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).
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:
| Date | Particulars | L.F. | 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)
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:
| Date | Particulars | L.F. | 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
- Current Liabilities
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.