Accounting for Debentures Test - 3

Debentures can be shown as long term borrowings, short term borrowings and other current liabilities, under different situations but cannot be shown as Shareholders Funds.

Debentures issued are shown under the heading of Non-current liabilities and sub-heading Long Term Borrowings.

When a company purchases some assets and issues debentures as a payment for the purchase, to the vendors it is known as issue of debentures for consideration other than cash.

Premium on Redemption of Debentures Account is a personal account. It is shown in the balance sheet (as premium due i.e. liability). Premium payable on redemption is treated as a loss and should be written off against the Statement of P/L.

Debentures are external equity i.e. outsiders liability. Capital contributed by the shareholders is called internal equity but amount contributed by the debenture holders is called external equity.

Discount allowed by company at the time of issue debentures is treated as capital loss and should be written off against the Statement of Profit and loss or against the Securities premium reserve.

A Debenture is acknowledgment of debt and a contract for the repayment of principal amount with interest. Interest paid on debentures is a fixed charge and will be paid whether firm is in profit or loss.

In a company only those people are shareholder can vote but debenture holders are not allowed to vote. The simple reason is debenture holders are treated as outsiders and shareholders are treated as insiders.

A company can issue its Debentures at par, premium and discount. But shares cannot be issued at discount.

Debentures are safe in comparison of shares. Debentures are almost risk free because most of the time they are secured by a charge on the assets of the company.