Accountancy · Ch 7 — Company Accounts
Interest on Debentures and Writing Off Discount on Issue
Interest on Debentures and Writing Off Discount on Issue
Interest on debentures is a fixed, contractual charge against profit — it must be paid to debenture holders whether or not the company has earned a profit in the year, unlike a dividend, which can be paid only out of profit and is at the Board's discretion. Interest is usually paid half-yearly, and the paying company must deduct income tax at source (TDS) on the interest (where applicable) before remitting the net amount to the debenture holders, separately depositing the tax deducted with the government.
Typical entries for interest on debentures
Debenture Interest A/c Dr. (gross interest for the period)
To Debentureholders A/c (net amount payable)
To Income Tax Payable/TDS A/c (tax deducted at source)
Debentureholders A/c Dr. — To Bank A/c (payment to holders)
Income Tax Payable A/c Dr. — To Bank A/c (tax remitted to the government)
At the year-end: Statement of Profit and Loss A/c Dr. — To Debenture Interest A/c (transferring the full year's interest, since it is a charge against profit, not an appropriation of it) …
A fixed periodic payment owed to debenture holders regardless of whether the company earns a profit; it is a charge against profit, unlike dividend which is …
Income tax the company must deduct from the gross interest payable to debenture holders and remit separately to the government, paying only the …