bonds payable

When a company needs a very large sum — say to build a factory — borrowing it all from a single bank may be impractical. Instead it can split the loan into thousands of small, identical pieces and sell them to many investors. Each piece is a bond: a formal promise to pay the holder a set amount at a future date, plus regular interest along the way. From the issuing company's books, the total it owes to all those bondholders is bonds payable.

Bonds payable is a long-term liability representing money a company has borrowed by issuing bonds to investors. A bond specifies a face value (the amount repaid at the end), a maturity date (when that repayment is due), and a coupon rate (the interest paid periodically, usually twice a year). For example, a 1,000,000 bond issue at a 5 percent coupon, maturing in ten years, obliges the company to pay 50,000 of interest each year for ten years and then repay the full 1,000,000. Investors can usually buy and sell bonds among themselves before maturity, but the company's obligation stays fixed by the bond's terms.

Bonds let companies and governments borrow huge amounts from the public on long timelines, often at lower cost than bank loans, while spreading the lending across many investors. On the balance sheet, bonds payable usually sits in non-current liabilities until the final year. Accounting for bonds gets interesting because they are rarely issued for exactly their face value — market interest rates almost never match the coupon precisely — which leads to discounts and premiums, covered separately.