What Is Bonds Payable? A Guide for Small Business Owners
If your business ever needs long-term capital, one tool that might come up is a bond-and with that, a key accounting term: bonds payable.
Download Our Free Brochure →This article breaks down what bonds payable really means, how it appears on your balance sheet, and what it tells investors and lenders about your business.
If you’re still getting familiar with core financial terms, check out our guide on Understanding Financial Statements.
What Is Bonds Payable?
Bonds payable is a long-term liability account that represents money your business owes to bondholders. When you issue bonds, you’re borrowing money with a promise to repay it in the future-usually with interest over time.
Think of it like this:
- You issue a bond.
- Someone buys it (a lender or investor).
- You now owe them the face value (principal) of the bond at a future maturity date-plus regular interest payments along the way.
Until you repay that bond, the amount you owe stays recorded on your balance sheet as bonds payable.
Why Do Businesses Issue Bonds?
Most small businesses won’t issue bonds-but larger corporations or government agencies do it to raise long-term capital without giving up ownership (equity).
It’s a financing option that offers:
- Fixed interest costs over time
- No dilution of ownership (unlike issuing stock)
- Predictable repayment structure
Bonds are often used for:
Download Our Free Brochure →- Expanding operations
- Buying fixed assets (like real estate or equipment)
- Funding long-term projects
Looking to understand the pros and cons of business borrowing? You may also want to read our blog on Catch-Up Bookkeeping to stay compliant if your records are behind.
Bonds Payable on the Balance Sheet
Bonds payable shows up as a non-current liability on the balance sheet because it usually represents debt due more than one year in the future.
Example:
| Liabilities | Amount |
|---|---|
| Accounts Payable | $25,000 |
| Accrued Expenses | $5,000 |
| Bonds Payable | $100,000 |
| Long-Term Loans Payable | $50,000 |
In this case, the business owes $100,000 to bondholders, which must be paid at maturity.
Components of Bonds Payable
When you see bonds payable on a company’s books, it includes:
- Face Value (Principal): The amount the company must repay at maturity.
- Interest Rate (Coupon): The rate the company pays regularly to bondholders (e.g., 6% annually).
- Maturity Date: When the principal must be repaid.
- Issue Date: When the bond was originally issued.
Some bonds also have:
- Premium or discount (based on market interest rates)
- Callable or convertible features
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Bonds Payable vs. Notes Payable
Don’t confuse bonds payable with notes payable. Here’s the difference:
| Feature | Bonds Payable | Notes Payable |
|---|---|---|
| Term | Long-term (usually) | Short or long-term |
| Issuer | Often public companies | Any business size |
| Marketable? | Yes (traded) | No |
| Regulation | Heavily regulated | Less formal |
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Test Case: Understanding Bonds Payable in Action
Client: Mid-size construction firm in Texas
Situation: Issued $500,000 in 10-year bonds at 5% interest to finance new equipment
Bookkeeping Impact:
- $500,000 recorded under Bonds Payable
- Interest recorded as an expense each year
- Balance reduced only if bond is paid early or at maturity
Insight: The company was able to expand without taking out a traditional bank loan or giving up equity. Clean records in bonds payable helped them secure favorable terms for future funding.
FAQs
Is bonds payable a current or non-current liability?
It’s a non-current liability because it’s typically due more than 12 months after the reporting date.
How do you record interest on bonds payable?
Interest payments are recorded as an expense on the income statement and reduce cash on the balance sheet.
Can small businesses issue bonds?
Technically yes, but it’s rare. Most small businesses use loans or lines of credit instead.
What happens when the bond matures?
The principal (face value) is paid to the bondholder, and the bonds payable account is cleared.
Are bonds payable taxable?
For the issuer, interest is usually tax-deductible. For the bondholder, interest received is taxable income.
Final Thoughts
Bonds payable represent a long-term financial obligation. If you’re a business owner or bookkeeper, understanding how this liability works is essential for accurate financial reporting and smarter funding strategies.
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