Meaning

The debenture is an acknowledgement of a debt

given under a common seal of a company and containing a contract for repayment of the principal sum on a specified date and for the payment of interest until the principal sum is repaid and it may or may not give a charge on the assets of the company as security.

Definition of debentures
According to Justice Chitty A debenture is a

document which either creates a debt or acknowledges it, and any document which fulfills either of these conditions is a debenture Topham in his book on company law defines debenture as A document given by a company, as an evidence of debt to the holder usually arising out of a loan and most commonly secured by a charge.

Important points relating to debentures

Debenture is a document relating to the money

lent or given as a loan to the company. Debenture is a security that bears a fixed rate of interest on which the interest is payable on a predetermined date. Such interest payment has nothing to do with the profit of the company. In other words, it is compulsory and the company has to pay the interest on debentures even if it has not earned profit.

Continue
debentures are shown under the heading

secured loans in the balance sheet of a company if they are secured. If the terms of the issue of debentures so provide, the debentures can be converted into shares. Debenture holders do not have any voting right in any matter of the company.

Types of debentures
Types of debentures are based on four

categories: A. Based on Security: B. Based on Condition of Redemption C. Based on Negotiability and Record Viewpoint D. Based on Convertibility E. Based on Priority of Redemption

Based on Security
Secured or Mortgage Debentures: when this type of debentures are issued, some of the assets of the company are given as security. 2. Unsecured or Simple Naked Debentures: such debentures are issued without giving any security or any charge on the assets of the company.
1.

Based on Condition of Redemption

Redeemable Debentures: The debentures which are issued with a condition that the amount of debentures can be repaid after a certain period are known as Redeemable Debentures. 2. Irredeemable debentures: generally, money borrowed against such debentures is repaid only at the time of the liquidation of a company.
1.

Based on Negotiability and Record Viewpoint

Registered Debentures: the company maintains a Register contains the name, address and other particulars related to debenture holders. 2. Bearer Debentures: there is no need to register the transfer of debentures with the company. The purchaser has to make a payment to the seller of debentures and take the delivery of the debenture instrument.
1.

Based on Convertibility
Convertible Debentures: the debentures which can be converted into shares for full or part of the amount of the debentures after a specified period are known as convertible debentures. 2. Non-Convertible Debentures: such debentures cannot be converted into shares.
1.

Based on Priority of Redemption

First Debentures: Such debentures have first charge on the assets given as security and are repaid before any other debentures are paid out. 2. Second debentures: such debentures are paid off only after the first charge or the first debentures are paid off.
1.

Accounting entries for issue of redeemable debentures

Situation Entry at the time of Entry at the time of When debenture issue redemption holders are paid Bank A/c Dr To Debentures A/c Bank A/c Dr To Debentures A/c To Debenture Premium A/c Bank A/c Dr Debenture discount A/c Dr To Debentures A/c Debentures A/c Dr To Debentures holders A/c Debentures A/c Dr To Debentures holders A/c Debentures A/c Dr To Debentures holders A/c Debentures holders A/c Dr To Bank A/c Debentures holders A/c Dr To Bank A/c Debentures holders A/c Dr To Bank A/c Debentures issued at par and redeemable at par Debentures issued at premium and redeemable at par Debentures issued at Discount and redeemable at par

Accounting entries for issue of redeemable debentures

Situation Entry at the time of Entry at the time of When debenture issue redemption holders are paid

Debentures issued at par and redeemable at premium

Bank A/c Dr Loss on Issue of Debenture A/c Dr To debentures A/c To Premium on Redemption A/c Bank A/c Dr Debenture Discount A/c Dr Loss on Issue of Debenture A/c Dr To debentures A/c To Premium on

Debentures A/c Dr Premium on Redemption A/c Dr To Debenture holders A/c

Debentures holders A/c Dr To Bank A/c

Debentures issued at discount and redeemable at premium

Debentures A/c Dr Premium on Redemption A/c Dr To Debenture holders A/c

Debentures holders A/c Dr To Bank A/c

Redemption of Debentures by Different Considerations

A company usually redeems its debentures by

cash payment at the time of repayment of money borrowed against debentures. However, sometimes, instead of paying cash for the redemption of debentures, the company might give consideration other than cash. For example, issue of new shares or new debentures as consideration at the time of the redemption of old debentures. Thus, amount due on redemption of the debentures can be discharged by different considerations viz. 1) By cash 2) By issue of new shares 3) By issue of new debentures.

Methods of Redemption of Debentures

1.

2.
3. 4. 5.

Redemption of Debentures on a Fixed Date Redemption of Part of Debenture Every Year Purchase From Open Market Buy-Back Method Conversion of Debentures Into Shares

Redemption of Debentures on a Fixed Date

Since the amount of Redeemable debentures is to be repaid on a Predetermined fixed data or dates, Such a data is mentioned in the debenture certificate when issued. If such a date is not fixed, the company can redeem such debentures by serving a notice of a certain period to the debenture holders.

Redemption of Part of Debenture Every Year

if it is provided in the terms of issue of debentures that a certain part of the total debenture will be redeemed every year, the debentures can be redeemed every year according to such terms

Purchase From Open Market

Companies can buy its own debentures from the

market. If at the time of issue it is provided that the company can buy its own debentures from the market, the company can purchase the same from the open market and cancel them. If the market price of debentures is less than the face value, it will be a gain for the company.

Buy-Back Method
If a provision is made at the time of issue of

debentures that the company can buy back its debentures holders, the company can buy such debentures from the debenture holders after a period of one year from the date of issue thereof in such a case, the company can repay the money to the debenture holders by periodic repurchase or buy back of debenture.

Conversion of Debentures Into Shares

As per the terms of the issue of debentures, a

company can issue its equity or preference shares in lieu of debentures to the debenture holders. Debenture can be so redeemed by the issue of shares in lieu of debentures. When the debentures are converted into shares the following journal entries are passed 1) Debenture A/c Dr To Debenture Holders A/c. :
2) Debenture Holder A/c Dr To Equity Share Capital A/c