Financial Accounting · Capital structure and finance costs

Loan Notes, Debentures and Finance Costs for ACCA FA

Updated 11 October 2026 · Fact-checked

A loan note is a debt a company issues to borrow money. You record it as a non-current liability at the net proceeds. Each year you charge a finance cost to profit or loss, using the effective rate, and accrue unpaid interest as a current liability. Debentures are loan notes secured on assets.

Understand Loan Notes, Debentures and Finance Costs

A company can raise money by issuing shares or by borrowing. Loan notes are a form of borrowing. The company receives cash now, pays interest each period and repays the amount at a set date. Because it is a debt, it is a liability, not equity. Lenders have a legal right to interest, whether or not the company makes a profit.

Debentures and loan notes are very close in meaning. In exams the two terms are often used for the same thing. Strictly, a debenture is a loan note backed by a charge over company assets, so it is secured. A loan note may be secured or unsecured. Do not spend time on the difference unless a question asks for it. The accounting is identical.

Under IFRS 9, loan notes are measured at amortised cost using the effective interest rate. If the loan notes are issued at par with no issue costs, this is simple: the effective rate equals the coupon rate. Interest expense equals the nominal value × coupon rate. If there are issue costs, they are deducted from the proceeds. The liability starts at the net amount, and the finance cost is spread over the loan life so that the liability grows to the redemption amount.

The coupon rate is the rate applied to the nominal value to work out the cash interest. The effective rate is the rate applied to the opening liability to work out the finance cost. The difference between finance cost and cash paid is added to the liability.

In the statement of profit or loss, the interest is shown as a finance cost. In the statement of financial position, loan notes due after more than 12 months are non-current liabilities. Accrued interest unpaid at the year end is a current liability. The part of the loan due within 12 months is also current.

Key formulas to remember

Annual interest (coupon): Nominal value × coupon rate; This is the cash interest. Use it when loan notes are issued at par with no issue costs.
Part-year interest: Nominal value × coupon rate × months outstanding ÷ 12; Use for loans issued or redeemed during the year.
Interest accrual: Finance cost for the year − interest paid = interest accrued; Show the accrual as a current liability.
Initial carrying amount: Proceeds − issue costs; The liability starts at the net amount received.
Amortised cost roll-forward: Closing liability = Opening liability + finance cost (opening × effective rate) − cash interest paid; Finance cost is charged at the effective rate, not the coupon rate.
Finance cost entry: Dr Finance costs (profit or loss); Cr Bank or Accrued interest; Accrued interest is credited when not yet paid.

How to solve Loan Notes, Debentures and Finance Costs questions

Use this order for any loan note or finance cost question.

1Identify the nominal value, coupon rate, issue date and payment dates.
2Check whether issue costs or a discount exist. If so, start with net proceeds and note the effective rate.
3Work out the finance cost for the year. Use coupon × nominal for simple loans, or opening liability × effective rate for amortised cost.
4Time-apportion if the loan was issued or repaid part way through the year.
5Compare the finance cost with the cash interest paid. Any unpaid amount is accrued interest.
6Post the entries: Dr Finance costs, Cr Bank, Cr Accrued interest (or add to the loan liability under amortised cost).
7Present finance costs in profit or loss, the loan as non-current, and the accrual and any due-within-one-year part as current.
8Check that the answer matches the question's requirement, for example the closing liability or the profit or loss charge.

Quickest way: Five-line loan note check

When to use it: Use in Section A questions where you need only one figure: the finance cost, the accrual or the liability.

Write nominal × rate × time fraction. This gives the finance cost.
Subtract interest already paid. The result is the accrual.
If issue costs exist, use opening liability × effective rate instead.
Closing liability = opening + finance cost − cash paid.
Read the requirement again before selecting an option.

