Professor Vipin 2014
Unit 7
Accounting for Bills of Exchange Transactions
Meaning
"A Bill of Exchange is an instrument in writing containing an unconditional order signed by the maker,
directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or
to the bearer of the instrument." Section 5 of the Negotiable Instrument Act, 1881
Features of a Bill of Exchange
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A Bill of Exchange must be in writing.
It must contain an order (and not a request) to make payment.
The order of payment must be unconditional.
The amount of bill of exchange must be certain.
The date of payment should be certain.
It must be signed by the drawer of the bill.
It must be accepted by the drawee by signing on it.
The amount specified in the bill of exchange is payable either on demand or on the expiry of a
fixed period.
The amount specified in the bill is payable either to a certain person or to his order or to the
bearer of the bill.
It must be stamped as per legal requirements.
Parties To A Bill Of Exchange
1. Drawer: Drawer is the person who makes or writes the bill of exchange. Drawer is a person who
has granted credit to the person on whom the bill of exchange is drawn. The drawer is entitled
to receive money from the drawee (acceptor).
2. Drawee: Drawee is the person on whom the bill of exchange is drawn for acceptance. Drawee is
the person to whom credit has been granted by the drawer. The drawee is liable to pay money
to the creditor/drawer.
3. Payee: Payee is the person who receives the payment from the drawee. Usually the drawer and
the payee are the same person. In the following cases, drawer and payee are two different
persons:
i.
When the bill is discounted by the drawer from his bank: payee is the bank.
ii.
When the bill is endorsed by the drawer to his creditors: payee is the endorsee.
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Specimen of a Bill of Exchange
Promissory Note
A Promissory note is an instrument in writing (not being a bank note or a currency note) containing an
unconditional undertaking signed by the maker to pay a certain sum of money only to or to the order of
a certain person or to the bearer of the instrument.
Features of a Promissory Note
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There must be an unconditional promise to pay a certain sum of money on a certain date.
It must be signed by the maker.
The name of the payee must be mentioned on it.
It must be stamped according to its value.
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Specimen of a Promissory Note
Important Terms
1. Term of Bill: The period intervening between the date on which a bill is drawn and the date on
which it becomes due for payment is called 'Term of Bill'.
2. Due Date: Due date is the date on which the payment of the bill is due. Due date is ascertained
in the following manner
a. In case of 'Bill at sight' - Due date is the date on which a bill is presented for the
payment.
b. In case of 'Bill after Date' - Due Date = Date of Drawing + Term of Bill.
c. In case of ' Bill after sight' – Due date = Date of Acceptance + Term of Bill.
3. Days of Grace: Drawee is allowed three extra days after the due date of bill for making
payments. Such 3 days are know as 'Days of Grace'. It is a custom to add the days of grace.
4. Date of Maturity: The date which comes after adding three days of grace to the due date of a bill
is called 'Date of maturity'.
5. Bill at sight/Bill on Demand: When no time for payment is mentioned in the bill of exchange and
the bill is payable whenever it is presented to the drawee for the payment, such bills are know
as "Bill at sight" or "Bill on Demand". 3 days of grace are not allowed when bill is payable on
demand.
6. Bill after Date: Bill after date is the bill in which due date and date of maturity is ascertained
from the date on which the bill is drawn. 3 days of grace are allowed for ascertaining the date of
maturity in case of bill after date.
7. Discounting of Bill: When the bill is enchased from the bank before its due date, it is known as
discounting of bill. Bank deducts its charges from the amount of bill and disburses the balance
amount.
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8. Endorsement of Bill: Endorsement of a bill means the Process of transferring the title of bill from
the drawer or holder to their creditors. The person transferring the title is called "Endorser" and
the person to whom the bill is transferred called 'Endorsee'. The endorsee can further endorse
the bill in favor of his creditors. Endorsement is executed by putting the signature at the back of
the bill.
9. Bill sent for Collection: Bill sent for Collection It is a process when the bill is sent to the bank with
instructions to keep the bill till maturity and collect its amount from the acceptor on the date of
maturity.
