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Issue of Debentures as a Collateral Security

Collateral security means supporting security for a loan which can be realized by the lender in case of default in repayment of the original loan.

Sometimes, companies issue their own debentures as a collateral security for a loan availed by it.

If the loan is repaid on the due date, the debenture is cancelled along with the loan account and if there is a default, then the lender becomes the debenture holder of the company, who can exercise all the rights of a debenture holder.

The accounting treatment in such cases is as follows:

  • Option 1: No entry in the books of accounts. The fact of debentures being issued as a collateral security is disclosed in the balance sheet as a note.
  • Option 2: Pass the following journal entry:


The debenture suspense account will appear in the asset side of the balance sheet while the debenture account appears on the liability side of the balance sheet. On repayment of loan, the entry is reversed to cancel it.

Illustration 4


A Ltd. borrows ₹ 5 lakhs from Axis Bank and it decides to issue 8 per cent ₹ 7 lakhs debentures as collateral security. Discuss the accounting treatment under both the methods.



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