What is meant by a Debenture?

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Q. What is meant by a Debenture?

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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.

A debenture is a written instrument issued by a company under its common seal, acknowledging a debt and containing a promise to repay the principal amount on a specified date (or in installments) along with a fixed rate of interest at regular intervals. It is essentially a loan certificate issued to the public.

Unlike shareholders, debenture holders are creditors of the company, not owners. They do not have voting rights, and the interest paid on debentures is a charge against the company’s profits (deducted before arriving at net profit). Debentures are generally secured against the company’s assets, though unsecured (or "naked") debentures also exist.

The key features are summarised below:

Feature	Description
Nature	Loan capital / borrowed funds
Return	Fixed interest (payable even if no profit)
Repayment	At a fixed future date (or in tranches)
Security	Usually secured by a charge on assets
Voting Rights	None
Status	Creditors (prior claim over shareholders)

✓Final answer

A debenture is a formal debt instrument issued by a company that acknowledges a loan from the holder, promising repayment of the principal at a fixed date and payment of a fixed interest.

A debenture is a written instrument issued by a company acknowledging a debt and containing a promise to repay the principal amount along with a fixed rate of interest at a specified date.

Concept and Accounting Treatment

A debenture is a formal certificate of debt issued by a company under its common seal. When a company needs long-term funds but does not want to dilute ownership (by issuing shares), it borrows money from the public by issuing debentures. The debenture holder is a creditor of the company, not an owner. This is the fundamental distinction from a shareholder.

The key features that define a debenture are:

It carries a fixed rate of interest (called the coupon rate), which is a charge against the company's profits — meaning interest must be paid whether the company earns profit or not.
It has a specified maturity date (redemption date) when the principal is repaid.
It is usually secured against the company's assets (though unsecured debentures also exist).

Accounting Treatment:

When debentures are issued, the company receives cash and creates a liability. The journal entry is:

Debit Bank Account (asset increases)
Credit Debentures Account (liability increases)

Interest on debentures is treated as a charge against profit, not an appropriation. This means it is deducted from the company's profit before calculating net profit or distributing dividends. The entry for interest is:

Debit Debenture Interest Account (expense)
Credit Bank Account (or Debentureholders' Account if unpaid)

At the end of the year, the Debenture Interest Account is closed by transferring it to the Profit and Loss Account (debit side).

Watch out

A common mistake is to treat debenture interest like dividend — as an appropriation of profit. Remember: interest on debentures is a charge, not an appropriation. It must be paid even if the company suffers a loss. Dividends are paid only out of profits.

Tip

Think of a debenture as a company's "IOU" — it's a loan taken from the public, with a fixed interest rate and a promise to repay. The company is the borrower; the debenture holder is the lender.

Solution

Since the question only asks "What is meant by a Debenture?" and does not provide any specific figures or scenario, no journal entries, ledger accounts, or working notes are required. The definition and explanation above constitute the complete answer.

✓Final answer

A debenture is a written instrument issued by a company under its common seal acknowledging a debt, with a promise to repay the principal amount at a specified date and to pay a fixed rate of interest periodically. The debenture holder is a creditor of the company, not an owner.

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Q.What is meant by a Debenture?

Concept and Accounting Treatment

Solution

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