Last Updated on: 5th July 2024, 01:43 pm
Bill of Exchange Accounts
Bill of Exchange
A person, liable to pay money, instead of giving money instantly, may give a definite and express order in writing (called Bill of Exchange) to pay on a certain date. A Bill of Exchange is a negotiable instrument (it can be transferred to a third party).
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.
Such commercial practice has evolved to provide more liquidity and credit to the business. These documents are considered so valuable instruments that they are treated as if the debtor has discharged his liability and the creditor has received payment. Such documents are often accepted by bank to advance money to the holder, and transferred from one person to another.
Parties Involved in a Bill of Exchange
Generally there are three parties to the bill of exchange, 1. Drawer: The person who draws the bill is called the Drawer. 2. Drawee: The person who accepts the order is known as Drawee. 3. Payee: The person to whom the amount has to be paid is known as the Payee. Sometimes, Drawee and the Payee can be same person (in that case, there are two parties in the Bill of Exchange, Drawer & Payee).
Promissory Note
Promissory Note is also a negotiable instrument. It has only two parties with a promise to make payment unconditionally.
As per Negotiable Instrument Act, 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 to, or to the order of, a Third party”.
Parties Involved in Promissory Note
There are only two parties to a Promissory Note. 1. Promisor: The person who promises to make payment (also called the maker). 2. Payee: The person on whose order the note is made payable.
Treatment of Bill of Exchange
The Drawer may retain the Bill up to the date of maturity. The Drawer may Discount Bill with a Banker (or a third party) to get money instantly. The Drawer may endorse the bill to a third party. The Drawer may send the Bill for Collection.
Accounting : The Party which receives the accepted BoE (Bill of Exchange), or a Promissory Note, treats it as new Asset under Bills Receivable. The Party which accepts Bill of Exchange or issues a Promissory Note treats it as new Liability under Bills Payable.
Bill Maturity Date
A Bill must be paid within due date. There are various methods of specifying and computing the Due date
Term of Bill : Term of Bill means the period from the date of Bill to the due date of Bill. In case of bills at sight, the date of Bill starts from the date when it is accepted. In case of ‘After Date’ Bills, the term of Date starts from the date of drawing of the Bill
Days of Grace : In case of time bills (where the due date is not specified on the instrument, but is reckoned from the period specified), an additional 3 days (called Days of Grace) is allowed from due date of the Instruments. The instrument should be paid within Due date + Days of grace. This date is referred as Maturity date.
Bill at Sight : For Bill at sight, no due date is mentioned on the Bill of Exchange. It is payable on sight (i.e when presented), like a cheque, payable on demand. No Days of grace is allowed.
Bill after date : In Bill after date, the time of due date is mentioned on the instrument. The due date may be after a specified period, or after a specified date, or after sight, or after happening of certain event.
Computation of Bill Due Date : The Bill Due date is reckoned as per rules mentioned below :
- Specific Date : If due date is specified in Bill, the bill would be payable on the specified date
- After Date Bill : If Bill payable after specified period (month / days), the due date is reckoned after the specified period from the date of the bill. If the period is in months, number of months would be computed ignoring the days in the month. When the period is in months, if there is no corresponding date on the due month, the due date would be last day of the month. Examples: Due after 3 days of 26th March. Due date 29th March, Bill due after 1 month from 31st May, due date is 30th June. Due 3 months after 25thth Nov, Due date is 25th Feb of the next year. The days of grace has not been considered. So, 3 days would be added to compute Maturity Date. So, the Maturity date would be 28th Feb.
If the Maturity date is a Public Holiday, the preceding working date would be due date. If the Maturity date is emergency date (not a public holiday), the due date would be next working date.
Bill retained by the Drawer till maturity Accounting entries
Bill of Exchange retained by the Drawer till maturity-Accounting Entries
Dishonour of Bills Accounting entries
Dishonour of Bills of Exchange
If the drawee fails to meet the bill on the due date, then the bill is said to be dishonoured.
In the books of Drawer
Drawee A/c Dr
To Bill Receivable A/c
(The dishonour of Bill)
In the books of Drawee
Bill Payable A/c Dr
To Drawer A/c
If only a part of amount is received (due to insolvency etc.), cash account will be debited by the amount received, and the personal account of the debtors will be credited. The remaining irrecoverable amount should be written off as bad debt
Noting: If there is a chance of dishonour, the bill is handed over to “Notary Public”, who presents the bill for payment the money to the original party. If the bill is again dishonoured, the fact of dishonour is noted and the bills are returned to the client. This process is called “Noting”. It is the authentic and official proof of dishonour of bill and for this service of “Noting”; notary charges a nominal fee called “Noting Charges”.
