Class XII Accounts Fundamental Concepts
Accounts - Debentures
are debt instruments issued by a joint stock company. Amounts collected by way
of debentures form part of the loan capital of a company. They are repayable
after a fixed period. Debentures are issued in units of small value for
convenient buying and selling in the market. Debenture holders get interest on
their debenture. They are creditors of the company. They do not get dividend.
Only shareholders get dividend.
to S.2 (12) of the companies Act, 1956, debentures include “debenture stock,
bonds and any other securities of a company”. The basic difference between
debentures and bonds is that the debentures are usually secured. Unlike
debentures bonds can be floated with a fixed interest or floating interest rate.
They can also be issued without interest as discount bonds. Discount bonds are
issued at a discount on the face value. The investor gets full amount on
redemption of debenture. From the point of view of investor, bonds are
instruments carrying higher risks and higher rates of returns compared to
characteristics of debentures can be summarised as follows:
are debt instruments.
generally carry fixed rate of interest.
are normally repayable at the end of a fixed period. Repayment of debenture or
cancellation of debenture liability in the books of the company is known as redemption
can be issued at par, premium or at discount depending on the reputation of the
can either be placed privately or offered for public subscription.
may or may not be listed in the stock exchange.
offered for public subscription, they should be rated by a credit rating agency
approved by SEBI, prior to listing.
is payable on debentures at a fixed rate irrespective of the profit earned by
may be issued with or without the security of assets of the company.
the event of winding up of the company the debenture holders are treated as
creditors and given priority in repayment of their money.
holders normally do not have representation in the Board of the company.
between Shares and Debentures
represent the ownership of the company
holders are paid dividend if the company makes profit
is usually paid once a year
is no fixed rate of dividend on shares.
are elected by shareholders and thus the shareholders participate in the
management through representatives
are permanent (except redeemable preference shares)
are not issued on the security of any asset of the company
the event of winding up of the company, share holders get their payment
at the end, only after all other claims are settled.
represent the loan of the company
holders are paid interest at the fixed period irrespective of profit
on debenture is usually paid in six months
on debenture is paid at the fixed rate
holders are allowed to have their representatives in the Board only
under special circumstances
are repayable at a fixed period and failure to repay the debentures on
due date can cause disqualification of directors.
can be issued on the security of any specific asset or with a general
charge on all the assets of the company.
debentures get priority over all the normal creditors. Unsecured
debentures are listed with creditors and settled prior to any payment to
are classified as follows:
On the Basis of Repayment:
debentures are paid off or redeemed after the prescribed period.
Irredeemable or Perpetual Debentures
debentures are permanent debentures of a company. They are paid back only in the
event of winding up of a company.
On the Basis of Transferability:
are debentures for which the company maintains record of debenture holders.
Therefore when such debentures are sold or transferred it should be intimated to
the company for making change in the register of debenture holders.
debentures are transferable by mere delivery. There is no need or registration
of transfer with the company.
On the Basis of Security:
Simple or Naked Debentures
are debentures not secured by any asset of the company. If the company goes into
liquidation these debentures are treated as unsecured creditors.
debentures are issued on the security of certain assets of the company. They can
be secured by fixed assets or floating assets of the company. If the debentures
are secured by a fixed charge on assets, the company cannot sell or exchange the
assets without paying off the debentures. However in case of floating charge,
the company can buy or sell the assets involved until the winding up procedures
are initiated or the debenture holders exercise their right to ‘crystallise’
On the basis of Conversion:
debentures are issued with an option to debenture holders to convert them into
shares after a fixed period. Convertible debentures are either partially
convertible debentures or fully convertible debentures. In case of
partially convertible debentures part of the instrument is redeemed and part of
it is converted into shares.
case of fully convertible debentures the full value of the debenture is
converted into equity. Convertible debentures are generally issued to prevent
sudden outflow of the capital at the time of maturity of the instrument, which
may cause liquidity problems. The conversion ratio, which is the number
of equity shares exchanged per unit of the convertible debenture is clearly
stated when the instrument is issued.
Non Convertible Debentures
are debentures issued without conversion option. The total amount of the
debenture will be redeemed by the issuing company at the end of the specific
On the Basis of Pre-Mature Redemption Rights:
Debenture with “Call” option
callable debenture is one in which the issuing company has the option of
redeeming the security before the specified redemption date at a pre-determined
Debenture with “Put” option
is a debenture in which the holder has the option of getting it redeemed before
On the Basis of Coupon Rate (interest rate):
Fixed Rate Debentures
of the time debentures are issued with a prefixed rate interest. These
debentures are called fixed interest debentures
Floating rate Debentures
rate as the names suggests keeps changing. It is usually linked with PLR (prime
lending rate). It may add a risk premium to PLR on debenture. Thus PLR + 50 “basis
points” and if the PLR is 11 percent, debenture interest rate will be 11.5
Zero Coupon Bonds
are debentures issued with no interest specified. They are issued at a
substantial discount to compensate the investors. These bonds are known as deep
discount bonds. The difference between the face value and the issue price is
the total amount of interest for the duration of the bond. From the account
point of view this discount is recorded as “Deferred Interest Expense Account”
at the time of issue bonds and proportionate amounts are written off each year
over the life of the bond.
shares debentures can also be issued at par, premium or discount. Collection of
money also can be made in installments. Debentures can be issued for cash or
consideration other than cash.
Entries for the issue of debentures are similar to that of shares. In comparison
with issue of shares, all temporary accounts for issue of debentures bear the
prefix ‘debenture’ instead of share, such as debenture application,
debenture allotment, debenture 1st call etc. Share capital account on
the credit side of the journal entry is replaced by Debenture Account bearing a
prefix indicating the rate of interest.
Entries for the issue of Debentures
entries for the issue of debentures will vary according to the conditions of
issue and the conditions of redemption. Debentures can be issued at par, premium
or discount. Similarly the debentures can be redeemed at par, premium or
discount. Thus there can be nine different combinations for the issue of
Debentures issued at par, to be redeemed at par
Debentures issued at par, to be redeemed at premium
Debentures issued at par, to be redeemed at discount
Debentures issued at premium, to be redeemed at par
Debentures issued at premium, to be redeemed at premium
Debentures issued at premium, to be redeemed at discount
Debentures issued at discount, to be redeemed at par
Debentures issued at discount, to be redeemed at premium
Debentures issued at discount, to be redeemed at discount