10. Dishonor of Bill: When the drawee (or acceptor) of the bill fails to make payment of the bill on
the date of maturity, it is called 'Dishonor of Bill’
11. Noting of Bill: To obtain the proof of dishonor of a bill, it is re-sent to the drawee through a
legally authorized persons called Notary Public. Notary Public charges a small fee for Providing
this service known as noting charges. Noting charges are paid to the Notary Public first by the
holder of the bill but are ultimately recovered from the drawee, because he is the person
responsible for the dishonor.
12. Retirement of a Bill: When the drawee makes the payment of the bill before its due date it is,
called 'Retirement of a bill'. In such a case, holder of the bill usually allows a certain amount as
Rebate to the drawee. Amount of rebate is calculated at a fixed percentage for the unexpired
period only.
13. Renewal of a Bill: Sometimes, the drawee of a bill finds himself unable to meet the bill on due
date. To avoid dishonoring of bill, he may request the holder of the bill to cancel the original bill
and draw a new bill in place of old one. It the holder agrees, the old bill is cancelled and a new
bill with new terms is drawn on the drawee and also accepted by him. This process is called
'Renewal of a bill'. In this case, Noting of the bill is not required as cancellation of the bill is
mutually agreed upon by both the parties of the bill. Normally, the drawer charge interest for
the period of new bill. The interest may be paid in cash or may be added in the amount of new
bill. If any part payment is made at the time of renewal of a bill, interest is calculated only on the
outstanding amount.
14. Insolvency of Acceptor: When the drawee (i.e., acceptor) of a bill is unable to meet his liabilities
on due date, the drawee become insolvent. In such a case, entries for the dishonor of the bill are
passed in the books of drawer/holder and drawee of the bill. Any proportionate amount
received from the drawee is recorded in the books of the holder and the amount unrecoverable
is debited to 'Bad Debts A/c'.
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Accounting Entries
When a Bill of Exchange is Kept Till the Date of Maturity
In case the receiver of a bill of exchange keeps it with him till the date of maturity, the following
accounting entries will be passed in the books of the receiver of the Bill of Exchange (Drawer) and the
Drawee of the bill of exchange.
Transaction
In The Book of The Drawer
Particulars
On Selling of Goods on
credit to the drawer
On receipt of bills of
exchange duly accepted
by the drawee
On receiving payment
on maturity of the bill
Transaction
Bills Receivable A/C
To Drawee
Cash A/C
To Bills Receivable A/C
In The Book of The Drawee
Particulars
On purchasing goods on
credit from the drawer
On Acceptance of the
Bill of Exchange in favor
of Drawer
On payment of the bill
on maturity
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Drawee
To Sales /C
Purchases A/C
To Drawer
Drawer
To Bills Payable A/C
Bills Payable A/C
To Cash
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When the Bill of Exchange is Endorsed in Favor of a Creditor
In case the drawer of a bill of exchange endorses the bill of exchange received in favor of a creditor and
the bill is met on maturity, the following journal entries will be passed in the books of the drawer and
the drawee.
Transaction
In The Book of The Drawer
Particulars
When bill is endorsed in
favor of creditor
Creditor A/C
To Bills Receivable A/C
Drawee is note concerned with the endorsement of a bill.
When Bill of Exchange is Discounted with The Bank
The drawer of the bill of exchange may get it discounted from the bank. In such a case, the following
journal entries will be passed in the books of the drawer and drawee.
Transaction
Discounting a bill
In The Book of The Drawer
Particulars
Bank A/c
Discount A/C
To Bills Receivable A/C
Drawee is note concerned with the discount of a bill.
Dishonor of Bill of Exchange
On maturity when the bill is presented for payment, in case the acceptor of the bill refuses to make a
payment of the bill on the date of maturity, the bill is dishonored.
In such a case, the following journal entries will be passed in the books of the drawer and drawee.
