When a company writes off the discount on debentures, it means the discount (the difference between the face value and the issue price of the debentures) is treated as an expense and amortized over the life of the debentures. The discount is written off gradually each year, not in the year of issue, to match the expense with the revenue generated from the debentures. Specifically:
- The discount on debentures is considered a capital loss and shown as an asset initially on the balance sheet under "Miscellaneous Expenditure" or similar.
- It is gradually written off through the Statement of Profit and Loss over the tenure of the debentures as a finance cost.
- The write-off can be done by either charging it to the Securities Premium Reserve (if available) or against the profit and loss account in installments.
- Two common methods are used for writing off the discount:
- Fixed Installment Method: equal amounts over the debenture's life.
- Fluctuating Installment Method: proportional write-off based on outstanding debentures each year.
- This reduces the reported profit of the company for the years in which the discount is written off, reflecting the cost of borrowing accurately.
In summary, when the discount on debentures is written off, it is charged as an expense gradually over the tenure of the debentures, impacting the profit and loss statement each year during the debentures' life.
