The Impact of Bonds on Financial Statements
A bond is a debt product a company sells to investors -- such as investment banks, rich people and pension funds -- privately or on public exchanges, also known as debt markets. Bond transactions affect various financial statements, from income statements and balance sheets to statements of cash flows and shareholders' equity reports.
A balance sheet is the financial synopsis you review to know more about a company's assets, debts and equity capital -- which consists of investors' money and the entity's own cash. To record bond issuance, a corporate bookkeeper debits the cash account and credits the bonds payable account. This bookkeeping scenario assumes the company sold the bonds at par value -- also called face value -- meaning the debt products fetched the exact price shown on the debt covenant. In accounting terminology, debiting cash means increasing company money. Bond issuance at par value increases corporate cash -- an asset account -- and triggers a hike in the bonds payable account, which is a long-term debt. A bond-selling business also records bond issue costs -- which include professional fees incurred in issuing the debt instruments -- in the "other assets" category on the balance sheet.
If you look into a corporation's income statement -- the other name for statement of profit and loss -- you identify top products that brought most of the cash into the organization's coffers during the period under review, along with expense items that reduced net income. To calculate net income, deduct expenses from revenues. Bond transactions affect an income statement through two the interest expense and amortization expense accounts. The last item comes from the fact that accountants spread the value of bond issue costs over several years.
A statement of cash flows tells readers whether a company is awash in money or whether its near-empty coffers are constantly forcing senior executives to canvass the offices of lenders and investors. If you comb through the report, you see things like operating cash flows along with incoming and outgoing cash stemming from investing, lending and fundraising initiatives. Bond transactions affect a liquidity report -- the other name for a cash flow statement -- through various entries. Accountants report interest payments as well as principal remittances and issuance proceeds in operating cash flows and financing cash flows, respectively.
An equity statement includes elements such as accumulated profits, dividends, common stock and preferred shares. Bond issuance affects this financial synopsis through interest and amortization expenses, both of which decrease net income -- and ultimately flow into the retained earnings account, which is an equity item.