Businesses can go about raising funds for various enterprises in a number of ways. Two methods are borrowing the money in the form of a loan or through the issuance of bonds. When accounting for these borrowed funds, businesses use a bonds payable or a notes payable account to keep track of the repayment.
Both types of accounts have similarities but differ significantly in the type of borrowing agreement each represents. Notes payable accounts that are maintained by the business owner represent the long-term liabilities that the business owner has. These liabilities are usually in terms of a loan that has been taken out to fund business development, research or daily business operations through periods of financial difficulty.
The loans taken out for these purposes are generally lower in amount than what a business owner can expect to get through issuing a bond. Bonds are also a long-term debt obligation that the business owner has to its lenders, but the debt is of a different type and is usually much larger in scale. When a business loan will not suffice for the scope of the project or whatever expenses the business has planned, the business can issue bonds instead through the help of an investment banker.
Bonds payable payment. Determine the dollar amount of principal the Christopher Corporation will have to pay to bonds owners at the end of five years. Determine the dollar amount of interest the Christopher Corporation will have to pay to bonds owners every 12 months. Determine the dollar amount of interest the Christopher Corporation will have to pay to bonds owners over all five years.
Determine the Christopher Corporation's total five-year cost of borrowing through issuing the bonds. Principal payment on August 31, end of year 5. Determine the Christopher Corporation's total monthly cost of borrowing through issuing the bonds. Bonds payable and notes payable Bonds payable and notes payable are written promises to pay known dollar amounts, on specific dates, to the owners of the bonds or notes.
Date Description Post. Debits Credits Dec. Previous section Next section. Total Resources. Stockholders' Equity. July 1. Bonds Payable. Cash received on July 1. In many bonds, the investors also have the right to regular interest payments on their loan to the entity. Typically, the more certain the repayment of the bond, the lower the rate of return. A company's decision to issue bonds is often a major financial decision, since it places the company in debt. In some cases, government agencies are required to consult voters through a referendum election before issuing bonds.
A note payable also known simply as a "note" is essentially a traditional loan. The term "note" comes from the typical use of a promissory note to immortalize the transaction.
A note is characterized by having a specified principal amount and term of maturity. It has a particular interest rate as well, although that interest rate may be either fixed, or set to fluctuate based on the prime interest rate, depending on the legal terms of the loan agreement. Issuance of a note payable by a company may require approval by the company's board of directors. For accounting purposes, bonds and notes payable receive similar treatment.
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