Question

Describe the meaning of 'Debenture Issued as Collateral Securities. What accounting treatment is given to the issue of debentures in the books of accounts?

Answer 1

Collateral security refers to an additional layer of security over and above the primary security. It is seen in case of company taking a loan from a financial institution, in such cases, company issues debentures which are additional security or collateral security. The money lender will not be receiving any interest on these debentures. In case the company defaults in making payment and the primary security is not sufficient to cover the debt, then debentures can be used for recovering the amount.

Treatment of Debentures:

Balance Sheet

$$\begin{array}{cccc}\text{Liabilities}& \text{Amt.(Rs)}& \text{Assets}& \text{Amt.(Rs)}\\ \text{Loan(Secured by the issued of}& & & \\ \text{Debentures of Rs....As Collateral Security)}& & & \\ \text{Debentures (In addition to these debentures,}& & & \\ \text{debentures of Rs.... has been issued as}& & & \\ \text{Collateral Security)}& & & \end{array}$$

For creating accounting record Debenture Suspense A/C is debited and debenture account is credited. Debentures are represented in liabilities side and Debenture suspense A/c is shown on credit side. When the debt is paid off by the business debenture account is debited and debenture suspense account gets credited.