Bills of Exchange

Prepared By:- CA Kapileshwar Bhalla

Fundamentals Of Accounting

Learning Objectives
After studying this unit, you will be able to :
{ Understand the meaning of Bills of Exchange
and Promissory Notes and also try to grasp
their underlying features.
{ Grasp the accounting treatments relating to
issue, acceptance, discounting, maturity and
endorsement of bills and notes in the books
of drawer and drawee.

Fundamentals Of Accounting:Bills
of Exchange

Continued
{

Learn the technique of accounting

relating to accommodation bills.
Learn the special treatment needed
in case of insolvency as well as
early retirement of bill.

Fundamentals Of Accounting:Bills
of Exchange

Bills of Exchange- Meaning

A Bill of Exchange has been defined
as
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. When such an order is
accepted in writing on the face of the
order itself, it becomes a valid bill of
exchange.
Fundamentals Of Accounting:Bills
of Exchange

NOTES
The following points should be noted:
1. A Bill of Exchange must be in writing.
2. It must be dated.
3. It must contain an order to pay a
certain sum of money.
4. The money must be payable to a
definite person or to his order to the
bearer.
5. The draft must be accepted for
payment Fundamentals
by the
party whom the
Of Accounting:Bills
order is made.of Exchange

PROMISSORY NOTE
A promissory note is an instrument in
writing, not being a bank note or
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. Under Section 31(2) of the
Reserve Bank of India Act a promissory
note cannot be made payable to bearer.
A promissory note has the following
characteristics.
Fundamentals Of Accounting:Bills
of Exchange

Characteristics- Promissory Note

It must be in writing.
2. It must contain a clear promise to
pay. Mere acknowledgement of a
debt is not a promissory note.
3. The
promise to pay must be
unconditional I promise to pay Rs.
500 as soon as I can is not an
unconditional promise.
4. The promiser or maker must sign the
promissory note.
5. The makerFundamentals
mustOfbe
a certain person.
Accounting:Bills
1.

of Exchange

Continued
6. The payee (the person to whom the
payment is promised) must also be
certain.
7. The sum payable must be certain. I
promise to pay Rs. 500 plus all fine is
not certain.
8. Payment must be in legal currency of
the country.
9. It should not be made payable to the
bearer.
Fundamentals Of Accounting:Bills
of Exchange
10. It should be properly
stamped.

Accounting Bills of Exchange &

Promissory Notes
On receipt of Bill :
Bills Receivable A/c
To Party A/c

.Dr.

Example :
(1) A accepts a Bill of exchange
drawn on him by B. In the books of B
the entry will be :
Fundamentals Of Accounting:Bills
of Exchange

Continued
Bills Receivable Account
To A
(2) A sends to B the acceptance of D.
In this case also, the entry in the
books of B will be:
Bills Receivable A/c
.Dr.
To A

Fundamentals Of Accounting:Bills
of Exchange

10

Options
Example:
The person who receives the bill has three
options. These are :
(i)
He can hold the bill till maturity.
(Naturally in this case no further entry
is necessary until the date of maturity
arrives).
(ii) The bill can be endorsed in favour of
another party. In the case the entry will
be to debit the party which now
receives the bill and to credit the Bills
Receivable Account.
Fundamentals Of Accounting:Bills
of Exchange

11

Continued
A

.Dr.
To Bills Receivable Account

(iii)
The Bill of Exchange can be
discounted with bank. The bank will
deduct. A small sum of money as
discount and pay the rest of the
money.
Fundamentals Of Accounting:Bills
of Exchange

12

Continued
Bank Account

Dr. (with the

amount actually
received)
Discount Account
Dr. (with the amount
of loss or discount)
To Bills Receivable Account
Example 3 :
On the date of maturity there will be two
possibilities. The first is that the bill will be
paid, that is to say, met or honoured. The
entries for this will depend upon what was
done to the bill during the period
of
maturity. If the bill was kept, the
Fundamentals Of Accounting:Bills
of Exchange

