Bill of Exchange

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.

01A 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

Bill of Exchange retained by the Drawer till maturity-Accounting Entries

ParticularsIn books of DrawerIn books of Drawee
Sale of goods.Drawee (Customer) A/c  Dr To Sale A/c. (Sale of goods)Purchase A/c  Dr To Drawer (Supplier) A/c. (Purchase of goods)
Acceptance of BillBill Receivable A/c.  Dr To Drawee A/c. (Acceptance received)Drawer A/c  Dr To Bill Payable A/c. (Acceptance given)
Payment  on maturityCash / Bank A/c  Dr To Bill Receivable A/c (receipt of amount on maturity )Bill Payable A/c  Dr To Cash / Bank A/c (Payment of Bill on maturity)

Dishonour of Bills

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 (The dishonour of Bill)

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

ParticularsIn books of DrawerIn books of Drawee
Bill retained till due dateDrawee A/c  Dr To Bill Receivable A/c. To Cash A/c. (Drawee’s A/c debited with the bill amount and noting charges paid in cash)Bills Payable A/c    Dr Noting Charges A/c   Dr To Drawer A/c (Drawer’s A/c credited with bill amount and the noting charges to be reimbursed.)
Bill discounted with the bankDrawee A/c  Dr Noting charges A/c To Bank A/c (Bill Amount and noting charges paid on dishonour of bill.)Bills Payable A/c   Dr Noting Charges A/c.  Dr To Drawer A/c (Drawer A/c credited by bill amount and noting charges.)
ParticularsIn books of DrawerIn books of Drawee
Bill endorsedDrawee A/c  Dr To Endorsee A/c (Bill amount and the noting charges paid by the endorsee.)Bills Payable A/c.  Dr Noting Charge A/c  Dr To Drawer A/c. (Bill Amount and noting charges paid.)
Entry in the books of EndorseeDrawer (Endorser) A/c  Dr To Bills Receivable A/c. To Cash (Bill amount and Noting Charges paid in cash ) 
ParticularsIn books of DrawerIn books of Drawee
Bill sent for collectionDrawee A/c  Dr   To Bills sent for Collection A/c.   To Bank (Noting Charges) A/c. (dishonoured bill sent to Bank for collection.)Bills Payable A/c.  Dr Noting Charges A/c  Dr To Drawer A/c. (bill dishonoured and noting charges paid.)

Dishonour of Bills – 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                                                                            Dr.                                                                            1,000                                                                      To B A/c                                1000                                                                                                                                                                           1,000 (1.The bill drawn for 3 months.)Bank A/  Dr.        950                                                   Discount A/c   Dr. 50                                                     To Bill Receivable A/c.  1000                                                                                                                                                                                                             1,000 (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

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

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/cIn 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.   Dr2,000 
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

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

TransactionIn the Books of DrawerIn the Books of Drawee
1. Bill sent for collectionBills sent for collections A/c  Dr   To Bills Receivable A/c.No Entry.
2. Realization by bankerBank A/c  Dr   To Bills sent for collection A/c.Bills Payable A/c  Dr   To Bank A/c.
3. Collection charges paid to bankerCollection charges A/c  Dr   To Cash/Bank A/c.No Entry
4.On Dishonour and Noting charges paidDrawee A/c  Dr  To Bills sent for collections A/c  To Bank A/cBill Payable A/c  Dr Noting Charges A/c  Dr  To Drawer A/c

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

i) When Bill is paid on maturity
Bill Receivable A/c  Dr2,000 
To M A/c 2,000
(The acceptance received.)  
Bills sent for collections A/c  Dr2,000 
To Bill Receivable A/c 2,000
(Bill sent to bank for collection.)  
Bank A/c  Dr2,000 
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  Dr2,170 
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

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

TransactionIn the Books of DrawerIn the Books of Drawee
Cancellation of old billDrawee A/c   Dr   To Bills Receivable A/c.Bills Payable A/c  Dr   To Drawer A/c.
Part-payment receivedCash / Bank A/c  Dr   To Drawee A/c.Drawer A/c  Dr    To Cash / Bank A/c.

Interest on renewal of bill

TransactionIn the Books of DrawerIn the Books of Drawee
interest paid in cashCash A/c  Dr    To Interest A/c.Interest A/c  Dr   To Cash A/c
interest included in new billDrawee A/c  Dr    To Interest A/c.Interest A/c  Dr   To Drawer A/c

New Bill issued

In the Books of DrawerIn the Books of Drawee
Bill Receivable A/c  Dr    To Drawee A/c.Drawer A/c  Dr   To Bills Payable A/c

Renewal of Bills – 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

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.

