An adjunct account is an account that adds to the value another account without impacting the balance in the main account. The combination of the balance in the main account and the balance in the related adjunct account equals the full value of the account.
What is an Example of an Adjunct Account?
The main use for an adjunct account is in tracking the value of a bond issued at a premium. This happens when the market rate of interest is lower than the coupon rate on a bond.
This means the value of the offered bond is higher because it offers a higher interest rate than what is available for other similar bonds being sold. When the coupon rate of the bond is higher than the market rate, the bond is issued at a premium.
Premium on Bonds Payable is an adjunct account to Bonds Payable. It is used to track the additional value without impacting the face value of the bond.
Here’s an example:
Let’s say our corporation is offering a bond is $100,000, issued at 12% interest for 5 years on January 1, with interest being payable on June 30 and December 31 each year. The market rate is 11%. Because the market rate is less than the contract rate, the bond is at a price greater than 100%.
For the purposes of our example, we’ll say the bond sells at the premium amount of $103,769. This is the amount of cash that will be received. The face value is recorded at $100,000. This is amount that will be due when the bond is paid. The difference between the two is the bond premium. Rather than adjusting the face value, the reduced interest to be paid is added to the cash.
When the bond is issued, the following journal entry is prepared:
| Cash | 103,769 | |
| Premium on Bonds Payable | 3,769 | |
| Bond Payable | 100,000 |
When this entry is posted to the accounts, the result on the Balance Sheet would be:
| Bonds Payable | 100,000 |
| Premium on Bonds Payable | 3,769 |
| Bond Carrying Amount | 103,769 |
The account Premium on Bonds Payable is an adjunct account. An adjunct account works the same as its related account. It is an addition to its related account. It supplements it. The related account is Bonds Payable. Bonds Payable is a liability. It has a normal credit balance. It increases with a credit and decreases with a debit.
Premium on Bonds Payable is an adjunct liability. It has a normal credit balance. It increases on the credit side and decreases on the debit side. The overall effect of Premium on Bonds Payable is to increase the balance of Bonds Payable without changing the main balance of the account.
What is the Difference Between an Adjunct Account and a Contra Account?
Adjunct accounts add to the value of the related account. Contra accounts subtract from the value of a related account.
For more information about Contra Accounts, check out this article:
For more information and step-by-step instructions for accounting for Bonds Payable, check out this Accounting Student Guide:
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