Q.Describe the meaning of 'Debenture Issued as Collateral Securities'. What accounting treatment is given to the issue of debentures in the books of accounts?

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).

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:

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)

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:

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

1. Shareholders' Funds
2. Non-Current Liabilities
   • Long-term borrowings
     • Debentures
3. Current Liabilities

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.