Interest on Debentures

Meaning of Interest on Debentures :

An interest paid is an award to all the debenture holders for investing in the debentures of an enterprise. Usually, interest is paid in a periodical systematic manner at a fixed rate of interest on the face value of the debentures and is being treated as a charge on the profits.

When an enterprise circulates debentures, it is under a accountability to pay interest hereon at a fixed % (half yearly) systematically until debentures are paid back. This percentage is normally a part and parcel of the name of debentures like 8% debentures, 10% debentures, etc., and interest payable is computed at the nominal value of debentures.

Interest on debenture is a charge opposite to the profit of the enterprise and has to be paid whether the enterprise has acquired any profit. According to the Income Tax Act, 1961, an enterprise must deduct income tax at the recommended rate from the interest payable on debentures if it surpasses the guided limit. It is known as TDS or Tax Deducted at Source and is to be accumulated and deposited with the tax authorities. The debentureholders can allocate this amount against the tax that is due from them.

Accounting Treatment for Interest on Debentures :

The below mentioned journal entries are documented in the books of an enterprise in association with the interest on debentures :

  • When interest is due :

Debenture Interest A/cDr.

To Income Tax payable A/c

To Debentureholders A/c

(Amount of interest due on debenture and tax deducted at source)

  • For payment of interest to debentureholders :

Debentureholders A/c Dr.

To Bank A/c

(Amount of interest paid to debentureholders)

  • On transfer debenture Interest Account to statement of Profit and Loss :

Statement of Profit and Loss Dr.

To Debenture Interest A/c

(Debenture interest transferred to profit and loss A/c)

  • On payment of tax deducted at source to the Government :

Income Tax Payable A/c Dr.

To Bank A/c

(Payment of tax deducted at source on interest on debentures)

NOTE : The above furnished journal entries are fetched from the Official NCERT website.

The above mentioned is the concept, that is elucidated in detail about the Interest on Debentures for the class 12 Commerce students. To know more, stay tuned to BYJUS.