Types of Debentures in Accounting
Debentures are essential debt instruments used by companies to raise long-term capital without diluting ownership. In accounting, understanding the types of debentures is crucial for recording liabilities accurately and evaluating a company’s financial strategy. These instruments represent borrowed funds, where the company commits to repaying the principal with interest. Their classification depends on various factors, including security, convertibility, registration, and mode of repayment.
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What Is a Debenture?
A debenture in accounting refers to a written instrument acknowledging a debt under the company’s seal. It is issued by companies to borrow money at a fixed rate of interest, usually repayable at a future date. Debentures do not grant any ownership rights to the holders; instead, they function as loans with agreed-upon terms. From an accounting perspective, debentures appear on the balance sheet under non-current liabilities.
For example, if ABC Ltd. issues ₹10,00,000 worth of debentures at 8% interest for five years, the balance sheet reflects ₹10,00,000 under liabilities, and interest of ₹80,000 annually is recorded as an expense.
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Types of Debentures
There are multiple types of debentures in accounting, each serving different financial and strategic needs:
- Secured Debentures: Backed by company assets for added investor security.
- Unsecured Debentures: Not secured by collateral; rely on issuer’s credibility.
- Registered Debentures: Issued in a specific name, requiring formal transfer procedures.
- Bearer Debentures: Transferable by delivery without registration.
- Convertible Debentures: Can be converted into equity shares later.
- Non-Convertible Debentures: Cannot be converted; redeemed only in cash.
- Redeemable Debentures: Payable after a fixed duration.
- Irredeemable Debentures: Not repaid until liquidation of the company.
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Secured vs. Unsecured Debentures
Secured Debentures: Backed by assets, offering lower risk and interest.
Unsecured Debentures: No collateral, higher risk, and thus higher interest.
For instance, a logistics firm may issue secured debentures against its fleet, while a tech startup might use unsecured debentures to retain asset flexibility.
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Convertible and Non-Convertible Debentures
Convertible Debentures: Can be exchanged for shares after a specified time. They generally offer lower interest due to their conversion benefit.
Non-Convertible Debentures: Pure debt instruments, redeemed in cash, typically offering higher interest.
For example, XYZ Ltd. may issue ₹5,00,000 in convertible debentures, while ABC Ltd. issues ₹10,00,000 in NCDs redeemable after 5 years.
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Advantages of Debentures for Companies
- No Ownership Dilution: Raise capital without losing equity control.
- Fixed Interest Obligation: Simplifies financial forecasting and budgeting.
- Tax Deductibility: Interest paid is a tax-deductible expense.
- Appeals to Risk-Averse Investors: Particularly secured and fixed-return types.
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How Debentures Are Recorded in Accounting
Debentures are recorded as long-term liabilities in the balance sheet. Interest paid is recorded as an expense, and journal entries help reflect all transactions accurately.
Journal Entries Example:
- On Issue: Bank A/c Dr. ₹10,00,000
To 10% Debentures A/c ₹10,00,000 - On Interest Payment: Interest on Debentures A/c Dr. ₹1,00,000
To Bank A/c ₹1,00,000 - On Redemption: 10% Debentures A/c Dr. ₹10,00,000
To Bank A/c ₹10,00,000
These entries help ensure that liabilities and related expenses are transparently accounted for in financial reports.
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Conclusion
Understanding the various types of debentures and how they are treated in accounting is critical for both companies and investors. Whether it’s the flexibility of convertible debentures, the safety of secured ones, or the simplicity of bearer instruments, each type serves a unique purpose in corporate finance. Accurate accounting of these instruments is essential for transparency, compliance, and financial reporting.
I am a Chartered Accountant with more than five years of experience in the accounting field. My areas of expertise include GST, income tax, and audits. I am passionate about sharing knowledge through blogs and articles, as I believe that learning is a lifelong journey. My goal is to provide valuable insights and simplify financial matters for individuals and business owners alike.
