Collateral security means secondary security in addition to the principal security.
There are two method of dealing with such debentures in the Books of Accounts of the Company:
(1) First Method: In this method, no entry need to be passed in the books of the company, as the debentures are not actually issued, but only given away as collateral security. As such under this method, entry is passed only for taking a loan.
If the loan is taken from a bank the entry will be:
Bank A/c Dr.
To Bank Loan A/c
On the equity and liabilities side of the balance sheet a note is appended below the loan that the loan is secured by the issue of debentures as collateral security.
(2) Second Method: In this method the entry for issuing debentures as collateral security is also recorded with the entry for taking the loan.
(i) On Taking a Loan
Bank A/c Dr.
To Bank Loan A/c
(ii) On Issuing the Debentures as Collateral Security
Debenture Suspense A/c Dr.
To Debentures A/c