13

Continued
Cash Account
..Dr.
To Bills Receivable Account
But if he has already endorsed the bill in
favour of his creditor or if the bill has
been discounted with the bank he will
not get the amount; it will be the
creditor or the bank wich will receive the
money. Therefore, in these two cases,
no entry will be made in the books of
the party which originally received the
bill.
Fundamentals Of Accounting:Bills
of Exchange

14

Continued
The second possibility is that the bill will
be dishonoured, that is to say, the bill
will not be paid. If the bill is
dishonoured, the bill becomes useless
and the party from whom the bill was
received will be liable to pay the amount
(as also the expenses incurred by the
party).
Therefore, the following entires will be
made :
Fundamentals Of Accounting:Bills
of Exchange

15

Continued
1. If the bill was kept till maturity then :
Party (giving the bill)
To Bills Receivable Account
2. If the bill was endorsed in favour of a
creditor, the entry is :
Party (giving the bill)
To Creditors
3. If the bill was discounted with the bank :
Party (giving the bill)
To Bank
A/c
Fundamentals Of Accounting:Bills
of Exchange

16

Continued
Thus it will be seen that in case of
dishonour, the party which gave the bill
has to be debited (because he has
become liable to pay the amount). The
credit entry is in Bills Receivable
Account (if it was retained) or the
Creditor or the bank (if it was endorsed
in their favour).
Fundamentals Of Accounting:Bills
of Exchange

17

HOW TO CALCULATE DUE DATE OF A BILL

The due date of each bills is calculated

as follows:
Case
(a)

(b)

Due Date

When the bill is made

payable on a specific
date.
When the bill is made
payable at a stated
number of month(s)
after date

(a)
(b)

That specific date will

be the due date.
That date on which
the term of the bill
shall expire will be
the due date

Fundamentals Of Accounting:Bills
of Exchange

18

Continued
Note: The term shall
expire on that day of the
month which
corresponds with the day
on which the bill is
dated. If the month in
which the period
terminates has no
corresponding day, the
period shall be deemed
to expire on the last day
Fundamentals Of Accounting:Bills
of such a month.
of Exchange
19

Continued
(c) When the bill is
made payable at a
stated number of
days after date.

(c) That date which

comes after adding
stated number of
days to the date of
bill, shall be the
due date.
Note: The date of
Bill is excluded.
(d) When the due date (d) The preceding
business day will
is a public holiday.
be the due date.
Fundamentals Of Accounting:Bills
of Exchange

20

Continued
(e) When the due
date is an
emergency/
unforeseen
holiday.

(e)

The
next
following day will
be the due date.

Note: The term of a Bill after sight

commences from the date of acceptance
of the bill whereas the term of a Bill
after date of drawing a bill commences
Of Accounting:Bills
from the dateFundamentals
of drawing
of bill.
of Exchange
21

Illustration 1
Mohan sold goods to Gupta on 1st
September, 2005 for Rs. 1,600. Gupta
immediately accepted a three months
bill. One due date Gupta requested that
the bill be renewed for a fresh period of
two months. Mohan agrees provided
interest at 9% was paid immediately in
cash. To this Gupta was agreeable. The
second bill was met on due date. Give
Journal entries
in the books of Mohan.
Fundamentals Of Accounting:Bills
of Exchange

22

Solution
Books of Mohan
Journal
2005

Sept.
1

Dr.
Rs.
Gupta
To Sales Account
(Sales of goods to Gupta as per
Invoice No.)
Bill Receivable Account
To Gupta
Fundamentals Of Accounting:Bills
of Exchange

Dr.

Cr.
Rs.

1,600
1,600

Dr.

