What should be recorded when a company pays interest on its bonds?

When a company pays interest on its bonds, it incurs a financial obligation, which is recorded as an interest expense. This represents the cost of borrowing and is recognized in the financial statements to reflect the company's expenses accurately. The accounting entry involves debiting the interest expense account to recognize this cost.

At the same time, the company must pay this interest, which reduces its cash balance. Therefore, the cash account is credited to reflect the outflow of resources. By debiting the interest expense and crediting cash, the transaction appropriately captures the cost of borrowing and the effect on the company’s cash position.

This transaction results in a clear recording of expenses incurred during the reporting period and indicates the use of cash resources, providing a true picture of the company's financial activities.