Accounting Treatment of Bill of

Exchange
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ADVERTISEMENTS:

Here we detail about the five heads for accounting treatment

of bill of exchange, i.e., (I) On the Due Date, Bill is Honoured;
(II) On the Due Date, Bill is Dishonoured; (III) Renewal of Bill;
(IV) Retiring of Bill; and (V) Insolvency of Acceptor.
I. On The Due Date Bill Is Honoured:
The accounting treatment under this heading is based on the assumption
that bill is duly honoured on maturity of the bill.

Keeping in view the significance of the bill, the drawer can

treat the bill in the following ways:
ADVERTISEMENTS:

(i) Bill is retained till the date of maturity

(ii) Bill is discounted from the bank

(iii) Endorsement of bill

(iv) Bill is sent for collection

ADVERTISEMENTS:

Now we shall move to discuss the accounting treatment of bill

transactions under all above cases.

(i) Bill is Retained Till the Date of Maturity:

The receiver may keep the bill till the date of maturity of the bill and bill
is honoured. In this case, the acceptor (drawee) shall make the payment
to the receiver (drawer).
The drawer and drawee will record the following journal
entries in their respective books:

Explanations of the Journal Entries (Using Modern Approach

Only):
ADVERTISEMENTS:

Transaction (i):
In the books of A, Sales is to be credited (being increase in revenue) and
B’s A/c is to be debited (being increase in assets). In the books of B,
Purchases is to be debited (being increase in expense) and A’s A/c is to
be credited (being increase in liabilities)

Transaction (ii):
In the books of A, Bills Receivable A/c is to be debited (being increase in
assets) and B’s A/c is to be credited (being decrease in assets). In the
books of B, A’s A/c is to be debited (being decrease in liabilities) and
Bills Payable A/c is to be credited (being increase in liabilities).

Transaction (iii):
In the books of A, Cash A/c is to be debited (being increase in assets) and
Bills Receivable A/c is to be credited (being decrease in assets). In the
books of B, Bills Payable A/c is to be debited (being decrease in
liabilities) and Cash A/c is to be credited (being decrease in assets).

Illustration 1. (Calculation of maturity date)

Calculate the maturity date of the following Bills Receivables:
(ii) Bill is Discounted from the Bank:
Bank facilitates the customers to get their bill discounted from it. Banks
deduct some amount as discount and pay the balance of the bill to the
customers. In case of need of funds, customers opt for this facility and
obtain the cash in respect of bill by discounting them. The amount of
discount is the interest for lending the money to the customers before
the maturity of the bill. The discount portion usually depends upon the
prevailing rate of interest and the unexpired period of the bill.
The following journal entries shall be passed in the books of
drawer and the drawee:

Explanations of the Journal Entries (Using Modern Approach

Only):
Transaction (i):
In the books of A, Bank A/c is to be debited (being increase in assets),
Discount A/c is to be debited (being an expense) and Bills Receivable A/c
is to be credited (being decrease in assets). In the books of B, no entry
shall be made for this transaction as B is not affected by this transaction.

Transaction (ii):
In the books of A, no entry shall be made as A has already received the
payment. Now the payment shall be received by the Bank from the
acceptor since the bill becomes the property of the bank. In the books of
B, Bills Payable A/c is to be debited (being decrease in liabilities) and
Bank A/c is to be credited (being decrease in assets). It is worth
mentioning here that instead of cash, bank account should be credited in
the books of drawee because in banking transaction bank deals with the
respective Bank of Drawee.

Illustration 2. (Discounting the bill with the Bank) Rahul owes

Rs. 50,000 to Anup. On 1st July, 2010, Anup received from
Rahul Rs. 10,000 and an acceptance for Rs. 40,000 for 3
months. Anup got the bill and discounted at 12% per annum at
his bank. On the due date, Rahul paid the required amount.
Give journal entries in the books of Rahul and Anup.

(iii) Endorsement of Bill:

Signing and transferring the title of the bill is called endorsement. Bill of
exchange is a negotiable instrument which means the amount is payable
to the bearer of the instrument. Bearer of the bill means the person who
is in possession of the bill legally. This feature makes the bill of exchange
readily transferable. A bill can be transferred by the holder unless its
transfer is restricted. By putting signatures at the back of the bill along
with the name of party to whom it is to be transferred, the bill can be
endorsed.

Types of Endorsement:
Bill can be endorsed in the following ways:
(i) Blank Endorsement:
In this type of endorsement, only signature of the transferor is required
and the bill can be transferred by mere delivery.

