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What Is Bond Accounting?

Last editedMar 20222 min read

Like any financial instrument, purchasing a bond can create a variety of transactions over its lifespan, from issuance to redemption. How do you handle interest, amortization, and other issues related to a bond in accounting? In this guide, we’ll discuss the meaning of bond accounting and give a rundown of how to record these transactions. 

What does bond accounting mean?

Bond accounting refers to the process used to record bond-related transactions in your financial statements. This includes cash received when the bond is issued, which is recorded on the balance sheet. A bond in accounting should also be recorded in assets and liabilities depending on whether the bond is issued at par, at premium, or at discount.

The type of bond will impact how it should be recorded under assets and liabilities. There are three types of bond values to be aware of:

  • Par value bonds: The market interest rate equals the coupon rate

  • Premium value bonds: The market interest rate is less than the coupon rate

  • Discount value bonds: The market interest rate is greater than the coupon rate

Bond accounting at issuance

How do you record a bond in accounting when it’s issued at par value? The buyer pays cash to the issuer in this transaction. The issuer is now liable to pay back the bond, so it’s recorded as a liability on the balance sheet. When recording the transaction, the journal entry would look like this:

 

Debit

Credit

Cash

$X.XX

 

Bonds Payable

 

$X.XX

When the bond is issued at a premium rate, you’d record the difference between the bond’s face value and the cash received. In this case, the investor has decided to accept a lower rate of return on the investment.

 

Debit

Credit

Cash

$X.XX

 

Premium on bonds payable

 

$X.XX

Bonds payable

 

$X.XX

If the bond is issued at a discount rate, the difference between the face value and cash received is recorded along with the cash payment and liable bond value.

 

Debit

Credit

Cash

$X.XX

 

Discount on bonds payable

$X.XX

 

Bonds payable

 

$X.XX

Of course, when recording a bond in accounting you must also consider all the other associated transaction fees. Issuing a bond can involve legal fees, printing costs, and sales commissions, for example. These should also be recorded as an asset account journal entry initially. Over the bond’s lifespan, they’ll be charged to expenses

Interest payments in bond accounting

One of the benefits of purchasing bonds is earning money in the form of interest payments. For the issuer, these are recorded as an interest expense depending on the interest rate. The interest rate should be clearly stated on the bond’s face at time of purchase. For the investor or buyer, interest payments are recorded in accounting as revenue.

Amortization will come into play if the bonds are issued at a discount or premium. The difference in cost from face value (or par value) will be amortized in the books over the bond’s lifespan. For example, a discounted bond requires a periodic debit to interest expense and credit to discount on bonds payable. The opposite would hold true for premium bonds, which require a debit to premium on bonds payable and credit to interest expense.

Accounting for bond redemption

You’ll make periodic adjustments to journal entries to account for amortization and interest, depending on the type of bond and its discount or premium value. What happens when it’s time to redeem the bond at the end of its lifespan? By this time, all premiums and discounts should already be accounted for, if you’ve been updating them periodically. The final journal entry will therefore be a debit to bonds payable, and corresponding credit to cash. This keeps your balance sheet in order, with all associated transactions accounted for.

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