All subjects · Accounting · WAC12 Corporate and Management Accounting

Ordinary shares, preference shares and debentures

Edexcel IAL Accounting · WAC12 Corporate and Management Accounting

Companies can raise long-term finance from owners (shares) or lenders (debentures). Each type carries different rights, risks and returns, and is treated differently in the accounts.

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Comparing the three

Feature	Ordinary shares	Preference shares	Debentures
Status	Owners	Owners (usually without votes)	Lenders (creditors)
Return	Dividend varies; none if the directors decide	Fixed rate dividend, paid before ordinary dividends	Fixed rate interest, must be paid
Voting	One vote per share	Usually none	None
On winding up	Paid last: residual interest	Before ordinary shareholders	Before all shareholders; often secured on assets
In the accounts	Equity	Equity (redeemable preference shares are a liability)	Non-current liability; interest is a finance cost
Risk to holder	Highest	Medium	Lowest

Preference share variations

Cumulative: unpaid dividends carry forward and must be paid before any ordinary dividend.
Non-cumulative: a missed dividend is lost.
Redeemable: the company will buy them back on a set date. Redeemable preference shares are treated as liabilities and their dividends as finance costs; examiners expect the label 'Redeemable preference share dividends' in journals.
Participating: may receive an extra dividend when profits are high.

Debentures

A debenture is a long-term loan, usually in units of £100, with a fixed rate of interest and a redemption date. It may be secured by a fixed charge on a specific asset or a floating charge on assets generally.

For the company: interest is tax-deductible and must be paid even in a loss-making year; ownership is not diluted. For the investor: lower risk than shares, but no share in growing profits.

Calculating returns

7% preference shares with nominal value £1,000,000 receive a dividend of 7% x 1,000,000 = £70,000.

9% debentures of £2,500,000 cost 9% x 2,500,000 = £225,000 interest a year.

The rate is always applied to the nominal value, not the market value.

Worked example

A company has 4,000,000 6% cumulative preference shares of £0.50 each. No preference dividend was paid last year. How much must be paid in preference dividends this year before ordinary shareholders receive anything?

Nominal value = 4,000,000 x 0.50 = £2,000,000
Annual dividend = 6% x 2,000,000 = £120,000
Cumulative, so last year's arrears are also due: 2 x 120,000

Answer: £240,000

Key idea: Ordinary shares: votes, variable dividend, highest risk. Preference shares: fixed dividend, priority, usually no vote. Debentures: loans with fixed interest, a liability, interest is a finance cost.

Check yourself

A company has 2,000,000 8% preference shares of £0.50 each. Calculate the annual preference dividend.
Show answer
£80000. Nominal value £1,000,000 x 8% = £80,000.
A company issued £3,000,000 of 7% debentures on 1 April. Its year ends on 31 December. Calculate the debenture interest charge for the year.
Show answer
£157500. 9 months: 3,000,000 x 7% x 9/12 = £157,500.
A company has £800,000 of 5% cumulative preference shares. No preference dividends were paid in the last two years. What total preference dividend must be paid this year before any ordinary dividend?
Show answer
£120000. 3 years x £40,000 = £120,000.
Which type of finance normally gives the holder a vote at general meetings?
- Preference shares
- Ordinary shares
- Debentures
- Bank loans
Show answer
Ordinary shares. Ordinary shareholders own and control the company.
How are debentures shown in the statement of financial position?
- As part of equity
- As a current asset
- As a reserve
- As a non-current liability (unless repayable within 12 months)
Show answer
As a non-current liability (unless repayable within 12 months). Debenture holders are lenders, so debentures are liabilities.
Which investor faces the most risk?
- A secured debenture holder
- An ordinary shareholder
- A preference shareholder
- A trade payable with security
Show answer
An ordinary shareholder. Ordinary shareholders are paid last and have no fixed return.
Which payment must a company make even if it makes a loss?
- Ordinary dividends
- Non-cumulative preference dividends
- A bonus issue
- Debenture interest
Show answer
Debenture interest. Interest is a contractual obligation; dividends depend on profits and the directors' decision.

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Last updated 8 November 2026. Spotted a mistake? Tell us.