How Are Debenture Bonds Placed on the Balance Sheet?
Understanding various financial statements is an important aspect of running a business. Financial statements provide considerable information about the health of a business. Your business's financial statements are also often viewed by bankers or by other potential lenders or investors. The balance sheet is one of the commonly used financial statements, and a debenture bond is one item that may show on a business's balance sheet.
Selling bonds is a form of financing used by governments and some large companies. When your company sells bonds, other businesses or individuals can purchase those bonds from you for a face value amount. In essence, these businesses or individuals become investors in your company, because they are providing you with needed funds to run your business. In exchange, you promise to pay interest at regular intervals or at maturity, when the original face value is also due.
Debenture bonds are unsecured. This means that when the bonds are issued, there is no lien or security interest given to the purchasers. The investors cannot force a sale of any collateral because none was pledged in exchange for the sale of the bonds. Investors must rely on the company's reputation and history when purchasing debenture bonds.
The balance sheet shows a record of a company's financial standing as of a specific date. It shows the liabilities, assets and equity of the company. The assets are always equal to the equity plus the liabilities. This means the resources of the company are equal to its debts plus investment amounts of owners or stockholders.
Debenture bonds are liabilities of the company because they represent debts that will have to be repaid in the future. Liabilities are shown on the balance sheet as either current liabilities or long-term liabilities. Long-term liabilities are debts that are not required to be repaid within one year. Because debenture bonds fall into this category, they are placed on the balance sheet in the long-term liabilities section.