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Journal Entries for Treasury Bills (T-Bills) – an Easy Guide

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There are multiple ways to invest money, with the primary investment categories being debt, equity, and money markets. Governmental entities such as the US Treasury also issue debt through Treasury Bills (T-Bills). In this article, we will discuss the nature of treasury bills and the accounting treatment of buying treasury bills with an easy-to-understand journal entry example.

Understanding Treasury Bills (T-Bills) and the Accounting Treatment

Treasury Bills, Notes, and Bonds are bought from a governmental entity like the US government. Each category of Treasuries has a different maturity date, with Bills being the shortest (maturing within one year). In simple words, when purchasing these treasuries, you loan money to the government for some time and are expected to get it back when the debt matures.

To illustrate the proper accounting treatment, we assume that the Treasury Bills are purchased directly from the Treasury and held until the maturity date listed on the actual Bill. If the Bill is purchased on the secondary market, the amount paid may vary from the original sales price depending on how interest rates have changed.

In accounting terms, Treasury Bills are usually classified as held-to-maturity securities, and they follow these characteristics:

  • Given their short-term nature (maturity within 12 months), buyers often intend to hold them until maturity and have the ability to do so.
  • Interest is not paid out while the treasury bill is held. Instead, it is typically purchased at a discount. For example, a $1,000 treasury bill may be purchased at $940.
  • No gain or loss (neither realized nor unrealized) is recognized as they are not held for trading/selling purposes. Instead, interest income is recognized throughout the term. For instance, if a $1,000 treasury bill is purchased at $940, the $60 difference is effectively the interest income, which will be recorded incrementally throughout the term.
  • In technical accounting terms, the treasury bill is recorded at amortized cost with no gain or loss recognition. We will illustrate this concept with the example below.

In rare events, when a company purchases T-bills and intends to sell them before maturity, it won’t be classified as held-to-maturity, and gain or loss will be recognized in addition to interest income. Our example below does not discuss this scenario as they are uncommon for treasury bills.

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Journal Entry Example of a Treasury Bill (T-Bill) Purchase

Initial recognition: Purchasing the Treasury Bill

In our example, Richard purchases a Treasury Bill on January 1. The Bill matures on June 30, which means the government will give that money back to Richard in six months. The purchase price of the Bill varies based on interest rates; in this case, let’s assume the purchase price of the Bill is $940 and the maturity price is $1,000. (In simple words, Richard lends $940 to the government and will receive $1,000 in return.)

Here is the journal entry:

Journal Entries for Treasury Bills (T-Bills) - initial purchase

Explanation: When purchasing the Bill, Richard will debit the Investment in the Treasury Bill for $940 and credit Cash for $940. Investment in the Treasury Bill is an asset account. On the balance sheet, this account usually rolls up to the line item “Held to Maturity Securities” under “Current Asset,” given their short-term nature.

As mentioned above, held-to-maturity securities like T-bills are recorded at amortized cost (in this case, $940). There is no immediate P&L impact when Richard buys the bill, as interest income will be recognized monthly as time elapses.

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Monthly Interest Income Recognition

At the end of every month from January to June, Richard will need to book a journal entry to account for the interest he derives from purchasing the Bill. Keep in mind that no actual cash will be received until the Bill is redeemed, and Richard will need to account for the investment income as time elapses per GAAP/accrual basis.

The interest is typically booked on a straight-line basis. In this case, it’s derived by deducting the purchase price ($940) from the maturity price ($1,000), giving Richard an interest income of $60 in total. Because the government keeps the Bill for six months, the monthly income to be recorded is $10 ($60/6 months). 

Here is the journal entry:

Journal Entries for Treasury Bills (T-Bills) - monthly interest income

Explanation: On the last day of every month between January and June, Richard will debit the Investment in the Treasury Bill for $10 and credit the Interest Income for $10. The debit to the Investment in the Treasury Bill will affect his balance sheet as it’s an asset account, and the credit will be recognized as income on his income statement.

At the end of the six months, the Investment in the Treasury Bill account will increase to $1,000 ($940 initial recognition + monthly amortization of $10 * 6 months) and a total of $60 interest income ($10 per month * 6 months) will be recorded in the income statement.

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Redemption/Maturity of the Treasury Bill

When the time comes to redeem the Bill on June 30, Richard will receive the full $1,000 from the Treasury. 

Here is the journal entry:

Journal Entries for Treasury Bills (T-Bills) - Redemption

Explanation: The debit to Cash for $1,000 represents the amount received from the Treasury, and the credit of $1,000 to Investment in the Treasury Bills eliminates all the balance from this account, which concludes the whole cycle. Both accounts will only hit the balance sheet with no additional P&L impact, as interest income is only recorded through monthly journal entries. 

As mentioned above, over the course of the six months, the monthly entries will make the Investment in the Treasury Bills grow to $1,000 at the time of redemption. Therefore, a credit of $1,000 will reverse any balance in this account.

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Key Takeaways

When accounting for the purchase of a Treasury Bill, we need to ensure we are booking the purchase and redemption correctly and the income in between. Our entries are:

  1. At the point of purchase, debiting the Investment in the Treasury Bill and crediting Cash
  2. At the end of each month, debiting the Investment in the Treasury Bill and crediting Interest Income
  3. When redeeming the Treasury Bill, debiting Cash and crediting the Investment in the Treasury Bill will eliminate the investment balance from our books.

This example of journal entries is based on the assumption the Treasury Bill is classified as held-to-maturity, which is the most common case for this type of security. In the rare situation where the T-bill is held for trading or sale, gain or loss will also need to be recognized.

 

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