Accounting Entries for Dishonour of Bill
Dishonour of Bill of Exchange- Accounting Entries
Dishonour of Bills Accounting – Practical Problems
Dishonour of Bill of Exchange- Accounting Entries
C draws a bill on B for Rs.1,000 payable after 3 months. C gets it discounted with his bankers for Rs.950. On due date, the bill is dishonoured, the bank paying Rs.15 as per noting charges. B then pays Rs.250 in cash and accepted a bill of exchange drawn on him for 2 months, for the balance together with Rs.30 as interest. On due date, the bill is again dishonoured. C pays Rs.15 as noting charges. Show the necessary journal Entries in C’s Books.
Accounting Entries
Bills Receivable A/c Dr 1000
To B A/c 1000
(1.The bill drawn for 3 months.)
Bank A/ Dr. 950
Discount A/c Dr. 50
To Bill Receivable A/c. 1000
(2.The bill discounted with the bank.)
B A/c Dr. 1,000
Noting Charges A/c Dr. 15
To Bank A/c. 1015
(3.The payment of noting charges to Bank
on behalf of B on dishonour of the bill by him.)
Bank A/c Dr. 250
To B A/c. 250
(4.Receipt of a portion of the bills Rs.250)
Bills Receivable A/c Dr. 795
To B A/c. 750
To Noting Charges A/c. 15
To Interest A/c. 30
(5.A new bill drawn on B for the balance due, noting chargers and interest.)
B A/c Dr. 795
To Bills Receivable A/c 795
(6.The dishonour of the bill.)
Noting Charges A/c. Dr. 15
To Bank A/c 15
(7.The payment of the noting charges)
B A/c Dr. 15
To Noting Charges A/c. 15
(8.The noting charges due to B.)
Discounting of Bill Accounting
Discounting of Bill of Exchange
Discounting of bill means getting immediate payment against the bill before maturity, from Bank. Bank deducts a small amount as Discount (which is Bank’s income). On maturity, the bank presents it before the drawee and takes the full money from him. If the bill is dishonoured, bank charges from the drawer along with Noting charges (if any).
Accounting Entries for discounting in the books of Drawer
Bank A/c Dr
Discount on Bill A/c Dr
To Bills Receivable A/c
There is no entry in the books of Drawee, because Discounting is a private affair between the Bank and Drawer and Drawee is not involved in the Discounting process.
Ex. A draws a bill on B on for Rs.2, 000 payable after 3 months. Next day, A discounted the bill @ 5%. Show the accounting entries
Bill Receivable A/c. Dr. 2,000
To B A/c 2,000
(Bill drawn for 3 months.)
Bank A/c Dr. 1,975
Discount on Bill A/c Dr. 25
To Bills Receivable A/c 2,000
(bill discounted with banker @ 5% [Rs.2,000 x (3/12) x 5% = Rs.25]
Endorsement of Bill Accounting Entries
Endorsement of Bill of Exchange
A Bill of Exchange, being a negotiable instrument can be transferred by the holder to any other person (called endorsee). On endorsement, the endorsee becomes the holder and the Bill becomes payable to the endorsee.
Accounting Entries
In the books of Drawer
Endorsee’s A/c Dr
To Bills Receivable A/c
In the books of Endorsee
Bills Receivable A/c Dr
To Endorser’s A/c
There will be no entry in the books of Drawee, as endorsement is private affair between the drawer and the endorsee and the drawee is not involved
Example: The bill, drawn by A on B, for Rs 2000 payable after 3 months, is endorsed by A to D. Show the accounting entry in books of A.
Journal Entry in Books of A
| D A/c. Dr | 2,000 | |
| To Bill Receivable A/c | 2,000 | |
| (The bill endorsed in favour of D.) |
At maturity D will represent the bill to B and realize the full amount
Bills Sent for Collection Accounting Entries
Bills of Exchange Sent for Collection
Sometimes drawer sends his bills to Bank for collecting the amount from drawee (known as Bill sent or collection) on the date of maturity, with instruction that the bill should be retained till maturity and should be realized on that date.
