Bonds

• When investors purchase bonds from a company, they are essentially lending the company money for a specified period of time. The company must pay the bondholders regular interest payments from the time the bondholder first purchased the bond until the bond reaches maturity. At the maturity date, the bond investors receive the principal amount invested in the bond. The principal amount is what the investor originally paid for the bond. For example, an investor purchases a 10-year, $1,000 bond with a 10 percent coupon rate. The investor receives 10 percent interest payments over 10 years. At the end of the 10 years, the investor receives his $1,000 initial investment.
  
  

Accounting for Bonds

• If the company issues bonds for their face values and not at a discount or premium, at issue, the company debits cash for the proceeds it received from the sale of the bonds and credits bonds payable for the same amount. If the company sold the bonds at a discount, meaning the bonds sold for less than their face value, the company debits cash for the amount it received from the sale of the bonds. It then has to debit the bond discount account for the amount the bonds were discounted and credits bonds payable for the total face value of bonds.
  
  

Notes

• When a company issues a note receivable, it is similar to a customer making a purchase on credit in which the customer receives the merchandise, but pays for it at a later date. When a company obtains financing through a promissory note, it creates a debt obligation for which it must pay the lender regular interest payments until the note comes due. This is a note payable. When the note comes due, the company must then pay off the entire principal balance of the note.
  
  

Accounting for Notes

• When a company issues a notes receivable, it debits notes receivable and credits accounts receivable. When the customers pays off the note, the company debits cash for the total amount received for the note, credits interest income for the amount of money it received in interest payments on the note, and credits notes receivable for the principal and interest amounts. When a company obtains financing through a promissory note, it debits the asset account for which it obtained the note. For example, if the company obtained a note to purchase a piece of equipment, it debits the equipment account. The company then credits notes payable.