1,600
1,600
23

Continued

Dec.
4

(3 months acceptance received from

Gupta for the amount due from
him)
Dr. 1,600
Gupta
1,600
To Bills Receivable Account
(Guptas acceptance cancelled
because of renewal)
24
Dr.
Gupta
24
To interest
(Interest @ 9% on Rs. 1,600 due
from Gupta for 2 months because of
renewal)
Fundamentals Of Accounting:Bills
of Exchange

24

Continued
Bills receivable Account
Cash Account
To Gupta
[New acceptance for 2 months for
Rs. 1,600 and Cash (for interest)
received from Gupta]
2006
Feb.7 Cash Account
To Bills receivable Account
[Cash received against Guptas
second acceptance]
Fundamentals Of Accounting:Bills
of Exchange

Dr. 1,600
24
Dr.
1,624

Dr. 1,600
1,600

25

Illustration 2
R owed Rs. 1,000 to S. On 1st October,
2005, R accepted a bill drawn by S for
the amount at 3 months. S got the bill
discounted with his bank for Rs. 900 on
3rd October, 2005. Before the due date,
R approached S for renewal of the bill. S
agreed on the conditions that Rs. 500
be paid immediately together with
interest on the remaining amount at
12% per annum
Fundamentals Of Accounting:Bills
of Exchange

26

Continued
for 3 months and for the balance, R
should accept a new bill at three
months. These arrangements were
carried out. But afterwards, R became
insolvent and 40% of the amount
could be recovered from his estate
Pass journal entries (with narration)
in the books of S.
Fundamentals Of Accounting:Bills
of Exchange

27

Solution
In the books of S Journal
Particulars

L.F.

Dr.
Rs.

Bills Receivable A/c

To R
(Being a 3 months bill drawn on R
for the amount due)

Dr. 1,000

Bank A/c
Discount A/c
To Bills Receivable A/c
(Being the bill discounted)
Fundamentals Of Accounting:Bills

Dr.
Dr.

of Exchange

Cr.
Rs.
1,000

900
100
1,000
28

Continued
R

Dr.

1,000

To Bank A/c
(Being the bill cancelled up due to Rs
inability to pay it)
R

1,000

Dr.

15
15

To Interest A/c
(Being the interest due on Rs. 500 @
12% for 3 months)
Bank A/c
To R
(Being the receipt of a portion of the
amount due on the bill together with
Fundamentals Of Accounting:Bills
interest
of Exchange

Dr.

515
515

29

Continued
Bills Receivable A/c
To R
(Being the new bill drawn for the
balance)

Dr.

Dr.

500
500

500
500

To Bills Receivable A/c

(Being the dishonour of the bill due to
Rs insolvency)
Bank A/c
Bad Debts A/c
To R
(Being the receipt of 40% of the
amount due on the bill
from Rs
Fundamentals
Of Accounting:Bills
of Exchange
estate)

Dr.
Dr.

200
300
500

30

Illustration 3
Mr. David draws two bills of exchange
on 1.1.2005 for Rs. 6,000 and Rs.
10,000. The bills of exchange for Rs.
6,000 is for two months while the bill of
exchange for Rs. 10,000 is for three
months. These bills are accepted by Mr.
Thomas. On 4.3.2005, Mr. Thomas
requests Mr. David to renew the first bill
with interest at 18% p.a. for a period
of
Fundamentals Of Accounting:Bills
of Exchange

31

Continued
Two months. Mr. David agrees to this
proposal. On 20.3.2005, Mr. Thomas
retires the acceptance for Rs. 10,000,
the interest rebate i.e. discount being
Rs. 100. Before the due date of the
renewed bill, Mr. Thomas becomes
insolvent and only 50 paise in a rupee
could be recovered from his estate.
You are to give the journal entries in the
Fundamentals Of Accounting:Bills
books of Mr. David.
of Exchange
32

Solution
Journal Entries in the books of Mr. David
2005
Jan.1 Bills receivable (No. 1) A/c
Dr.
Bills receivable (No. 2) A/c
Dr.
To Mr. Thomass A/c
(Being drawing of bills receivable
No.1 due for maturity on 4.3.2005
and bills receivable No. 2 due for
Fundamentals Of Accounting:Bills
maturity on 4.4.2005
of Exchange

Dr.
(Rs.)

