Business accounting practices enable companies to manage their available assets and resources. Bond issues provide a company with the capital needed to finance business expansions and new project plans. When factored into a company’s balance sheet activities, accountants must track bond revenues and interest payments made to shareholders in different ways.
Companies use debt financing as a way to generate capital without reducing their existing equity holdings. Bond issues function as a type of debt financing. In effect, bonds allow companies to “borrow” money from bondholders in exchange for interest earnings paid out on a periodic basis. At some point, bonds reach a maturity date, at which time companies pay back the initial bond price to bondholders. Since bond issues create a financial liability, companies must keep track of bond issue activities on their balance sheet records.
Balance sheets record a company’s assets and liabilities at different points in time, such as on a yearly or biannual basis. In addition to the balance sheet, companies also use income statement ledgers to keep track of month-to-month cash flows. Bond issues may represent a short-term or long-term liability. In many cases, a company will use the capital provided through bond issues over a period of time. As a result, accountants must record bond activities on income statements as well as on the balance sheet to show where bond revenues were applied. In effect, as bond issues mature, balance sheet liability amounts decrease while income statement expense costs increase during the months where interest earnings payments go out.
Debits and Credits
Within the balance sheet portion of a company’s financial statement, the amount of equity a business has equals the total asset amount minus the total liability amount. So, whenever a reduction in liabilities occurs as a result of an interest earnings payout, the equity holdings amount increases. Debit and credit activities function as a double-entry accounting activity that keeps track of bond issues on both the balance sheet and income statement. Whenever shareholders receive a payout on interest earnings, the liability portion of a balance sheet gets debited, while the cost expenses for shareholder payouts gets credited. In effect, debiting the liabilities portion of the balance sheet increases asset amounts, while crediting the cost expenses on the income statement decreases the total amount owed.
When companies sell bond issues on the market, bonds can sell at the going market rate value or they can sell above or below market rates. Bonds sell for par when sold at their market value. Premium bonds sell above their market value while discount bonds sell below market value. In the case of premium bonds, companies show a profit, because bonds earn more in interest than companies have to pay out to shareholders. With discount bonds, companies lose money, because actual bond interest earnings pay out less than what companies must pay to shareholders. On the balance sheet, premium bond activities result in an actual increase in asset and equity holdings while discount bonds have the opposite effect.