"The name's Bond..."

Another important factor in a business' financial well-being is the issuing of bonds. Investors purchase bonds with cash after they are issued by a corporation. Essentially, a bond creates a long-term debt for a company as they borrow money. Those who purchase the bonds are considered lenders and/or bondholders.

As with most transactions, the issuing and paying off of bonds requires accurate accounting of interest that accrues throughout the bond's life until maturity. Interest is typically paid every six months (semiannually). Thus, if a corporation issues a bond to be paid at maturity in three years, it will make a total of six interest payments. Upon the maturity date of the bond, the issuer will pay the investor its final interest payment as well as the bond's principal amount.

A bondholder's claim to these interest payments is NOT a form of equity; the investor is not granted any form of the corporations ownership. Thus, the corporation that issues the bond does not make any entry to the equity accounts. Rather, upon issuing the bond, it will debit the amount of cash received and debit 'Bonds Payable'. This establishes a liability that will be paid at the bond's maturity date. When interest payments take place, the journal entry will be recorded as such with 'Bond Interest Expense' and 'Bond Interest Payable'.

Bonds can be issued with a Premium or Discount. A Premium is issued when the investor is willing to pay more than the principal amount proposed by the corporation. A discount, therefore, is issued when the investor purchases the bond at a price lower than par value. Both Discounts and Premiums are amortized accordingly at each semiannual interest payment and at the date of maturity.

Straight-Line Amortization and Effective Interest are two useful methods that effectively compute the reduction of a premium or discount throughout the life of the bond.

There is so much more to discuss regarding bonds and why they are so vital to the success of a business. As an aspiring entrepreneur, I have taken significant interest (no pun intended) in the importance of bonds. Lenders and investors are especially important to the success and survival of a start up industry. I have no interest in becoming an accountant, but I have definitely learned a lot of vital information regarding the financial endeavors and management for a business.

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