The method of endorsement is as under:

Signed
“Veer Singh”
(ii) Special Endorsement:
In this type of endorsement, the intention of the transferor is to transfer
the bill to the a specific person or to transfer the bill on the order of that
specific person. It is necessary to write the name of the party in whose
favour the property rights of the bill are endorsed. If a bill is to be
endorsed in favour of Ramesh & Co. by Sippy & Co; of the bill
endorsement shall be shown as under on the back of the bill

“Pay Ramesh & Co. or on order”

Sippy & Co.
Official Signatory
(iii) Restricted Endorsement:
Endorsement in favour of a definite person only is known as restricted
endorsement.

This is expressed as under:

“Pay Mehra Sons only”

Signed

Manohar Sons

(iv) Endorsement Sans Recourse (i.e. without recourse):

The endorsement which relieves the holder of the bill from any liability
to all subsequent endorsees due to dishonour of bill is called
endorsement sans recourse. In this case, the holder of the bill acts only
in a representative capacity as agent and not as principal.

The endorsement is completed in the following way:

“Pay Jitender Kumar or order”

Signed

Noor Ali

Sans Recourse.

(v) Facultative Endorsement:

In this case, the endorser waives some of his rights to which he is
entitled. The right which is given up is clearly stated. In the following
manner, the endorsement gets effected;

“Pay Har Govind Parsad or order

Notice of dishonour waived”

Signed

Vishwas & Co.

In this way, the notice of dishonour, need not be given before demanding
the payment from the endorser.

Effects of Endorsement:
(i) After endorsement, the person endorsing the bill is called ‘endorser’
and the person to whom the bill is endorsed is called ‘endorsee’.

(ii) The bill would become payable to the third party instead of original
holder. However, during the term of the bill, the bill may be again
endorsed to fourth person unless its endorsement is restricted.

(iii) In the case of unrestricted endorsement, business dues may be

settled unrestrictedly.

The following journal entries shall be passed in the books of

drawer, drawee and endorsee:
Explanations of the Journal Entries (Using Modern Approach
Only):
Transaction (i):
In the books of A, C’s A/c shall be debited (being decrease in liabilities),
and Bills Receivable A/c is to be credited (being decrease in assets). In
the books of B, no entry shall be made for this transaction as B is not
affected by this transaction. In the books of C, Bills Receivable A/c is to
be debited (being increase in assets) and A’s A/c shall be credited (being
decrease in assets).

Transaction (ii):
In the books of A, no entry shall be passed as the bill has been
transferred to C. In the books of B, Bills Payable A/c is to be debited
(being decrease in liabilities) and Cash A/c is to be credited (being
decrease in assets). In this case C (creditor) becomes the owner of the bill
and will receive the payment on maturity. In the books of C, Cash A/c is
to be debited (being increase in assets) and Bills Receivable A/c is to be
credited (being decrease in assets).

Illustration 3. (Endorsement to third party)

Rohit sold goods to Ankit worth Rs 11,500. On 1st May, 2010, he drew on
Ankit a bill for Rs 11,500 for 3 months. On 5th May, 2010 the bill was
endorsed in favour of Shakul, who got the payment on maturity. Give
journal entries in the books of Rohit, Ankit and Shakul.
(iv) Bill Sent for Collection:
In the course of business, it may happen that business enterprises
receive various bills on different occasions. But obviously the dates of the
bills are different. Further, the maturity dates may vary according to the
tenure of the bills. It may also happen that the various parties of the bill
are located at different locations.
To overcome the burden of encashing all bills falling due on different
dates and at different locations, banks may facilitates its customers to
collect on behalf of them, the amounts due on various bills from the
drawees of the bills in time.

In this case, the following journal entries shall be passed in the

books of drawer and the drawee:

Explanations of the Journal Entries (Using Modern Approach

Only):
Transaction (i):
In the books of A, Bills Sent for Collection A/c is to be debited (being
increase in assets) and Bills Receivable A/c is to be credited (being
decrease in assets). In the books of B, no entry shall be passed as B is not
affected by this transaction.

Transaction (ii):
In the books of A, Bank A/c is to be debited (being increase in assets)
and Bills Sent for Collection A/c is to be credited (being decrease in
assets). In the books of B, Bills Payable A/c is to be debited (being
decrease in liabilities) and Cash/Bank A/c is to be credited (being
decrease in assets).

