Debentures are an instrument, an acknowledgement of debt, issued under the common seal of the company which is duly signed by authorized signatory and is an agreement for the repayment of principal sum and interest at a specified rate on a specified date. They are categorised as the liability of the company.
With respect to debentures, the company is bound by the obligation to pay fixed percentage of interest periodically (annually, half yearly, quarterly, monthly). This interest is payable till the time debentures are not redeemed.
The percentage of interest on debentures is fixed and it forms part of the name of the instrument. For eg – 10% debentures or 8% debentures. This 10% or 8% is the rate at which the company is liable to pay interest to the debentureholders. Also, the interest is calculated at the nominal value of debentures.
Since, debentures are a liability of the company, the interest on debentures is required to be paid even if the company does not earn any profit. Therefore, it is nothing but a charge against the profits of the company. Due to this, it is debited in the profit and loss account.
Accounting Treatment of Interest on Debentures –
In respect of interest on debentures, the following journal entries are required to be posted in the books of accounts –
1. When interest is made due
Debenture Interest A/c Dr.
To Income Tax payable A/c
To Debentureholders A/c
(Being interest on debentures made due and the income tax deducted as source)
2. Entry for paying interest to debentureholders
Debentureholders A/c Dr.
To Bank A/c
(Being interest amount paid to debentureholders)
3. Interest on debentures transferred to Statement Profit and Loss account
Statement of Profit and Loss Dr.
To Debenture Interest A/c
(Being interest on debentures transferred to profit and loss A/c)
4. Tax deducted on Interest on debentures paid to Government
Income Tax Payable A/c Dr.
To Bank A/c
(Being income tax paid to government)
The debentures are classified as debt instruments of a company and the company is liable to repay the principal amount along with certain fixed amount of interest at a specified period of time. The debenture interest is required to be paid even in case of insufficient profits as a result of which they are known as charge on profits of a company.