Transaction
In The Book of The Drawer
Particulars
If the bill is kept by the
drawer till date of
maturity
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Drawee
To Bills Receivable A/C
To Cash
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If the bill is discounted
with a banker and is
dishonored
If the bill is endorsed by
the drawer in favor of
the creditor
Transaction
Drawee
To Bank A/C
Drawee
To Creditors A/C
In Books of the Acceptor
Particulars
Acceptor passes this
entry irrespective of the
bill being endorsed or
not
Bills Payable A/C
Noting Charges A/C
To Drawer
Renewal of Bill
The acceptor of the bill may not be able to in a position to meet the bill on the date of maturity.
However, he may accept to meet the bill in case he is given some time by the drawer of the bill for
making payment of the bill.
In such a case, the following journal entries will be passed in the books of the drawer and drawee.
Transaction
In The Book of The Drawer
Particulars
Cancellation of the old
Bill
On receipt of amount of
interest in cash
Drawee's Personal A/C
To Bills Receivable A/C
Cash A/C
To Interest (charged due to delay in
payment)
In case the interest is
not payable in cash
For receipt of new bill
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Drawee's Personal A/C
To Interest A/C
Bills Receivable A/C
To Drawee Personal A/C
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Transaction
In The Book of The Drawee
Particulars
Cancellation of the old
Bill
When Interest is paid in
cash
In case the interest is
not paid in cash
On Acceptance of new
bill
Bills Payable A/C
To Drawer's Personal A/C
Interest A/C
To Cash
Interest A/C
To Drawer's Personal A/C
Drawer's Personal A/C
To Bills Payable A/C
Retiring of a Bill (Under Rebate)
The acceptor of a Bill may be in a position to meet the Bill before maturity. He may, therefore approach
the acceptor to make the payment of the Bill may be in a position to meet the bill before maturity. In
this case usually the drawer gives some rebate to the drawee for early payment of the bill.
Transaction
In The Book of The Drawee
Particulars
On receipt of payment
of the Bill
Transaction
In The Book of The Drawer
Particulars
On receipt of payment
of the Bill
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Bills Payable A/C
To Cash A/C
To Rebate A/C
Cash A/C
Rebate A/C
To Bills Receivable A/C
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Retiring a Bill (Discounted / Endorsed by Drawer)
In case the acceptor requests the drawer to accept retirement of a bill which has been endorsed or
discounted by the drawer, the drawer will have to request the bank or the creditor to return the bill
back to him.
In The Book of The Drawer
Transaction
Particulars
On return of the Bill
Bills Receivable A/C
To Bank / Creditor
On receiving payment
from the drawee
On making payment to
the Bank / Creditor
Cash A/C
Rebate Allowed A/C
To Bills Receivable
Bank / Creditor A/C
To Cash A/C
To Rebate A/C
In The Book of The Drawee
Transaction
Particulars
On return of the Bill
Bills Payable A/C
To Cash A/C
To Rebate A/C
Example 1
Give the necessary entries as would appear in A’s books
1. May 5th: A drew three bills on B for Rs. 500, Rs. 400, Rs. 300 payable at 4, 4 and 2 months
respectively.
2. May 12: He endorsed the first bill in favor of his customer C at Rs. 475
3. May 19: He discounted the second bill with his banker for Rs. 380
4. May 26: He was paid the proceeds of the third bill at a rebate of 5% on the total amount of the
bill.
On due dates, the first and the second bill was dishonored. But the third one was paid.
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Solution 1
Date
Particulars
5-May Bills Receivable A/C
To B
(Being, three bills of Rs. 500, Rs. 400
and Rs. 300 were received from B)
L/F Debit
Credit
1200
1200
12-May C
Discount A/C
To Bills Receivable A/C
(Being, first bill for Rs. 500 was
endorsed in favor of C)
475
25
19-May Bank A/C
Discount A/C
To Bills Receivable A/C
(Being second bill was discounted)
380
20
26-May Bank A/C
Rebate Allowed A/C
To Bills Receivable A/C
(Being third bill was retired at a
rebate of 5%)
285
15
500
400
300
8-Aug B
To Bank A/C
(Being second bill was dishonored
on maturity)
400
8-Sep B
To C
(Being first bill was dishonored on
maturity)
500
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400
500
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Example 2
A, a small trader has a supplier B, and a customer C with whom the following transactions took place:
1.
