Bonds Payable is a liability account that represents the total face value of bonds issued by a company. When a company issues bonds at a price lower than their face value, a Discount on Bonds Payable account is established as a contra-liability. This account is debited to reflect the initial discount and is gradually amortized over the bond’s life.
Conversely, when bonds are issued at a price higher than their face value, a Premium on Bonds Payable account is created as another contra-liability. Premium on Bonds Payable is credited initially and amortized over the bond’s term. This amortization is also recorded as a reduction in Interest Expense.
These contra-liability accounts, Discount on Bonds Payable and Premium on Bonds Payable, serve to adjust the carrying value of the bonds on the balance sheet over time, ensuring that the reported liability aligns with the economic reality of the bond issuance.