Accountancy · Chapter 5
Study notes aligned to the official NEB syllabus.
A company that needs money but does not wish to bring in more owners can borrow instead of issuing shares, and one common way of long term borrowing is to issue debentures. A debenture is a written acknowledgement of a debt owed by the company, carrying a fixed rate of interest. This chapter studies what debentures are, how they differ from shares, and how their issue is recorded when they are issued at par, at premium and at discount.
A debenture is a certificate issued under the common seal of the company acknowledging that the holder has lent a stated sum to the company and is entitled to a fixed rate of interest and to repayment of the principal on a fixed date. Its main features follow from the fact that it is a loan. The debenture holder is a creditor, not an owner, so has no voting rights. The interest on debentures is a charge against profit, meaning it must be paid whether or not the company earns a profit. Debentures are usually secured by a charge on the assets of the company, and they are repaid (redeemed) on maturity.
Debentures are classified along several lines. On the basis of security they are secured (backed by a charge on assets) or naked (unsecured). On the basis of records they are registered (the holder's name is recorded and interest is paid to the recorded holder) or bearer (transferable by mere delivery). On the basis of redemption they are redeemable (repaid on a fixed date) or irredeemable. On the basis of convertibility they are convertible (can be exchanged for shares later) or non convertible.