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)

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 )

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)

Bills Receivable A/c

Date        Particulars     Dr          Date        Particulars           Cr

1.5.15      To Emm A/c    4,000     1.5.15      By Bank A/c          3,850

                                                                      By Discount A/c      150

Total                               4,000                                                   4,000

  Emm A/c 

Date        Particulars           Dr          Date      Particulars                       Cr

1.5.15      To Bank A/c         1,925     1.5.15    By Bills Receivable A/c   4,000

                To Discount A/c        75                                                            

4.8.15      To Bank A/c         2,000                                                            

Total                                     4,000                                                             4,000

Bank A/c 

Date        Particulars                     Rs.          Date      Particulars       Rs.

1.5.15      To Bill Receivable A/c   3,850       1.5.15    By Emm A/c      1,925

                To balance c/d                    75       4.8.15    By Emm A/c      2,000

Total                                               3,925                                               3,925

In the Books of Emm

1.5.15Ess A/c4,000 
 To Bills Payable A/c 4,000
Acceptance given to Ess  
1.5.15Bank A/c1925 
 Discount A/c75 
 To Ess A/c 2000
(Half the proceeds after discounting received from Ess who is also credited with half the discount.)  
4.8.15Bank A/c2000  
 Ess A/c 2000 
Amount retained by Ess from the proceeds of the bill now received from him.   
4.8.15Bills Payable A/c4000  
 To Bank 4000 
(Acceptance to Ess met.)   
Bills Payable A/c  
4.8.15To Bank A/c4,0001.5.15By Ess A/c4,000 
Ess A/c 
1.5.15To Bills Payable A/c4,0001.5.15By Bank A/c1,925
    By Discount A/c75
   4.8.15By Bank A/c2,000
  4,000  4,000
Bank  A/c 
1.5.15To Ess A/c1,9254.8.15By Bills Payable A/c4,000
4.8.15To Ess A/c2,000   
 To balance c/d75   
  4,000  4,000

Trade Bills vs Accommodation Bills

Trade Bills vs Accommodation Bills

 Trade BillsAccommodation Bills
ConsiderationTrade Bills are drawn and accepted on consideration.Accommodation Bills are drawn and accepted without any consideration.
PurposeTrade Bills is drawn for genuine business transaction.Accommodation Bills drawn for personal finance.
DiscountingTrade Bills may or may not be discounted with bank.Accommodation Bills is discounted with bank.
Discounting chargeDiscounting charge of Trade Bills is borne by drawer only.Discounting charge of Accommodation Bills is shared by drawer and drawee.
Legal statusDrawer can take legal action on dishonour of Trade Bills.No legal action can not be taken on Accommodation Bills as there is no consideration.

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

In books of DrawerIn books of Drawee
Drawee A/cBills payable A/c
To Bills Receivable A/c / Bank A/c / Endorsee A/c / Bills sent for collection A/cTo Drawer A/c
(1.The dishonour of bill on maturity)(1.The  dishonour of bill due to insolvency.)
Bank A/cDrawer A/c
Bad Debt A/cTo Bank A/c
To Drawee A/cTo Deficiency A/c
(2.Receipt of final dividend and irrecoverable amount is treated as bad debt.)(2.Payment of part amount as final dividend and balance amount treated as deficiency.)

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

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/c4,000 
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.)  
7.4.15 Shyam A/c  4,000 
Discount Receivable A/c200 
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/c1,000 
To Shyam A/c 4,000
(75% of Shyam’s acceptance received.)  

In the books of Shyam

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.)  
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.)  

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

In the books of DrawerIn the books of Drawee
Bank A/c  DrBills payable A/c  Dr
Discount / Rebate given on Bill A/c  DrTo Bank A/c 
To Bills Receivable A/cTo Discount / Rebate received on Bill

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.

Journal entries In the Books of B (Drawer)

1.1.15  Bills Receivable A/c  Dr To A A/c. (The Bill drawn on A for 4 months)7,000  7,000
4.2.15Bank A/c.  Dr Discount Allowed A/c.   Dr To Bill Receivable A/c.  (Bill retired allowing discount @ 6% for 3 months Rs.7,000 x 6% x 3/12=105)6,895 105    7,000

Journal entries in the Books of A

1.1.15  B A/c To Bills Payable (Bill accepted for 4 months)7,000  7,000
4.2.15Bills Payable A/c.   To Bank A/c.   To Discount  Received7,000  6,895 105

Bills Payable and Receivable Book

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.

Bill Receivable Book

Name of acceptorReceived FromDate of BillTerm  Date of MaturityAmount (Rs.)Remark
X Y ZX Y Z01.01.2015 15.01.2015 19.01.20152 Months 4 Months 2 Months04.03.2015 18.05.2015 22.03.20152,000 4,000 12,000Discounted. Endorsed.

Bill Payable Book

  Date of BillName of Drawer  PayeeTerm (Months)Date of  MaturityAmount (Rs.)Remarks
05.01.2015 20.01.2015 21.01.2015P Q PP Q P3 Months 2 Months 4 Months08.04.2015 23.03.2015 24.05.20158,000 3,000 4,200Renewed

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