A debenture is an instrument of debt executed by the company acknowledging its obligation to repay the sum at a specified rate and also carrying an interest. It is only one of the methods of raising the loan capital of the company. A debenture is thus like a certificate of the loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures become a part of the company’s capital structure, it does not become share capital. The types of debentures may be of different categories depending on its nature.
Types of Debentures
Difference between shares and debentures
|Capital vs. Loan||It is the part of owned capital.||It is the part of loan.|
|Reward for Investment||Dividend is the reward.||Interest is the reward.|
|Secured by Charge
||Shares are not secured by any charge.||Debentures are generally secured by a charge.|
|Voting right||Shareholders enjoy voting rights.||Debenture-holders does not enjoys voting rights.|
|Conversion||Equity shares can never be converted.||Debentures can be converted in to shares or debentures of different category.|
Journal Entries in case of Debenture issue
|For making interest due||Debenture Interest A/c Dr.
To Debenture-holders A/c
To TDS A/c
|For making payment of interest||Debenture-holders A/c Dr.
To Bank A/c
|For payment of TDS
||TDS A/c Dr.
To Bank A/c
|For transfer of debenture interest||Profit & Loss A/c Dr.
To Debenture Interest A/c
Methods of redemption of debentures
Points to remember
- Profit on cancellation of debentures is transferred to Capital Reserve Account.
- DRR is not mandatory for infrastructure companies.
- Redemption of debentures means the discharge of an obligation arising out of the contractual obligation created by the Debenture trust Deed.
Debenture interest is always paid even in the case of losses.