Common mistakes in Loan Notes, Debentures and Finance Costs

Charging the cash paid as the finance cost instead of the amount incurred.
Students think of interest as a bank payment, not an expense that builds up over time.
Fix: Charge the expense for the period on an accruals basis. Then work out the accrual as expense minus cash paid.
Forgetting to time-apportion interest for a loan issued part way through the year.
The annual rate is in front of you and the issue date gets ignored.
Fix: Count the months outstanding in the year and multiply by months ÷ 12.
Treating loan notes as equity or putting interest in the statement of changes in equity.
Students confuse loan notes with preference shares or dividends.
Fix: Loan notes are liabilities and interest is an expense. Only dividends on equity shares go through equity.
Applying the coupon rate to the carrying amount, or the effective rate to the nominal value.
The two rates are mixed up.
Fix: Coupon × nominal gives cash interest. Effective rate × opening liability gives the finance cost.
Showing accrued interest within non-current liabilities.
Students attach it to the loan note.
Fix: Accrued interest is payable within 12 months, so it is a current liability.
Ignoring issue costs when stating the opening liability.
The nominal value is assumed to be the amount borrowed.
Fix: Start with proceeds less issue costs. The liability then accretes to the redemption amount.

Worked examples

Example 1

On 1 January 20X1 a company issues $400,000 of 6% loan notes at par. Interest is paid annually in arrears on 31 December. The year end is 31 December 20X1. On 1 October 20X1 the company issued a further $200,000 of 6% loan notes at par, with the first interest payment due on 30 September 20X2. What is the finance cost for 20X1, the interest paid in the year and the accrual at 31 December 20X1?

Show the solution

Interest on the first loan notes: $400,000 × 6% = $24,000 for the full year.
Interest on the second loan notes: $200,000 × 6% × 3 ÷ 12 = $3,000.
Total finance cost = $24,000 + $3,000 = $27,000.
Interest paid in the year: the first loan paid $24,000 on 31 December. The second paid nothing.
Accrual = $27,000 − $24,000 = $3,000.

Answer: Finance cost $27,000; interest paid $24,000; accrued interest $3,000 shown as a current liability. Loan notes of $600,000 are non-current liabilities.

Example 2

On 1 January 20X1 a company issues $100,000 of 5% loan notes. Issue costs are $2,000, so net proceeds are $98,000. The effective interest rate is 6%. Interest of $5,000 is paid on 31 December 20X1. Calculate the finance cost and the closing liability at 31 December 20X1.

Show the solution

Opening liability = $100,000 − $2,000 = $98,000.
Finance cost = $98,000 × 6% = $5,880.
Cash interest paid = $100,000 × 5% = $5,000.
Closing liability = $98,000 + $5,880 − $5,000 = $98,880.
Journal at year end: Dr Finance costs $5,880; Cr Bank $5,000; Cr Loan notes $880.

Answer: Finance cost $5,880; closing liability $98,880, presented as a non-current liability (assuming redemption is more than 12 months away).

Exam tips

In multiple choice, work out finance cost, cash paid and accrual separately. Wrong options are often built from each one.
Look for issue or redemption dates inside the year. Time-apportionment is the most common trap.
For number entry, check whether the answer needs the profit or loss charge or the liability. The two differ when issue costs exist.
In Section B, show the journal: Dr Finance costs, Cr Bank, Cr Accrued interest or loan liability. Then place each balance in the right section of the financial statements.
Check whether the question says issued at par. If it does, the finance cost equals the coupon interest.

Practice questions from Capital structure and finance costs

Loan Notes, Debentures and Finance Costs in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Loan Notes, Debentures and Finance Costs: frequently asked questions

What is the difference between debentures and loan notes?

A debenture is a loan note secured by a charge over company assets. A loan note may be secured or unsecured. In ACCA FA the accounting is the same: a liability, with interest charged as a finance cost.

How do I record accrued loan note interest?

Debit finance costs and credit accrued interest, a current liability, for the unpaid part. When you pay it next period, debit accrued interest and credit bank. The expense is then recognised in the period it relates to.

What does amortised cost mean for loan notes?

It means the liability starts at net proceeds and moves each year by adding the finance cost at the effective rate and deducting cash paid. By redemption it reaches the amount repayable.

Where do loan notes appear in the financial statements?

Finance costs appear in profit or loss. Loan notes due after more than 12 months are non-current liabilities. Accrued interest and any part repayable within 12 months are current liabilities.