Cr.
(Rs.)

6,000
10,000
16,000

33

Continued
March
4

Mr. Thomass A/c

Dr.
To Bills receivable (No.1) A/c
(Being the reversal entry for bill
No.1 on agreed renewal)

6,000

March
4

Bills receivable (No. 3) A/c

Dr.
To Interest A/c
To Mr. Thomass A/c
(Being the drawing of bill of
exchange no.3 due for maturity on
7.5.2005 together with interest at
18% p.a. in
lieu of the original
Fundamentals
Of Accounting:Bills
acceptance of
Mr. Thomas)

6,180

of Exchange

6,000

180
6,000

34

Continued
March
20

May 7

Bank A/c
Dr.
Discount A/c
Dr.
To Bills receivable (No.2) A/c
(Being the amount received on
retirement of bills No.2 beofore
the due date)

9,900
100

Mr. Thomass A/c

Dr.
To Bills receivable (No.3) A/c
(Being the amount due from Mr.
Thomas on dishonour of his
acceptanceFundamentals
on presentation
on the
Of Accounting:Bills
of Exchange
due date

6,180

10,000

6,180

35

Continued
May 7 Bank A/c
Dr.
To Mr. Thomass A/c
(Being the amount received from
official assignee of Mr. Thomas
at 50 paise per rupee against
dishonoured bill)

3,090

May 7 Bad debts A/c

Dr.
To Mr. Thomas A/c
(Being the balance 50% debt in Mr.
Thomass Account arising out of
Fundamentals
Of Accounting:Bills
dishonoured bill
written
as bad)

3,090

of Exchange

3,090

3,090

36

BILLS FOR COLLECTIONS

When a person received a bill of
exchange he may decide to receive the
total amount by keeping it till the date
of maturity. But in order to ensure
safety, he may sent it to bank with
instructions that the bill should be
retained till maturity and should be
realised on that date. This does not
mean discounting because the bank will
not credit the client until the amount is
actually realised. If the bill
Fundamentals Of Accounting:Bills
of Exchange

37

Entries
Is sent to the bank with such instructions it is
known as Bill sent for collection.
It is better to make a record of this also in books
by passing following entry :
Bills for Collection Account
Dr.
To Bills Receivable Account
When the amount is realised the entry will be

Fundamentals Of Accounting:Bills
of Exchange

38

Continued
Bank Account
Dr.
To Bills for Collection Account
When the amount is not honoured,
the entry will be
Party (from whom the bills
was received)
Dr.
To Bills for collection A/c
Fundamentals Of Accounting:Bills
of Exchange

39

RETIREMENT OF BILLS OF
EXCHANGE
We have seen that renewal of a bill of
exchange is made when a person does
not have sufficient funds to pay for the
bill of exchange on the due date and he
requires a further period of credit. Many
a time instances do arise when the
acceptor has spare funds much before
the maturity date of the bill of
Fundamentals Of Accounting:Bills
of Exchange

40

Continued
exchange accepted by him. In such
circumstances he approaches the payee
of the bill of exchange and asks him
whether the payee is prepared to accept
cash before the maturity date. In such
cases the acceptor gets a certain rebate
or interest or discount for premature
payment. The interest becomes the
income of the acceptor and expense of
the payee. It is a consideration of
premature payment.
Fundamentals Of Accounting:Bills
of Exchange

41

Illustration 4
On 1st January, 2006, Vilas draws a
bill of exchange for Rs. 10,000 due
for payment after 3 months on
Eknath. Eknath accepts to this bill of
exchange. On 4th March, 2006.
Eknath retires the bill of exchange at
a discount of 12% p.a. You are asked
to show the journal entries in the
books of Vilas.
Fundamentals Of Accounting:Bills
of Exchange

42

Solution
Journal entries in the books of
Eknath
Date

Particulars

L.F.

