What entry should be made when recording bond issuance and related interest?

When a company issues bonds, it receives cash from investors, which is reflected in the accounting records. The correct entry to record the bond issuance involves debiting Cash to increase the asset account, as the company is receiving funds. Simultaneously, Bonds Payable is credited, which signals an increase in liabilities since the company now owes this amount to the bondholders.

This first entry is crucial as it establishes a clear record of the company borrowing money through bonds, showing both the cash inflow and the corresponding obligation to repay the bondholders in the future.

Understanding this process is important because it highlights how bond transactions affect the financial statements. The increase in Cash may enhance the company's liquidity position, while the increase in Bonds Payable reflects future financial obligations that the company will need to manage, including interest payments and principal repayment upon maturity. Thus, the entry accurately captures the dual impact of bond issuance on a company's financial position.