Debenture

What it means

A written acknowledgement of a long-term debt issued by a company, carrying a fixed rate of interest and repayable on a stated date.

Example

A company issues RM50,000 of 6% debentures, paying RM3,000 interest each year.

Why it matters

Debenture interest is an expense charged before profit, and the loan is a non-current liability, not part of ownership.

In practice

A debenture is a form of borrowing. It is shown as a non-current liability in the statement of financial position, not in the equity section. The interest is a finance cost charged in the income statement before profit is calculated. Debenture holders are creditors, not owners. They have no vote and receive fixed interest whether or not the company makes a profit.

A company issuing RM200,000 of 6% debentures must pay RM12,000 in interest each year. This is an expense that reduces profit.

Students often confuse a debenture with an ordinary share. A share gives ownership and a variable dividend, paid only when profits allow and directors decide. A debenture gives no ownership, but it gives a contractual right to interest and to repayment of the principal. Debenture interest is an expense while dividends are a distribution of profit, so they are recorded in different places. In a winding-up, debenture holders rank ahead of shareholders.

If you mix up interest and dividends in company accounts, one of our teachers can show you where each one goes with worked examples. Book a trial class.

Related terms

• Limited company
• Non-current liability
• Liability

Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 5.3 Limited companies (page 16).

Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.