Debit
Rs.

Jan.
1

Vilas A/c
To Bills Payable A/c
(Being the bill draws by him
accepted)

Dr.

10,000

Fundamentals Of Accounting:Bills
of Exchange

Credit
Rs.
10,000

43

Continued
Mar. 4 Bills Payable A/c
Dr.
To Bank A/c
To Interest A/c (Discount
A/c)
(Being retirement of acceptance
1 month before maturity,
interest allowed at 12% p.a.

Fundamentals Of Accounting:Bills
of Exchange

10,000
9,900
100

44

MCQ 1
On 1.1.05 X draws a bill on Y for
Rs. 20,000for 3 months due date
of the bill will be :
(a) 1.4.05
(c) 4.4.05

Fundamentals Of Accounting:Bills
of Exchange

(b) 3.4.05
(d) 4.5.05

45

MCQ 2
On 15.8.05 X draws a bill on Y for
3 months for Rs. 20,000. 18th Nov
was a sudden holiday, due date of
the bill will be:
(a) 17th Nov
(c) 19th Nov

Fundamentals Of Accounting:Bills
of Exchange

(b) 18th Nov

(d) 15th Nov

46

MCQ 3
On 16.6.05 X draws a bill on Y for
Rs. 25,000 for 30 days . 19th July is
a public holiday, due date of the bill
will be:
(a) 19th July
(c) 17th July

Fundamentals Of Accounting:Bills
of Exchange

(b) 18th July

(d) 16th July

47

MCQ 4
X draws a bill on Y for Rs 30,000 on
1.1.05 X accepts the same on
4.1.05. Period of the bill 3 months
after date. What will be the due
date of the bill:
(a) 4.4.05
(c) 7.4.05
Fundamentals Of Accounting:Bills
of Exchange

(b) 3.4.05
(d) 8.4.05
48

MCQ 5
X draws a bill on Y. X endorsed the
bill to Z. The payee of the bill will
be
(a) X
(c) Z

(b) Y
(d) None

Fundamentals Of Accounting:Bills
of Exchange

49

MCQ 6
A bill of 12,000 was discounted by A
with the banker for 11,880. At
maturity,
the
bill
returned
dishonoured noting charges Rs 20.
How much amount will the bank
deduct from As bank balance at the
time of such dishonour?
(a) 12,000
(c) 12,020

(b) 11,880
(d) 11,900
Fundamentals Of Accounting:Bills
of Exchange

50

MCQ 7
X draws a bill on Y for Rs. 20,000
on 1.7.05 for 3 months after sight,
date of acceptance is 6.1.05. Due
date of the bill will be:
(a) 8.1.05
(c) 10.1.05

Fundamentals Of Accounting:Bills
of Exchange

(b) 9.1.05
(d) 11.1.05

51

MCQ 8
X sold goods to Y for Rs. 1,00,000. Y
paid cash Rs. 30,000. X will grant 2%
discount on balance, and Y request X
to draw a bill for balance, the amount
of bill
will be:
(a) 98,000
(c) 68,600

(b) 68,000
(d) 70,000
Fundamentals Of Accounting:Bills
of Exchange

52

MCQ 9
On 1.1.05 X draws a bill on Y for
Rs 50,000 for 3 months. X got the
bill discounted 4.1.05 at 12% rate.
The amount of discount on bill will
be:
(a) 1500
(c) 1800
Fundamentals Of Accounting:Bills
of Exchange

(b) 1600
(d) 1450
53

MCQ 10
Mr. A draws a bill on Mr. Y for Rs.
30,000 on 1.1.06 for 3 months.
On 4.2.06. X got the bill
discounted at 12% rate. The
amount of discount will be:
(a) 900
(c) 300
Fundamentals Of Accounting:Bills
of Exchange

