing Money

Think of a debenture like this: you need ₹5,00,000 to expand your business. Instead of asking a bank for a loan, you go to the public and say, "Lend me money, and I'll pay you interest every year. After 5 years, I'll return your full amount." Each person who lends you money gets a certificate — that certificate is a debenture.

The Precise Meaning

A debenture is a written instrument issued by a company under its common seal, acknowledging a debt. It contains a promise to repay the borrowed amount at a specified date (maturity) and to pay interest at a fixed rate at regular intervals (usually half-yearly or yearly).

Note

A debenture holder is a creditor of the company, not an owner. They have no voting rights and no share in profits — only a fixed interest payment.

Why Debentures Matter

Companies issue debentures because:

They raise large funds without diluting ownership (unlike shares)
Interest paid on debentures is a tax-deductible expense (reduces taxable profit)
Debentures are safer for investors than shares (fixed return, priority in repayment)

For investors, debentures offer:

Fixed, predictable income
Higher safety than equity shares
Priority over shareholders if the company is liquidated

Accounting Treatment

When a company issues debentures, the journal entry is:

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	[Amount received]
To Debentures A/c		[Face value]
To Securities Premium Reserve A/c (if issued at premium)		[Premium amount]
(Being debentures issued at premium)

Key points:

Debit Bank A/c with the actual amount received
Credit Debentures A/c with the face value (nominal value)
If issued at a premium (e.g., ₹100 debenture issued for ₹110), credit the extra ₹10 to Securities Premium Reserve A/c
If issued at a discount (e.g., ₹100 debenture issued for ₹95), debit the discount to Discount on Issue of Debentures A/c (a fictitious asset written off over the debenture's life)

Watch out

Never confuse debentures with shares. Debentures are liabilities (shown under "Non-Current Liabilities" in the Balance Sheet), while shares are equity (shown under "Shareholders' Funds").

Interest on Debentures

Interest is calculated as:

Interest = Face Value of Debentures × Rate of Interest × Time Period

For example, if a company issues ₹10,00,000 worth of 9% debentures, the annual interest is:

₹10,00,000 × 9% = ₹90,000 per year

The journal entry for interest payment:

Particulars	Debit (₹)	Credit (₹)
Debenture Interest A/c Dr.	[Gross interest]
To Bank A/c		[Net interest paid]
To TDS Payable A/c		[Tax deducted at source]
(Being interest paid on debentures after deducting TDS)

At the end of the year, Debenture Interest A/c is closed by transferring to the Statement of Profit and Loss (as a finance cost).

Format in the Balance Sheet

As per NCERT Class 12 Accountancy, debentures appear under:

EQUITY AND LIABILITIES

Shareholders' Funds
Non-Current Liabilities
- Long-term borrowings
  - Debentures
Current Liabilities

Important

Debentures are always shown at their face value in the Balance Sheet, regardless of whether they were issued at a premium or discount. The premium or discount is shown separately.

The Big Picture

Debentures are the company's IOU — a formal promise to repay borrowed money with interest. They give the company funds without giving away control, and they give investors a safe, fixed-income investment. In accounting, they are treated as long-term liabilities, with interest treated as an expense in the Profit and Loss statement.

Meaning of 'Debentures Issued as a Collateral Security'

When a company borrows money (say, from a bank) and offers its debentures as additional security over and above the primary security (like land or building), those debentures are said to be issued as collateral security.

The key point: the lender does not become a debenture holder in the usual sense. The debentures are held only as a backup. If the company repays the loan on time, the debentures are returned. If the company defaults, the lender can exercise the right to sell those debentures or convert them into ownership to recover the loan amount.

Note

No cash is received for these debentures — they are issued purely as a security cover. The borrower (company) does not record the receipt of any money from the lender for these debentures.

Accounting Treatment

There are two methods. The most common and exam-relevant method is the Contra Entry Method:

At the time of issue: The face value of the debentures is debited to a "Debentures Suspense Account" (or "Debentures Issued as Collateral Security Account") and credited to "Debentures Account".
At the time of repayment of loan: The entry is reversed.

Journal Entry (Contra Entry Method):

Particulars	Debit (₹)	Credit (₹)
Debentures Suspense A/c Dr.	1,00,000
To Debentures A/c		1,00,000
(Being debentures of ₹1,00,000 issued as collateral security for a bank loan)

Watch out

A common mistake is to credit "Bank A/c" here. No cash is received, so Bank is never credited. The credit is always to "Debentures A/c".

Presentation in the Balance Sheet

The Debentures Suspense Account is shown as a negative figure (deducted) from the Debentures head under "Non-Current Liabilities" (or "Long-Term Borrowings").

Extract of Balance Sheet (as at ...)

Particulars	Note No.	Amount (₹)
EQUITY AND LIABILITIES
1. Shareholders' Funds
2. Non-Current Liabilities
Long-Term Borrowings
Debentures		1,00,000
Less: Debentures Suspense A/c		(1,00,000)
Net Debentures		Nil

✓Final answer

Debentures issued as collateral security are debentures given as a backup security for a loan, with no cash received, and are recorded via a contra entry (Debentures Suspense A/c Dr. to Debentures A/c) showing a net nil liability in the balance sheet.

