What is Debentures? Definition, Meaning, Types and Transactions | maijson GKB.

Debentures is a kind of debt instrument used by businesses to raise money is debentures. A business effectively borrows money from investors or the general public when it issues debentures and holders of debentures are entitled to the principal amount as well as fixed interest payments at the time of maturity.

Below are some key features of debentures:

Debt Instrument: A firm may borrow money for a desired period of time by issuing debentures. Debentures are a type of debt where the company pledges to repay the principal amount plus interest, in contrast to equity, which symbolizes ownership in the company.

Fixed Interest Payments: Debentures holders get fixed interest payments on a monthly, quarterly or annually basis. Debentures are different from several other forms of bonds in which interest rate is fixed.

Maturity Date: Debentures have a maturity date, after which the company must pay the principal amount to the holders. The length of the maturity period depends on the terms of the debenture and might vary from a few years to several decades.

Secured and Unsecured Debentures: Debt instruments may be classified as either secured or unsecured. Holders of secured debentures have some security because the debentures are backed by particular corporate assets. Conversely, unsecured debentures depend on the company's overall creditworthiness rather than being guaranteed by any particular assets.

Convertible and Non-Convertible Debentures: Debentures can be classified as either convertible or non-convertible based on their ability to be exchanged into equity shares of the issuing firm at a predetermined ratio. Debentures that are not convertible into equity are not convertible.

Priority in Repayment: Debenture holders are entitled to a larger portion of the company's assets than equity stockholders are in the case of bankruptcy or liquidation. They still have a lesser priority than secured creditors.

Marketability: Prior to their maturity date, debentures can be purchased and sold on the secondary market. For holders of debentures who might want to sell their investments before they mature, this offers liquidity. Debentures are a common component of capital structures used by businesses to diversify their funding sources. Debentures, on the other hand, draw investors because they offer fixed returns on investments that are comparatively stable. Before purchasing debentures, investors should carefully consider the issuing company's creditworthiness.

Transaction Entries of Debentures in the books of Account

A corporation must document debenture transactions in its books of accounts whenever it issues debentures or conducts debenture transactions. An outline of how a business documents debenture transactions is provided below:

1. Initial Issuance:

Debit: Cash or Bank (for the amount received from the debenture issuance).

Credit: Debenture Liability (representing the total face value of debentures issued).

2. Interest Payments:

Debit: Interest Expense (income statement) or Interest Payable (if accrued but not yet paid).

Credit: Cash or Bank (for the interest paid).

3. Conversion of Debentures (if applicable):

Debit: Debenture Liability (for the face value of debentures being converted).

Credit: Share Capital or Reserves (for the equity shares issued upon conversion).

4. Repayment at Maturity:

Debit: Debenture Liability (for the face value of debentures being repaid).

Credit: Cash or Bank (for the amount paid to debenture holders).

5. Recording Interest Accruals (if applicable):

Debit: Interest Expense (income statement).

Credit: Interest Payable (liability on the balance sheet).

6. Recording Unrealized Gains or Losses (if applicable):

Debit or Credit: If the debentures are marked to market, the company may need to recognize unrealized gains or losses in the income statement.

7. Redemption of Debentures (if applicable):

Debit: Debenture Liability (for the face value of debentures being redeemed).

Credit: Cash or Bank (for the amount paid to debenture holders).

Additional Considerations:

Depending on the company's accounting policies and chart of accounts, different accounts may be used. Debentures that are issued at a premium or discount must have the amount of the premium or discount amortized throughout the term of the debenture, which will impact interest costs. Company may need to establish a charge against particular assets in the case of secured debentures, and the relevant entries should be made to reflect this.

When recording debenture transactions, the company must adhere to accounting norms and principles. To further promote transparency for stakeholders and investors, corporations frequently include pertinent information about their debentures in the notes to the financial statements. To guarantee proper and legal accounting for debenture transactions, it is advised that businesses seek advice from accounting specialists.