(b) 600
(d) 650
54

MCQ 11
X draws a bill on Y for Rs. 20,000 for
3 months on 1.1.05. The bill is
discounted with banker at a charge
of Rs. 100. At maturity the bill
return dishonoured. In the books of
X, for dishonour, the bank account
will be credited by:
(a) 19,900
(b) 20,000
(c) 20,100
(d) 19,800
Fundamentals Of Accounting:Bills
of Exchange

55

MCQ 12
On 1.1.05 X draws a bill on Y for
Rs 10,000. At maturity Y request
X to renew the bill for 2 month a
12% p.a. interest. Amount of
interest will be:
(a) 200
(c) 180
Fundamentals Of Accounting:Bills
of Exchange

(b) 150
(d) 190
56

MCQ 13
On 1.1.05 X draws a bill o n Y for
Rs. 15000 for 3 months. At maturity
Y request X to accept Rs. 5000 in
cash and for balance to draw a fresh
bill for 2 months together with 12%
p.a. interest, amount of interest will
be:
(a) 200
(b) 300
(c) 240
(d) 380
Fundamentals Of Accounting:Bills
of Exchange

57

MCQ 14
On 1.8.05 X draw a bill on Y for
30 days after sight. The date of
acceptance is 8.8.05. The due
date of the bill will be:
(a) 8.9.05
(c) 11.9.05

Fundamentals Of Accounting:Bills
of Exchange

(b) 10.9.05
(d) 9.9.05

58

MCQ 15
On 1.6.05 X draw a bill on Y for Rs.
25,000. At maturity Y request X to
accept Rs. 5,000 in cash and noting
charges incurred Rs. 100 and for the
balance X draw a bill on Y for 2
months at 12% p.a. Interest
amount will be:
(a) 410
(c) 440

(b) 420
(d) 400
Fundamentals Of Accounting:Bills
of Exchange

59

MCQ 16
On 1.1.05 X draw a bill on Y for Rs.
50,000.
At
maturity,
the
bill
returned dishonoured as Y become
insolvent and 40 paise per rupee is
recovered from his estate. The
amount recovered is:
(a) 20,000
(c) 30,000

(b) Nil
(d) 40 paise

Fundamentals Of Accounting:Bills
of Exchange

60

MCQ 17
X draws a bill on Y for Rs 3000. X
endorsed to Z. Y will pay the
amount of the
bill to:
(a) X
(c) To himself

Fundamentals Of Accounting:Bills
of Exchange

(b) Z
(d) None

61

MCQ 18
On 1.1.05 X draw a bill on Y for 3
months for Rs. 10,000. On 4.3.05
Y pay the bill to X at 12%
discount, the amount of discount
will be:
(a) 100
(c) 300
Fundamentals Of Accounting:Bills
of Exchange

(b) 200
(d) 50
62

MCQ 19

Ram draws on Aslam a bill for Rs. 60,000 on

1.4.01 for 2 months. Aslam accepts the bill and
sends it to Ram who gets it discounted for Rs.
58,800. Ram immediately remits Rs. 19,600 to
Aslam. On due date, Ram being unable to remit
the amount due accepts a bill for Rs. 84,000 for
2 months which is discounted by Aslam for Rs.
82,200. Aslam sends Rs. 14,800 to Ram out of
the same. How much discount will be borne by
Ram at the time of 14,800 remittances.
(a) 1200 (b) 1800
(c) 1100
(d) 800
Fundamentals Of Accounting:Bills
of Exchange

63

MCQ 20
Mr. Bobby sold goods worth Rs. 25,000 to Mr.
Bonny. Bonny immediately accepted a bill on
1.11.01, payable after 2 months. Bobby
discounted this bill @ 18% p.a. on 15.11.01. On
the due date Bonny failed to discharge the bill.
Later on Bonny became insolvent and 50 paise is
recovered from Bonnys estate. How much
amount of bad debt will be recorded in the books
of Bobby:
(a) 12,500 (b) 9,437 (c) 11,687 (d) 13,650
Fundamentals Of Accounting:Bills
of Exchange

64

THE END
Bills Of Exchange