Introduction & Overview
In the modern age, there have been notable innovations in accounting and finance that have significantly increased the number of options they have about financing. Where financing tends to be an increasingly important phenomenon in today’s competitive business landscape, companies are faced with the need to decide which particular financing tool would be the best fit.
Regardless of the options available to organizations, bonds continue to be a top choice for organizations because of several different reasons, the primitive of which is that they are relatively easier to obtain and subsequently exercise. This article will cover accounting for bonds payable and how bonds payable are accounted for in the normal course of the business.
What Are Bonds Payable?
Bonds can be defined as obligations that indicate the need to repay the issuing party at a future date, in addition to periodic (and agreed upon) interest rates. Bonds are normally issued simultaneously to different buyers, and organizations mostly procure them to ensure that they can raise funds for the business.
Bonds are referred to as units of corporate debt that are mostly securitized as tradeable assets. It can be classified as a fixed income instrument because a fixed interest rate is paid to the issuing party in most cases.
Speaking of bonds payable, it can be seen that bonds payable mostly refer to instruments that need to be settled by the company, in principle and the interest that is supposed to be paid on the given amount.
Types of bonds payable:
Within the realm of bonds payable, there are several options that investors or companies can choose from. These options are curated to satisfy the risk appetite of the given buyer. The types of bonds are given below:
- Serial Bonds: These are bonds that are issued in different groups and intervals, which mature at different dates.
- Sinking Fund Bonds: Sinking Fund Bonds are bonds that require the issuer of the bonds to have certain assets designated specifically to pay the principal amount on maturity. Setting aside of specific assets ensures that the risk profile is reduced, and there are funds at the end to pay the amount.
- Convertible Bonds: Convertible Bonds have the option of the amount of finance raised to be exchanged for a fixed number of shares for the company’s common stock. Therefore, if organizations opt for this type of Bond, they have the option to issue equity, rather than paying back the amount in cash.
- Secured Bonds: Secured Funds bonds are somewhat similar to Sinking Fund bonds, except for the fact that when these bonds are issues, organizations are supposed to pledge some of their assets as collaterals as surety that the party will eventually be paid, in case the organization fails to abide by the required terms and conditions.
- Debenture Bonds: Debenture Bonds are unsecured bonds, and they require the bondholder to have a good name and repute in order to ensure repayment of principal and interest for the issuing company. These can be considered riskier as compared to secured bonds.
Bonds Payable in Balance Sheet
Bonds Payable are considered as a Long-Term Liability for the company issuing the bonds. This is primarily because Bonds Payable is supposed to be paid in full upon maturity. Organizations need to depict this particular obligation on the Balance Sheet at the end of the subsequent year.
Therefore, Bonds Payables are presented under Non-Current Liabilities (if they are supposed to be settled after a period of one year) in the company’s Balance Sheet.
Journal Entry and Example
Bonds can either be issued at par or a discount by the company. The accounting process carried out when working with bonds payable is illustrated in the following example.
Example 1
On July 1, 2019, ABC Corporation issued bonds worth $10,000 for a ten-year period with a coupon rate of 10% and semi-annual payments.
The entries for the above transaction in the General Journal would be as follows:
| Date | Account Title and Description | Debit | Credit |
| 1 July 2019 | Cash | 10,00 | |
| Bonds Payable | 10,000 | ||
| 31 Dec 2019 | Interest Expense | 500 | |
| Cash | 500 | ||
| 30 Jun 2020 | Interest Expense | 500 | |
| Cash | 500 |
In the same manner, upon principal repayment, the following journal entry is made:
| Date | Account Title and Description | Debit | Credit |
| 30 July 2020 | Bonds Payable | 10,000 | |
| Cash | 10,000 |
The above entry is made to showcase the settlement of Bonds Payable after the principal amount has subsequently been made. Before the settlement, Bonds Payable are represented as a Long Term Liability (Non-Current Liability) on the Balance Sheet.
In the case where Bonds are issued at a discount, the amount actually paid upon issuance of bonds is the amount debited as cash. For example,
| Date | Account Title and Description | Debit | Credit |
| 1 July 2020 | Cash | 9500 | |
| Discount | 500 | ||
| Bonds Payable | 10000 |
Similarly, if the Bonds are issued at Premium, the following journal entry is made.
| Date | Account Title and Description | Debit | Credit |
| 1 July 2020 | Cash | 10000 | |
| Bonds Payable | 9500 | ||
| Premium Paid on Bonds | 500 |
Conclusion
Bonds Payable can be considered a handy and resourceful tool for companies that helps them to arrange their financing needs without many strings attached. Factually, Bonds Payable can be considered a safe and secure means of external financing that can help companies increase their leverage in the desired manner.
The accounting for bonds payable can be considered as the treatment of long-term liability. When the principal is paid for, the amount is then removed from the company’s Non-Current Liabilities. However, the company’s amount upfront from Bonds depends on whether the bond is issued at par, premium, or a discount. Depending on this, the journal entry is subsequently made.