A bond is considered a fixed-income debt instrument that provides finance to companies and issuers. In most cases, these instruments come with a fixed interest rate. However, some may also come with a floating rate.
Either way, bonds allow companies to raise finance. In exchange, it provides the investor with the right to receive interest based on the rate. This relationship allows both parties to benefit from the underlying instrument.
Bonds include several terms, such as coupon rate, maturity, face value, etc. These terms are a part of the bond indenture.
Usually, these terms play a significant role in the relationship between the bond issuer and the holder.
The issuer drafts these terms in the bond indenture and provides them to a trustee. The trustee acts as an intermediary between both parties in this relationship.
The accounting for bonds is also straightforward. These are financial instruments that allow companies to raise capital.
In accounting, bonds fall under the definition of liabilities. However, some people may wonder whether they are current or non-current.
The answer to that is complex, though. Nonetheless, it is crucial to understand what a bond payable is first. This concept helps differentiate between the current and non-current portions.
What are Bonds Payable?
A bond payable is a liability that companies record on the balance sheet. The accounting for bonds payable occurs when an issuer issues bonds. In most cases, the issuer includes companies, municipalities, local governments, etc.
These parties offer their bonds to investors in exchange for which they receive finance. Therefore, they must record that finance with the corresponding liability associated with the instruments.
Bonds payable relates to the accounting for bonds. Accounting standards require companies to record liabilities as soon as they become probable. In the case of bonds, it occurs when companies issue them to investors.
Therefore, it is crucial to record these liabilities due to the issuance process. The account used to account for these liabilities is the bonds payable account.
The bonds payable account holds a balance of the amount owed by a company to its bondholders.
This account may appear on the current and non-current portions of the balance sheet. Usually, companies record two types of entries into this account.
The first entry relates to recording any new bonds issued during a year. The other involves the repayment of the owed amounts to investors.
Bonds payable are crucial in accounting as it shows how much companies hold in debt. These bonds are also a critical part of a company’s capital structure.
Usually, investors seek this amount to understand the gearing or leverage position of the company.
Some issuers may also issue bonds at a premium or discount. However, bonds payable only record the par value of the bonds.
Overall, bonds payable is a liability account that holds the amount owed to bondholders. This account includes balances from all bonds issued that are still payable.
In accounting, bonds payable fall under liabilities and appear on the balance sheet.
Once repaid, the issuer removes any balance from the underlying account. However, the classification of bonds payable into current and non-current liabilities may be complex.
Are Bonds Payable Current or Non-current liabilities?
Liabilities include any amounts owed by a company to third parties other than its owner. It consists of obligations from past events which result in outflows of economic benefits.
Similarly, these definitions help understand the amounts that companies must record as a liability. In the balance sheet, liabilities appear under a separate section. This section includes two classifications, current and non-current liabilities.
Current liabilities include any obligations repayable within the next 12 months. Usually, these consist of short-term liabilities that companies owe from their operations. For example, these may involve accrued expenses or accounts payable.
In contrast, non-current liabilities last longer than 12 months. These include long-term liabilities that companies use for financing. For example, non-current liabilities consist of loans, leases, etc.
The above definitions help understand whether bonds payable are current or non-current liabilities. Usually, companies issue bonds for a period longer than one year. For example, companies may offer 3-year, 5-year, 10-year, or longer bonds.
Since these bonds last longer than a year, they fall under non-current liabilities. On the other hand, short-term bonds become a part of current liabilities.
However, any bonds that fall under non-current liabilities do not stay under the section until maturity. During the last year of the bond, companies must classify them as current liabilities.
As mentioned, this classification is crucial to meet the definition of a current liability. In contrast, short-term bonds do not classify as non-current liabilities. They stay under the heading until their eventual maturity.
Bonds payable are mostly non-current liabilities. However, some may also fall under current liabilities.
Furthermore, bonds payable issued for a long-term also enter the current portion on the balance sheet. It happens when the bond is in its last year of maturity.
Since it meets the definition of current liabilities, being lower than 12 months, it gets reclassified. Nonetheless, bonds payable are both current and non-current liabilities, based on the circumstances.
What are the Journal Entries for Bonds Payable?
As mentioned, bonds payable usually include two types of journal entries. The first of these is when a company issues bonds.
When investors purchase the bond, the company receives finance. The company must create a liability while also increasing its cash resources.
This liability falls into the bonds payable account. Overall, the journal entries for the issuance of bonds are as below.
|Cash or bank
The second entry in the account is when companies repay the bonds. This transaction is the opposite of the one above.
In this process, companies reimburse their investors for the value of the bond. Overall, the journal entries for the repayment of bonds payable to investors are below.
|Cash or bank
Some companies may also create two accounts for current and non-current bonds. Therefore, these accounts may also include another journal entry. This journal entry involves transferring the bonds payable within 12 months to the current liability account.
However, most companies change the classification on the balance sheet. They do not maintain separate accounts.
A company, ABC Co., issues 1,000 bonds at $100 face value with a maturity date of 5 years. In exchange, the company receives funds in its bank account.
The total finance received by the company equals $100,000 (1,000 bonds x $100 face value). Therefore, ABC Co. records the issue of these bonds through the following journal entries.
At this time, the bonds stay in the non-current liabilities section of the balance sheet. This treatment is due to bonds being payable after 12 months.
Therefore, these bonds payable will be no-current. For four years, the bonds will have the same classification.
However, during the last year of the bond’s life, ABC Co. must reclassify it as current liabilities.
Once the bond reaches its maturity, ABC Co. must repay the investors. As mentioned, it will be the same amount that the company received.
At this point, the remaining balance will be under the current liabilities on the balance sheet. Once repaid, the balance in the bonds payable account will become nil. The journal entries to record the reimbursement of bonds payable are as below.
Bonds payable are an amount that represents money owed to bondholders by an issuer. This account either falls under non-current or current liabilities. Usually, bonds payable classify under the former section.
During the last year of their maturity, they become a current liability. The accounting treatment of bonds payable does not depend on the classification and stays the same.