This does not mean Discounting of Bill, as the Bank does not credit the amount to customers. Still it is better to make an accounting entry, to record the fact that the Bill (which is equivalent to money) lying with bank for collection, is due for collection on due date.
The Accounting entries are shown in the Table
Ex.: M gave his acceptance on three months bill of Rs.2, 000 of S. S sent it to bank for collection on maturity. Pass the necessary journal entries in the books of S, when i) bill is paid on maturity. Ii) bill is dishonored and nothing charges Rs.170 paid.
Journal entries in the books of S
| Particulars | Dr. | Cr. |
| i) When Bill is paid on maturity | ||
| Bill Receivable A/c Dr | 2,000 | |
| To M A/c | 2,000 | |
| (The acceptance received.) | ||
| Bills sent for collections A/c Dr | 2,000 | |
| To Bill Receivable A/c | 2,000 | |
| (Bill sent to bank for collection.) | ||
| Bank A/c Dr | 2,000 | |
| To Bills sent for collections A/c | 2,000 | |
| (Bill amount collected on maturity.) | ||
| ii) On bill dishonoured and noting charges paid, following additional entry is also passed. | ||
| M A/c Dr | 2,170 | |
| To Bills sent for collections A/c | 2,000 | |
| To Bank A/c | 170 | |
| (Dishonour of bill and payment of nothing charges.) |
Renewal of Bills Accounting Entries
Sometimes the acceptor is unable to pay the amount and he may request the drawer for extension of time for paying the amount of the bill. In such case, the drawer cancels the old bill, draws a new bill (called renewal of bill). For renewal of bill, interest is charged by the drawer for the period of new bill (which may be paid in cash or added to the amount of old bill).
Accounting entries for renewal of bill
Renewal of Bills Accounting – Practical Problems
Renewal of Bills of Exchange – Problem & Solution
M sold goods to N on 1st July, 2015 for Rs.2,400. N immediately accepted a 3 months bill. On due date, N requested that the bill be renewed for a fresh period of 2 months. M agrees on the condition that interest at 10% was paid immediately in cash. To this, N agreed. The second bill was met on due date. Give Journal entries in the books of M.
Accounting entries in the Books of M
Entries on 1st July 2015 (Date of Acceptance )
N A/c Dr 2400
To Sales A/c 2400
(Goods sold to N)
Bill receivable A/c Dr 2400
To N A/c 2400
(3 months acceptance received from N)
Entries on 4th Oct 2015 (Date of Maturity)
N A/c Dr 2400
To Bill Receivable A/c 2400
(N’s acceptance cancelled on renewal.)
N A/c Dr 40
To Interest A/c 40
(Interest @10% for 2 months)
Bill receivable A/c Dr 2400
Cash Dr 40
To N A/c 2440
(New acceptance & interest received in cash)
Entries on 7th Dec 2015 (Date of Maturity of renewed bill)
Cash Dr 2400
To Bill Receivable A/c 2400
(Cash Received on renewed bill.)
Accommodation Bills Accounting
Sometimes bills are drawn and accepted for the purpose of helping one or both the parties involved, without any genuine business transaction between them (known as accommodation bills, or Fictitious Bills).
Accommodation bills may be drawn to accommodate the drawer alone or both
- Bills for accommodation of the drawer only : In such case, one party draws a bill on another. The drawer discounts the bill and remits the required amount to the drawee, so that the drawee can honour the bill on maturity date.
- Bill accommodation of both drawer and drawee : Insuch case, both parties draw bill on each other. Both can discount the bill and keep the proceed to themselves. On maturity date, each will honour other’s bill.
For accommodation bills, additional entries are to be passed for sending the remittance to the other party, and also for debiting the other party with the requisite amount of discount.
Accounting of Bills for accommodation of the drawer only
Bills for accommodation for benefit of drawer
X approached Y to accept a bill for Rs.1,800 on 1st January, 2015 for 4 months, Who is in need of funds temporarily. Y accepted it. The bill was discounted at 10% p.a. On the due date, X sent the necessary sum to Y who met the bill. Show the necessary journal entries in the books of both parties.
Entries in the Books of X
1.1.15
Bill receivable A/c Dr 1800
To Y A/c 1800
(Bill accepted by Y on request.)
1.1.15
Bank A/c Dr 1740
Discount on Bill A/c Dr 60
To Bills Receivable A/c 1800
(Bill discounted @ 10%pa for 4 months, 1800x(4/12)x(10/100)
4.5.15
Y A/c Dr 1800
To Bank A/c 1800
(Remittance to Y to honour the bill)
Entries in the Books of Y
1.1.15
X A/c Dr 1800
To Bills Payable A/c Dr 1800
(Accepted given to X on request.)
