Issue of Debentures as a Collateral Security

09/05/2021 1 By indiafreenotes

The term ‘collateral security’ implies additional security given for a loan. Where a company obtains a loan from a bank or insurance company and the security offered to the company is not sufficient, the company may issue its own debentures to the lender as collateral security against the loan. In such a case, the lender has the absolute right over the debentures until and unless the loan is repaid.

Debentures can also be issued by a company as collateral security against a bank loan or any such borrowings. A collateral security is like a parallel security which is provided along with the actual security against the loan taken. Debentures issued as such a collateral liability are a contingent liability for the company, i.e. the liability may or may not arise. Only when the company defaults on such a loan will this liability arise.

On repayment of the loan, however, the lender is legally bound to release the debentures forthwith. But in case the loan is not repaid by the company on the due date or in the event of any other breach of agreement, the lender has the right to retain these debentures and to realize them. The lender is entitled to interest only on the amount of loan, but not on the debentures issued as collateral security.

Generally, because it is a contingent liability no entry is passed in the books of the company against such an issue of debentures. However, if some companies opt to pass an entry to record such a transaction, the following entries may be passed

Particulars Amount Amount
Debentures Suspense A/c Dr xxx
To Debentures  A/c xxx
(Being debentures issued as a collateral security)

Particulars Amount Amount
Debentures  A/c Dr xxx
To Debenture Suspense A/c xxx
(Being debentures cancelled on repayment of the loan)


Accounting Treatment:

When debentures are issued as a collateral security there are two treatments in the accounting books.

First Method:

(i) No journal entry is made in the account books at the time of issue of such debentures. A note is appended below the loan on the liabilities side of the balance sheet to the fact that they have been secured by the issue of debentures.

This will be shown in the balance sheet as follows:


Balance Sheet
Equity and Liabilities Note No. Current Year Previous Year
Non-Current Liabilities      
Long Term Borrowings      

Second Method:

(ii) Sometimes issue of debentures as collateral security is recorded by making journal entry as follows:

Debentures Suspense a/c Dr.

To Debentures a/c

(With nominal value of debentures)

The Debentures Suspense Account will appear on the assets side of the balance sheet and Debentures on the liabilities side. When the loan is re-paid the entry is reversed in order to cancel it.