In the realm of accountancy, the issue of debentures is a significant topic, especially for companies looking to raise long-term capital. Debentures are a type of debt instrument that companies use to borrow money from the public. This study note will delve into the concept of debentures, their types, the process of issuing debentures, accounting treatment, and other related aspects as per the CBSE syllabus.
A debenture is a medium to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest. Unlike other securities, debentures are not backed by physical assets or collateral.
Note
Debentures are a form of debt and should not be confused with shares, which represent ownership in a company.
Debentures can be classified based on various criteria:
Example
A company issues 1,000 debentures of $₹100$ each at a 10% interest rate, repayable after 5 years. These debentures are secured by the company's assets.
The process of issuing debentures involves several steps:
The accounting treatment for the issue of debentures varies based on their terms of issue:
When debentures are issued at par, the issue price is equal to the face value.
$$ \text{Bank A/c} \quad \text{Dr.} \quad \text{(Issue Price)} \ \quad \text{To Debentures A/c} \quad \text{(Face Value)} $$
Example
A company issues 1,000 debentures of $₹100$ each at par.
$$ \text{Bank A/c} \quad \text{Dr.} \quad ₹100,000 \ \quad \text{To 10% Debentures A/c} \quad ₹100,000 $$
When debentures are issued at a premium, the issue price is higher than the face value.
$$ \text{Bank A/c} \quad \text{Dr.} \quad \text{(Issue Price)} \ \quad \text{To Debentures A/c} \quad \text{(Face Value)} \ \quad \text{To Securities Premium A/c} \quad \text{(Premium Amount)} $$
Example
A company issues 1,000 debentures of $₹100$ each at a premium of $₹10$.
$$ \text{Bank A/c} \quad \text{Dr.} \quad ₹110,000 \ \quad \text{To 10% Debentures A/c} \quad ₹100,000 \ \quad \text{To Securities Premium A/c} \quad ₹10,000 $$
When debentures are issued at a discount, the issue price is lower than the face value.
$$ \text{Bank A/c} \quad \text{Dr.} \quad \text{(Issue Price)} \ \text{Discount on Issue of Debentures A/c} \quad \text{Dr.} \quad \text{(Discount Amount)} \ \quad \text{To Debentures A/c} \quad \text{(Face Value)} $$
Example
A company issues 1,000 debentures of $₹100$ each at a discount of $₹10$.
$$ \text{Bank A/c} \quad \text{Dr.} \quad ₹90,000 \ \text{Discount on Issue of Debentures A/c} \quad \text{Dr.} \quad ₹10,000 \ \quad \text{To 10% Debentures A/c} \quad ₹100,000 $$
Interest on debentures is a fixed charge and must be paid periodically, usually semi-annually or annually.
$$ \text{Debenture Interest A/c} \quad \text{Dr.} \quad \text{(Interest Amount)} \ \quad \text{To Bank A/c} \quad \text{(Payment)} $$
Example
A company pays $₹5,000$ as interest on its debentures.
$$ \text{Debenture Interest A/c} \quad \text{Dr.} \quad ₹5,000 \ \quad \text{To Bank A/c} \quad ₹5,000 $$
Tip
Ensure timely payment of interest to maintain the company's creditworthiness.
Redemption of debentures refers to the repayment of the principal amount to the debenture holders at the end of the maturity period.
$$ \text{Debentures A/c} \quad \text{Dr.} \quad \text{(Face Value)} \ \quad \text{To Bank A/c} \quad \text{(Payment)} $$
Example
A company redeems 1,000 debentures of $₹100$ each.
$$ \text{10% Debentures A/c} \quad \text{Dr.} \quad ₹100,000 \ \quad \text{To Bank A/c} \quad ₹100,000 $$
Common Mistake
Do not forget to account for any premium or discount on redemption, if applicable.
Understanding the issue of debentures is crucial for students of accountancy as it involves several key concepts and accounting treatments. Debentures are an essential tool for companies to raise long-term capital, and their accounting involves careful consideration of various factors such as issue price, interest payments, and redemption methods. By mastering these concepts, students can gain a comprehensive understanding of corporate finance and debt management.
Note
Always refer to the latest CBSE guidelines and syllabus for any updates or changes in the curriculum.