4.1.15
Bank A/c Dr 1800
To X 1800
(Amount received from X)
4.5.15
Bills Payable A/c Dr 1800
To Bank A/c 1800
(Bill honoured)
Accounting of Bill for accommodation of both Drawer and Drawee
Bills for accommodation for benefit of drawer & Drawee
M and C were both in need of funds temporarily. On 1st April, 2015. M accepted C’s bill for Rs.3,000 for two months. On the same date C accepted a bill of exchange payable to M for Rs.3,000 for two months. Both the bills were discounted at 10% p.a. On the due date both parties meet their acceptances. Give journal entries in the books of both the parties.
Accounting entries in the Books of M
1.4.15
Bill receivable A/c Dr 3000
To C A/c 3000
(Bill accepted by C on request for 2 months)
1.4.15
C A/c Dr 3000
To Bills Paybale A/c 3000
(Acceptance given to C for 2 months)
1.4.15
Bank A/c Dr 2950
Discount on Bill A/c Dr 50
To Bills Receivable A/c 3000
(Bill discounted @ 10%pa for 2 months, 3000x(2/12)x(10/100)
4.6.15
Bills Payable A/c Dr 3000
To Bank A/c 3000
(Bill honoured )
Accounting entries in the Books of C
1.4.15
Bills Receivable A/c Dr 3000
To M A/c 3000
(M’s acceptance received)
4.1.15
M A/c Dr 3000
To Bills Payable A/c 3000
(Acceptance given o M for 2 months)
1.4.15
Bank A/c Dr 2950
Discount on Bill A/c Dr 50
To Bills Receivable A/c 3000
(Bill discounted @ 10%pa for 2 months, 3000x(2/12)x(10/100)
4.6.15
Bills Payable A/c Dr 3000
To Bank A/c 3000
(Bill honoured )
Accounting of Bill for accommodation of both drawer and drawee
Accommodation Bills of Exchange for benefit of drawer & Drawee
Emm accepted on1st May, 2015, Ess’s bill for Rs.4,000 at 3 months for their mutual accommodation. Ess got the bill discounted at 15% p.a. and remitted half proceeds to Emm. On the due date, Ess sent to Emm the amount due to him and Emm met the bill. Show journal entries & ledger account in the books of both the parties.
Accounting Entries Books of Ess
1.5.15
Bill Receivable A/c Dr 4000
To Emm A/c 4000
(Emm’s acceptance for mutual accommodation)
1.5.15
Bank A/c Dr 3850
To Discount A/c Dr 150
(Emm’s acceptance for 3 months
discounted: (4,000 x 15% x 3/12=150.)
1.5.15
Emm A/c Dr 2000
To Bank A/c 1925
To Discount A/c 75
Half Amount sent to Emm to honour the bill)
4.8.15
Emm A/c Dr 2000
To Bank A/c 2000
Half Amount sent to Emm to honour the bill)
In the Books of Emm
Bills Payable A/c
Trade Bills vs Accommodation Bills
Trade Bills vs Accommodation Bills
| Trade Bills | Accommodation Bills | |
| Consideration | Trade Bills are drawn and accepted on consideration. | Accommodation Bills are drawn and accepted without any consideration. |
| Purpose | Trade Bills is drawn for genuine business transaction. | Accommodation Bills drawn for personal finance. |
| Discounting | Trade Bills may or may not be discounted with bank. | Accommodation Bills is discounted with bank. |
| Discounting charge | Discounting charge of Trade Bills is borne by drawer only. | Discounting charge of Accommodation Bills is shared by drawer and drawee. |
| Legal status | Drawer can take legal action on dishonour of Trade Bills. | No legal action can not be taken on Accommodation Bills as there is no consideration. |
Accounting for Insolvency of Drawee of Bill of Exchange
Insolvency means when a person is unable to pay the amount due by him.
When a drawee of a Bill of Exchange becomes insolvent, any bill accepted by him will be treated as dishonoured bill.
