You record the sale of a bond in almost the same way that you record the sale of a stock.
One tricky feature of a bond sale, however, concerns accrued interest. Even in the case of a bond that periodically pays interest, you need to accrue any interest earned since the last interest payment date. (Although in the case of a zero coupon bond, you have to accrue interest earned only since the last interest accrual transaction.) You need to record accrued interest on bonds because, if you sell a bond, some of what you are receiving represents accrued interest.
In a nutshell, you accrue interest by entering two transactions in the appropriate investment account register. First, you record the accrued interest by recording what appears to be a regular interest transaction. The interest amount gets transferred into the associated cash account, which is wrong, but you fix that by recording the second transaction. The
second transaction records a return of capital amount equal to the amount of accrued interest.
The tricky part with the return of capital transaction, however, is that the transaction amount needs to be set to a negative value. For example, if you are recording $100 of accrued interest, you need to set the return of capital transaction to -$100. The combination of these two transactions-a regular bond interest transaction and a negative return of capital transaction-results in the correct recording of accrued interest for the bond.
NOTE If you pay accrued interest when you purchase a bond, you also need to record that as part of the initial bond purchase transaction. To record the accrued interest on a bond you purchased, you need to record two separate
transactions. First, record the bond purchase in the way described earlier.
Second, record a return of capital transaction with a negative return of capital
amount. This negative amount equals the accrued interest. Then when you get
your first interest payment on the bond, you record as interest income only the amount that you didn't previously accrue. For example, if you received a $50 interest payment, but $20 of it had already been accrued as part of recording the purchase, you would record only $30 of interest income. You would, however, handle the remaining $20 as a return of capital transaction.
