What are Bonds Payable?

Bonds Payable are a form of debt financing issued by corporations, governments, and

other entities in order to raise capital.
As part of the financing arrangement, the issuer of the bonds is obligated to pay periodic
interest across the borrowing term and the principal amount on the date of maturity.

Bonds Payable: Balance Sheet Liability Accounting

Bonds payable represent a contractual obligation between a bond issuer and a
bond purchaser.

Bonds are an agreement in which the issuer obtains

financing in exchange for promising to make interest
payments in a timely manner and repay the principal
amount to the lender at maturity.

Normally, the interest on bonds is paid on a semi-annual basis, i.e. every six
months until the date of maturity.

The exact terms of bonds will differ from case to case and are clearly stated in the
bond indenture agreement.
For corporations, the benefit of issuing bonds rather than issuing stock is that
debt is considered a “cheaper” source of financing (i.e. lower cost of capital) as
long as the default risk is kept at a manageable level, the interest on bonds is tax-
deductible (i.e. creating the “tax shield“), and bondholders do not dilute the
ownership interests in a company’s equity.
Of course, in the case of bankruptcy — i.e. the worst case scenario, where a
borrower defaults — debt lenders are placed higher in the capital structure and
their claims are thus prioritized, so their recoveries are much higher relative to
equity shareholders.
However, for financially sound companies, bond issuances represent a valuable
method to raise capital while avoiding diluting equity interests as well as
providing other benefits.

Bonds Payable, Current vs. Non-Current Portion

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.
Moreover, the “payable” term signifies that a future payment obligation is not yet
fulfilled.

Depending on how far in the future the maturity date is from the present date,
bonds payable are often segmented into “Bonds payable, current portion” and
“Bonds payable, non-current portion”.

Current Portion → Maturity Date < 12 Months

Non-Current Portion → Maturity Date > 12 Months

Bonds Payable Journal Entry Example [Debit, Credit]
Suppose a company raised $1 million in the form of bond issuances. The journal
entries would be as follows:

Cash Account → Debit by $1 million

Bonds Payable → Credit by $1 million

For each month that the bond is outstanding, the “Interest Expense” is debited,
and “Interest Payable” will be credited until the interest payment date comes
around, e.g. every six months.
After each periodic interest expense payment (i.e. the actual cash payment date)
per the bond indenture, the “Interest Payable” is debited by the accumulated
interest owed, with “Cash” representing the offsetting account.

Interest Payable → Interest Expense Obligation

Cash → Interest Expense Obligation

Similarly, the journal entry on the date of maturity and principal repayment is
essentially identical, since “Bonds Payable” is debited by $1 million while the
“Cash” account is credited by $1 million.

Bonds Payable → Debit by $1 million

Cash Account → Credit by $1 million

At maturity, the outstanding balance owed by the issuer is now zero, and there
are no more obligations on either side, barring unusual circumstances (such as
the borrower being unable to repay the bond principal).