Question

‘A Company has to pay interest on debentures prior to paying dividend on shares.’ Justify.

Answer 1

Debenture interest represents the cost incurred by a company for using borrowed funds. It is treated as a deductible expense when calculating the company’s net profit and is therefore shown under finance costs in the company’s Statement of Profit and Loss. This means it is a charge against profits and must be paid regardless of whether the company earns a profit. In contrast, dividend is a distribution of profits, and a company can declare dividends only if it has earned profits. Thus, it is justified that interest is paid before dividends.