Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes: Introduction to Debentures

A debenture certificate. Image credit

A debenture certificate. Image credit

  • These are loan stocks that are issued to the company.
  • A debenture is simply a document or certificates that acknowledges said loan.
  • Debentures are creditors to the company and are, in the event of liquidation,
  • the first to receive their monies.
  • They usually earn a fixed rate of interest and are typically redeemable.
  • Some debentures are convertible.

Types of Debentures

Convertible debentures

  • these can be converted into one form of stock or another for example into ordinary shares,
  • at the discretion of the of the debenture holder at a predetermined future date.
  • For example Debentures can have the option to be converted into either Ordinary or Preference shares after a certain date.

Naked debentures

  • also known as simple debentures, these are issued without security since they are unsecured and not tied to any specific asset within the company.
  • These debentures are considered insecure in the event of liquidation since they have to wait in line with other creditors although they receive the money before the shareholders.

Floating debentures 

  • such debentures are secured by floating amounts on all the assets of the company.
  • Such assets may be Debtors, Stock etc.
  • These debentures are typically secured on the current assets of the company.

Mortgage debentures

  • these debentures are secured on the more permanent assets of the company such as Plant Property and Equipment or Buildings.

To access more topics go to the Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes.

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