2.
3.
4.
5.
6.
7.
8.
9.
July 5th: Bought goods on credit from B Rs. 3330
July 7th: Accepted bill from B at one month for Rs. 1000
July 9th: Sold goods on credit C Rs. 1200
July 11th: Drew bill on C for this amount at two months and endorsed the bill to B.
July 14th: Goods sold to C proved defective. Goods invoiced at Rs 150 were returned and an
allowance of Rs. 200 was made to him to cover claims on the remainder.
July 26th: Returned goods to B, Rs. 140
Aug 3rd: Paid B, Rs. 500withdrew his bill of 7th July and accepted another at two months for the
open balance on his account plus Rs. 40m interest.
Aug 24th: C being in financial difficulties, A agrees to accept cash for 80% of his indebtedness in
full settlement. This was duly paid on August 26th.
Sept 14th: Met C’s bill on presentation by B
You are required to give journal entries to record the above in books of A, B and C.
Solution 2
In Books of A
Date
Particulars
5-Jul Purchases A/C
To B
(Being goods purchased from B)
7-Jul B
To Bills Payable A/C
(Being acceptance of B's draft at one
month)
9-Jul C
To Sales A/C
(Being goods sold to C)
11-Jul Bills Receivable A/C
To C
(Being bills drawn on C for Rs. 1200
at two months)
14-Jul Sales Returns A/C
Sales A/C
To C
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L/F Debit
Credit
3330
3330
1000
1000
1200
1200
1200
1200
150
200
350
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(Being goods returned to C and
allowance made to him in respect on
defective goods)
26-Jul B
To Purchase Returns A/C
(Being goods returned to B)
3-Aug Bills Payable A/C
To B
(Being acceptance dated 7th July
withdrawn)
3-Aug Interest A/C
To B
(Interest payable to B as per
settlement)
140
140
1000
1000
40
40
3-Aug B
To Cash A/C
To Bills Payable A/C
(Being payment of cash Rs. 500 and
acceptance to bill for remaining in
favor B)
2030
24-Aug C
To B's Suspense A/C
(C debited for his acceptance which
will not be met on presentation to
B's suspense a/c because the date
of maturity is Sept 14th)
1200
26-Aug Cash
Bad Debts A/C
To C
(Cash received in full settlement
80% of Rs. 850 balance written off)
680
170
14-Sep B's Suspense A/C
To Cash A/C
(Being C's acceptance (held B) on
presentation, see entry on Aug 24)
1200
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500
1530
1200
850
1200
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In Books of B
Date
Particulars
5-Jul A
To Sales A/C
(Being Sales made to A)
7-Jul Bills Receivable A/C
To A
(Being A's acceptance for Rs. 1000
received at one month)
11-Jul Bills Receivable A/C
To A
(Being C's acceptance for Rs. 1200
received from A at two months)
26-Jul Sales Returns A/C
To A
(Being Goods received back from A)
L/C Debit
Credit
3330
3330
1000
1000
1200
1200
140
140
3-Aug A
To Bills Receivable A/C
(Being Acceptance by A as per
settlement)
1000
3-Aug Cash
Bills Receivable A/C
To A
(Being Receipt of cash, Rs. 500 and
acceptance for remaining balance
due from him)
500
1530
14-Sep Cash A/C
To Bills Receivable A/C
(Being Cash received from A against
C’s acceptance)
1200
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1000
2030
1200
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In the Books of C
Date
Particulars
9-Jul Purchases A/C
To A
(Being goods purchased from A)
11-Jul A
To Bills Payable A/C
(Being acceptance of Rs 1200 issued
in favor of A)
14-Jul A
To Purchases Returns A/C
To Purchases A/C
(Being goods returned to A and
allowance received from him in
respect of defective units)
24-Aug Bills Payable A/C
To A
(Being no possibility of meeting the
acceptance in favor of A,
cancellation of the same)
26-Aug A
To Cash A/C
To Deficiency A/C
(Being payment to A, 80% of the
amount due to him)
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L/C Debit
Credit
1200
1200
1200
1200
350
150
200
1200
1200
850
680
170
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