Debentures issued as a collateral security are a secondary or additional security given by a company to a lender (usually a bank or financial institution) to secure a loan or overdraft. The lender holds these debentures as a guarantee; if the company defaults on the loan, the lender can sell the debentures to recover the amount. The company does not receive any cash for these debentures, and they are not issued to the public for subscription.

Concept and Accounting Treatment

When a company takes a loan from a bank, the bank often demands security. The company may pledge its assets (like land, building, or machinery) as a primary security. However, sometimes the primary security is insufficient, or the bank requires an additional cushion. In such cases, the company issues its own debentures to the lender as a collateral security — meaning a "backup" or "secondary" security.

The key point is: the company does not receive any money for these debentures. They are not sold to investors; they are simply handed over to the lender as a guarantee. If the company repays the loan on time, the debentures are returned to the company. If the company defaults, the lender can sell those debentures in the market to recover the loan amount.

Accounting Rule

Since no cash comes in, and the debentures are not a genuine liability to the public, the accounting treatment is unique. The company must disclose this arrangement in its books, but it does not record the debentures as a regular liability. Instead, the standard practice (as per the Companies Act and accounting principles) is:

Debit the "Debentures Suspense Account" (or "Debentures Issued as Collateral Security Account") — this represents the face value of the debentures given as security.
Credit the "Debentures Account" — to show that the company has issued these debentures (even though they are not with the public).

Alternatively, some companies prefer to show a note in the balance sheet without passing a journal entry. But the most common and exam-friendly method is to pass the following entry:

Journal Entry: Date Particulars L.F. Debit (₹) Credit (₹) Debentures Suspense A/c Dr. [Face Value] To Debentures A/c [Face Value] (Being debentures issued as collateral security to Bank against loan)

Why This Treatment?

Debentures Suspense A/c (Dr.): This is a fictitious asset or a miscellaneous expenditure account. It represents the value of the security given. It is shown on the assets side of the balance sheet under "Other Non-Current Assets" or "Miscellaneous Expenditure" (depending on the accounting standard). It is not a real asset; it's just a placeholder.
Debentures A/c (Cr.): This is a liability account. Even though the debentures are not with the public, the company has a legal obligation to honour them if the lender exercises the right. So, the liability is recorded.

Disclosure in Balance Sheet

On the Liabilities side, the Debentures Account will appear under "Non-Current Liabilities" — but a note will clarify that these debentures are issued as collateral security. On the Assets side, the Debentures Suspense Account will appear as a separate item.

Watch out

Common Mistake: Students often think that issuing debentures as collateral security means the company receives cash. No cash is received. Also, do not confuse this with "issue of debentures for cash" or "issue of debentures as consideration for purchase of assets." This is purely a security arrangement.

Tip

Shortcut: Think of it as a "pledge" of debentures. The company gives its own IOUs (debentures) to the bank as a guarantee. The bank holds them, but the company still owns them (until default). So, the company records both an asset (the right to get them back) and a liability (the obligation to honour them if the bank sells them).

Example for Clarity

Suppose XYZ Ltd. takes a loan of ₹5,00,000 from a bank. The bank asks for collateral security. XYZ Ltd. issues 5,000 debentures of ₹100 each (face value ₹5,00,000) as collateral security.

Journal Entry:

Particulars	Debit (₹)	Credit (₹)
Debentures Suspense A/c Dr.	5,00,000
To Debentures A/c		5,00,000
(Being 5,000 debentures of ₹100 each issued as collateral security to Bank against loan)

Balance Sheet Extract:

Liabilities	Amount (₹)	Assets	Amount (₹)
Non-Current Liabilities		Non-Current Assets
Debentures (issued as collateral security)	5,00,000	Debentures Suspense A/c	5,00,000

Note

The loan itself is recorded separately (Bank Loan A/c Cr. and Bank A/c Dr.). The debentures entry is only for the collateral.

When the Loan is Repaid

When the company repays the loan, the debentures are returned. The entry is reversed:

Particulars	Debit (₹)	Credit (₹)
Debentures A/c Dr.	5,00,000
To Debentures Suspense A/c		5,00,000
(Being debentures returned by bank on repayment of loan)

If the Company Defaults

If the company defaults, the bank sells the debentures. The company then must treat the debentures as a genuine liability to the buyer. The entry would be:

Particulars	Debit (₹)	Credit (₹)
Debentures A/c Dr.	5,00,000
To Debentures Suspense A/c		5,00,000
(Being debentures transferred to regular liability on default)

And the loan liability is settled by the sale proceeds.

✓Final answer

Debentures issued as a collateral security means a company gives its own debentures to a lender (like a bank) as a secondary guarantee for a loan, without receiving any cash. The company records this by debiting a Debentures Suspense Account (shown as an asset) and crediting the Debentures Account (shown as a liability). The debentures are returned when the loan is repaid, or sold by the lender if the company defaults.

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Q.State the meaning of 'Debentures issued as a collateral security'.

Concept and Accounting Treatment

Accounting Rule

Why This Treatment?

Disclosure in Balance Sheet

Example for Clarity

When the Loan is Repaid

If the Company Defaults

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