What is Bonds Payable?

Bonds payable is a liability account that contains the amount owed to bond holders by the issuer. The account balance increases when an organization sells bonds to investors, and declines when the issuer redeems them.

An entity is more likely to incur a bonds payable obligation when long-term interest rates are low, so that it can lock in a low cost of funds for a prolonged period of time. Conversely, this form of financing is less commonly used when interest rates spike. Bonds are typically issued by larger corporations and governments.

Presentation of Bonds Payable

The bonds payable account typically appears within the long-term liabilities section of the balance sheet, since bonds typically mature in more than one year. If they mature within one year, then the line item instead appears within the current liabilities section of the balance sheet.

Bonds Payable Terms

The terms of bonds payable are contained within a bond indenture agreement, which states the face amount of the bonds, the interest rate to be paid to bond holders, special repayment terms, and any covenants imposed on the issuing entity.