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Accounting for Convertible Debentures

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A debenture is also known as a bond.

A company engages in borrowing activities to fund operating activities in the short term and long term. Sources of financing include private loans, common stock, bonds and convertible debentures or convertible bonds.

  1. Debenture Defined

    • A debenture is also referred to as a bond and is a loan that a firm must repay at maturity.

    Convertible Debenture

    • A convertible bond is a debt instrument that a debt holder, or bondholder, can exchange for shares of equity in accordance with the bond agreement.

    Significance

    • A convertible debenture helps a firm lower funding costs because bondholders accept lower interest payments in exchange for conversion privileges.

    Accounting for Debenture Issuance

    • To record a convertible debenture issuance, an accountant debits the cash account and credits the debentures payable account. In accounting parlance, debiting an asset account, such as cash, means increasing its amount.

    Accounting for Debenture Repayment

    • To record a convertible debenture repayment, an accountant debits the debentures payable account and credits the cash account.

    Reporting Convertible Debentures

    • Financial accounting and reporting rules require a company to report convertible debentures as liabilities in the balance sheet, also known as statement of financial condition or statement of financial position.

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