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The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless.The authors and reviewers work in the sales, marketing, legal, and finance departments. All have in-depth knowledge and experience in various aspects of payment scheme technology and the operating rules applicable to each.The team holds expertise in the well-established payment schemes such as UK Direct Debit, the European SEPA scheme, and the US ACH scheme, as well as in schemes operating in Scandinavia, Australia, and New Zealand.
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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A bond is a fixed obligation to pay that is issued by a corporation or government entity to investors. Bonds are used to raise cash for operational or infrastructure projects.
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.
Bonds are issued by governments and corporations when they want to raise money. By buying a bond, you're giving the issuer a loan, and they agree to pay you back the face value of the loan on a specific date, and to pay you periodic interest payments along the way, usually twice a year.
Record the appropriate book entries upon issuing the bond.
Record a debit to the Cash account and a credit to Bonds Payable, both for the total face value of the bonds issued. To record the sale of a $1000 bond, for example, debit Cash for $1000 and credit Bonds Payable (a long-term liability account) for $1000.
For example, if a company wants to build a new plant, it may issue bonds and pay a stated rate of interest to investors until the bond matures. The company also repays the original principal. Unlike buying stock in a company, buying a corporate bond does not give you ownership in the company.
A financial asset is a liquid asset that gets its value from a contractual right or ownership claim. Cash, stocks, bonds, mutual funds, and bank deposits are all are examples of financial assets.
The appropriate accounting treatment for issuance costs is to capitalize them upon original issuance and then expense them over the remaining life of the bond until maturity. Additionally, if bonds are paid off before their maturity date, the remaining unamortized issuance costs will be expensed as of the payoff date.
Bonds are an investment product where you agree to lend your money to a government or company at an agreed interest rate for a certain amount of time. In return, the government or company agrees to pay you interest for a certain amount of time in addition to the original face value of the bond.
It is a contract executed under seal whereby the party or parties entering into it bind themselves to pay to some other person or body a specified sum of money, referred to as the penalty to the bond, if any of the conditions of the bond are not satisfied. The obligation in all security bonds is joint and several.
Bonds are among a number of investments known as fixed-income securities. They are debt obligations, meaning that the investor loans a sum of money (the principal) to a company or a government for a set period of time, and in return receives a series of interest payments (the yield).
Bond issue costs are the fees associated with the issuance of bonds by an issuer to investors. The accounting for these costs involves initially capitalizing them and then charging them to expense over the life of the bonds.
The Bonds can be categorised into four variants: Corporate Bonds, Municipal Bonds, Government Bonds and Agency Bonds. The Bond prices are inversely proportional to the Coupon Rate. When the rate of interest increases the bond prices decrease and rate of interest decreases, the bond price increases.
What are Bonds Payable? Bonds payable are recorded when a company issues bonds to generate cash. As a bond issuer, the company is a borrower. As such, the act of issuing the bond creates a liability. Thus, bonds payable appear on the liability side of the company's balance sheet.
The “Bonds Payable” line item can be found in the liabilities section of the balance sheet. Since bonds are financing instruments that represent a future outflow of cash — e.g. the interest expense and principal repayment — bonds payable are considered liabilities.
Bonds are debt instruments. They are a contract between a borrower and a lender in which the borrower commits to make payments of principal and interest to the lender, on specific dates. The main types of financial securities are bonds and equities.
Thus, the issue of a bond (debenture) creates a financial liability as the monies received will have to be repaid, while the issue of ordinary shares will create an equity instrument.
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