Accounting treatment
Accounting of Insolvency of Drawee of Bill of Exchange – Problems
Insolvency of Drawee of Bill of Exchange – Problems & Solution
On 1st January,2015, Ram sold goods to Shyam for Rs.5,000. On 4th January,2015 Ram received from Shyam Rs.1,000 and drew a bill receivable 3 months after date for the balance for the balance amount. On the same date, Ram endorsed the accepted bill to Ratna for full settlement of a debt of Rs.4,200. On the due date, the bill was dishonoured and Shyam became insolvent. He paid only 75% of his acceptance. Show the Journal Entries in the books of Ram and Shyam.
In the Books of Ram
| Particulars | Dr | Cr |
| 1.1.15 Shyam A/c | 5,000 | |
| To Sales A/c | 5,000 | |
| (Goods sold to Shyam on credit.) | ||
| 4.1.15 Cash A/c | 1,000 | |
| Bill Receivable A/c | 4,000 | |
| To Shyam A/c | 5,000 | |
| (Receipt of Rs.1,000 from Shyam and a bill of 4000) | ||
| 4.1.15 Ratna A/c | 4,200 | |
| To Bill Receivable A/c | 4,000 | |
| To Discount Receivable A/c | 200 | |
| (bill endorsed to Ratna in full settlement of a debt of Rs.4,200.) |
| Particulars | Dr | Cr |
| 7.4.15 Shyam A/c | 4,000 | |
| Discount Receivable A/c | 200 | |
| To Ratna A/c | 4,200 | |
| (bill endorsed in favour of Ratna, now dishonoured.) | ||
| 5.5.15 Bank A/c | 3,000 | |
| Bad Debt A/c | 1,000 | |
| To Shyam A/c | 4,000 | |
| (75% of Shyam’s acceptance received.) |
In the books of Shyam
| Particulars | Dr | Cr |
| 1.1.15 Purchases A/c | 5,000 | |
| To Ram A/c | 5,000 | |
| (Purchase of goods on credit.) | ||
| 4.1.15 Ram A/c | 5,000 | |
| To Cash A/c | 1,000 | |
| To Bills Payable A/c | 4,000 | |
| (Payment of cash Rs.1,000 and acceptance of a bill 4000 for 3 months.) |
| Particulars | Dr | Cr |
| 7.4.15 Bills Payable A/c | 4,000 | |
| To Ram A/c | 4,000 | |
| (Bill dishonoured at maturity.) | ||
| 5.5.15 Ram A/c | 4,000 | |
| To Bank A/c | 3,000 | |
| To Deficiency A/c | 1,000 | |
| (Payment of 75% of dues.) |
Accounting of Retiring of Bill
Renewal of Bill is done when there is not sufficient fund to make payment, Additional Interest amount becomes payable on Renewal of Bill. Retirement of Bill is just the reverse. It is done when there is idle surplus fund. The Bill is paid before due date to earn some discount.
Retiring of Bill means payment of bill of exchange before due date. In such case, drawee gets some discount or rebate from drawer for payment before due date.
Accounting entries for Retirement of Bill before maturity date
On 1st January, 2015, A accepted a Bill, drawn on him by B for Rs.7,000 payable 4 months after sight, against his dues. Having surplus funds, A paid off the bill on 4th February and was allowed a rebate 6% p.a. Show journal entries in the books of A and B to record these transactions.
Bills Payable and Receivable Accounts Books
Bills Receivable and Bills Payable entries are made in journals recording the details of Bills Payable and Bills Receivable in a chronological order. When large number of bill transactions take place in an organization, it is convenient to maintain a separate book, which becomes a part of Journal book.
The total of the Bills Receivable book is posted to the debit side of the Bills Receivable Account and the total of the Bills Payable Book is posted to the credit side of the Bills Payable Account. In respect of each the Bills Receivable, the customer’s account (i.e. drawee) is credited in the ledger.
Transactions related to Bills Receivable & Bills Payable
1.1.15-Received from X an acceptance of 2 months for Rs.2,000, 5.1.15- Acceptance to P at 3 months for Rs.8,000. 15.1.15-Received from Y an acceptance for 4 months for Rs.4,000. 18.1.15 -Discounted X’s acceptance for Rs.1,960. 19.1.15-Received from Z an acceptance for 2 months for Rs.12,000. 20.1.15-Acceptance to Q at 2 months for Rs.3,000. 21.1.15- Renewed acceptance to P by paying him cash Rs.4,000 and accepted a fresh bill of Rs.4,200 at 4 months Rs.200 being interest charged. 22.1.15 -Y’s acceptance endorsed in favour of Ram in full settlement of a debt of Rs.4,500.
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