Issue of Debentures: Accounting Treatment of Issue of Debenture and Presentation of debentures in balance sheet (with format)
What is a Debenture?
A written instrument or document which is issued by the company acknowledging the borrowings is known as Debenture. In this document, the terms of repayment of principal and payment of interest at a specific rate are stated.
According to Section 2(30) of the Companies Act, 2013,”Debenture includes debenture stock, bonds and any other instrument of the company evidencing a debt, whether constituting a charge on the assets of the company or not.”
According to Topham,” A debenture is a document given by a company as evidence of a debt to the holder usually arising out of a loan and most commonly secured by a charge.”
The person to whom debentures are issued is called Debentureholder.
Characteristics of Debenture:
The characteristics of debentures are as follows:
- A debenture is a certificate or written document, which is an acknowledgement of debt taken by a company.
- It is borrowing of a company.
- It is issued under the seal of a company.
- Interests on Debentures is a charge against profit.
- It contains a contract for the repayment of the principal sum at a specified date.
- The funds raised by the issue of debentures are for a long period of time, such as 7 years, 10 years, or 12 years, and the loan raised by the issue of debentures is also called ‘Loan Capital’.
Issue of Debentures:
A listed company can go for the issue of debentures for public subscription, but an unlisted company cannot issue debentures to the public in general. However, by private placement, both listed and unlisted companies may issue debentures. The accounting entries and procedures for issuing debentures are similar to that for the issue of shares. Debentures may be issued for cash; consideration other than cash; and as collateral security.
Debentures may be issued at par; premium; or at discount whether issued for cash or consideration other than cash.
Accounting Treatment of Issue of Debenture:
The journal entries passed for issuing debentures are the same as in the case of shares. Only ‘Debenture A/c’ is used in place of ‘Share Capital A/c’. The rate of interest is usually pre-fixed with Debenture A/c.
1. On receipt of application money:
2. On transfer of application money to Debenture A/c:
3. On allotment due:
4. On receipt of allotment money:
5. On due of call money:
6. On receipt of call money:
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