How Do You Record Treasury Bills in Accounting?

Recording Treasury Bills, or T-bills, in your accounting system is a straightforward process once you understand the basic principles. Unlike typical interest-bearing bonds, T-bills are zero-coupon instruments sold at a discount to their face value—your entire earnings come from the difference between what you pay and what you get back at maturity. This guide will walk you through the key journal entries for purchasing a T-bill, accruing interest income correctly over its life, and recording its final maturity.

What Are Treasury Bills? A Quick Accounting Refresher

Before diving into the journal entries, let's clarify the key characteristics of Treasury Bills from an accountant's perspective. T-bills are short-term debt securities issued by the U.S. Department of the Treasury with maturities of one year or less, most commonly offered in 4, 8, 13, 17, 26, and 52-week terms.

The defining features for accounting purposes are:

• Issued at a Discount: You purchase a T-bill for less than its face value (also called par value). For example, you might pay $9,900 for a T-bill that will be worth $10,000 when it matures.
• Zero-Coupon: T-bills do not pay periodic interest payments. The entire income of $100 in the example above is realized at maturity but must be recognized over the security's life.
• Classification: In accounting, T-bills are treated as highly liquid, safe assets. They are typically recorded on the balance sheet as a current asset under an account like "Short-Term Investments" or "Marketable Securities."

Businesses use T-bills to earn a return on temporary cash surpluses without taking on significant risk. Properly accounting for them ensures your financial statements accurately reflect the investment's value and the income it generates each period.

Step 1: Recording the Initial Purchase of a Treasury Bill

The first journal entry occurs when you buy the T-bill. At this stage, you are simply exchanging one asset (cash) for another (the investment). You record the investment at its cost—the price you actually paid for it, not its face value.

Let's use a clear example that we can follow through each step:

Example: Phoenix Corp. buys a 26-week (182-day) Treasury Bill with a face value of $100,000. They purchase it at auction for a price of $97,500.

The journal entry to record this purchase is:

Date: January 1

• Debit: Short-Term Investments $97,500
  • (To increase the asset account representing the T-bill)
• Credit: Cash $97,500
  • (To decrease the cash account used for the purchase)

At this point, the total assets on Phoenix Corp.'s balance sheet remain unchanged. The company's cash has decreased by $97,500, but its short-term investments have increased by the exact same amount. The T-bill is now on the books at its cost basis of $97,500.

Step 2: Accruing and Recognizing Interest Income

This is the most important part of accounting for a T-bill. The $2,500 discount ($100,000 face value - $97,500 purchase price) represents the total interest income Phoenix Corp. will earn over the 182-day life of the T-bill. According to the accrual basis of accounting, this income must be recognized as it is earned over time, not as a lump sum at the end.

This process is called amortizing the discount. You systematically increase the book value of the T-bill investment over its life, recognizing a proportional amount of interest income in each accounting period.

First, calculate the income earned per day:

• Total Interest Income: $100,000 - $97,500 = $2,500
• Life of T-bill: 182 days
• Interest Income per Day: $2,500 / 182 days = $13.74 per day

Most companies close their books monthly. Therefore, at the end of each month, an adjusting journal entry is required to recognize the interest income earned during that month. Let's see how this works for the first two months.

End of January (31 days):

The income earned in January is $13.74 per day × 31 days = $425.94.

The adjusting journal entry on January 31 is:

• Debit: Short-Term Investments $425.94
  • (To increase the carrying value of the investment on the balance sheet)
• Credit: Interest Income $425.94
  • (To recognize the revenue on the income statement)

After this entry, the T-bill's new carrying value on the balance sheet is $97,500 (initial cost) + $425.94 (accrued interest) = $97,925.94.

End of February (28 days):

The income earned in February is $13.74 per day × 28 days = $384.72.

The adjusting journal entry on February 28 is:

• Debit: Short-Term Investments $384.72
  • (Increasing the investment's carrying value again)
• Credit: Interest Income $384.72
  • (Recognizing February's portion of the income)

The new carrying value at the end of February is $97,925.94 + $384.72 = $98,310.66. You continue this process every month until the T-bill matures.

Step 3: Recording the T-Bill at Maturity

On the maturity date (182 days after purchase), Phoenix Corp. will receive the full $100,000 face value from the government. By this time, if all monthly interest accruals were made correctly, the carrying value of the "Short-Term Investments" account for this T-bill will have been fully amortized up to $100,000.

The final amount of cumulative earned interest should equal the initial discount of $2,500. The book value of the asset should be its face value. The final step is to record the receipt of cash and remove the investment asset from the books.

Final Journal Entry at Maturity:

Date: July 2 (182 days after Jan 1)

• Debit: Cash $100,000
  • (To increase the cash account upon receiving funds)
• Credit: Short-Term Investments $100,000
  • (To remove the T-bill from the balance sheet)

There is no income recorded in this final entry because it was already recognized incrementally over the past 182 days through the monthly adjusting entries. This entry simply swaps the investment asset for cash.

Financial Statement Presentation

Properly recording these transactions ensures the T-bill is correctly reflected across your financial statements:

• Balance Sheet: The T-bill is shown as a current asset under "Short-Term Investments" or "Marketable Securities." Its value is the amortized cost (original cost plus any accrued interest to date). It increases in value each month until it reaches its face value at maturity.
• Income Statement: "Interest Income" is reported each period in the "Other Income and Expense" section of the income statement. This presents a smooth, consistent recognition of revenue.
• Statement of Cash Flows: The initial purchase of $97,500 is a cash outflow from Investing Activities. The final receipt of $100,000 at maturity is a cash inflow from Investing Activities.

Final Thoughts

Accounting for Treasury Bills boils down to a three-part process: record the initial purchase at cost, make monthly adjusting entries to amortize the discount as interest income, and record the receipt of the face value at maturity. By following these steps, you ensure both your balance sheet and income statement accurately reflect the asset's value and the revenue it has generated.

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