Illustration 4. (Sending the bill for collection)

Surjit draws a bill on Garima for Rs 25,000 payable 3 months after 1st
April, 2010. Immediately after its acceptance, Surjit sends the bill to his
bank for collection. On due date, bank gets the payment. Make journal
entries in the books of both the parties.
II. Dishonour of a Bill:
When the acceptor fails to meet his commitment on the date of maturity,
the bill is said to have been dishonoured. Failure to meet the
commitment means the acceptor could not pay the amount of the bill to
the holder of the bill on its maturity.

Upon receiving the information about dishonour of the bill, the entries
should be passed in such a way that the original entries passed in the
books of drawer and drawee shall be reversed and the original position of
creditor and debtor is restored between the drawer and the drawee. They
are now again considered as creditor and debtor.

Accounting Treatment:
It may happen that on the date of maturity of the bill:

(i) Bill was lying with the drawer,

(ii) Bill was discounted from the bank

(iii) Bill was endorsed to the creditor

(iv)Bill was sent for collection

(v) Bill was pledged for obtaining the loan from the bank.

In all these circumstances, the following journal entries shall

be passed:

Illustration 5. (Dishonour of bill)

Mohan Bhai sold goods for Rs 25,000 to Jamshedji on Jan. 1, 2010 and
on the same date, drew a bill on Jamshedji at three months for the
amount. This bill is duly accepted but is dishonoured on the due date.
Pass Journal entries in the books of Mohan Bhai & Jamshedji.
III. Renewal of the Bill:
Sometimes, the acceptor finds it difficult to meet the obligation of the bill
on due date of the bill. To avoid dishonouring of the bill, he may request
the drawer of the bill, to extend the maturity date. In that case, the
drawer may cancel the old bill and draw a new bill, with new terms, on
the drawee. This is known as renewal of the bill. In this case, noting of
the bill is not required as the cancellation of the bill is mutually agreed
upon by both the parties of the bill.

The drawer may demand the interest charges for the extended period.
The interest may be included in the amount of a new bill or can be paid
in cash. Sometimes, the acceptor of the bill requests for cancellation of
the old bill, partly for a new bill and partly for cash. For example, a bill of
Rs. 20,000 may be cancelled on cash payment of Rs. 12,000 and on
acceptance of a new bill for the balance of Rs. 8,000 plus interest as
agreed between both the parties of the bill.

Accounting Treatment:
For recording the entries in the books of both the parties, the entries
shall be passed in two phases. In the first phase, an entry for cancellation
of the old bill is to be passed in the books of both the parties of the bill.
This entry would be the same as that of dishonour of bill. In the second
phase, entries for interest and drawing and accepting a new bill shall be
recorded in the books of the parties.

The following journal entries will be passed in the books of

both the parties:

Illustration 6. (Renewal of bill)

Pass the journal entries in each of the following alternative
cares in the books of drawer and drawee:
IV. Retiring of Bill:
In case of sufficient funds, the acceptor of the bill may approach the
drawer to accept the payment of the bill before due date of the bill. The
intention of the drawee is either to utilize the surplus funds which
otherwise would be lying idle or to withdraw the bill from further
circulation.

If the holder of the bill agrees to the proposal of the acceptor, the bill is
said to be retired. Sometimes, the holder of the bill inspires the acceptor
of the bill for retiring the bill before the due date of the bill. In both the
cases some discount is allowed to the acceptor which is known as ‘rebate’
and recorded in the books of both the parties as ‘Rebate on Bills A/c’.

The rebate allowed by the holder is an expense for him and gain for the
acceptor. The amount of rebate shall be calculated as a fixed percentage
and on the unexpired period only.

Accounting Treatment:
In the case of retiring a bill, the entries shall be passed in the same way
as were passed in the case when bill was honoured on the due date of the
bill. In addition to that ‘Rebate on Bill A/c’ is to be debited in the books
of the holder (being an expense). Similarly, the acceptor of the bill shall
credit the ‘Rebate on Bill A/c’ (being gain for him).

The following journal entries are passed in the books of both

the parties:

Illustration 7. (Retiring of bill)

Vijayshree retired her acceptance for Rs 1,10,000 by giving Rs 1,09,000
to Hari. Give the entries in the book of Hari.
V. Insolvency of Acceptor:
Insolvent is the person whose assets are not sufficient to pay off his
liabilities in full. In that case, the court appoints a legal person who is
known as ‘Official Assignee’ or Official Receiver’. This person realizes all
the assets of the acceptor of the bill and pays off to his creditors in
proportion to their debts. The amount that could not be given to the
holder shall be considered as ‘Bad Debts’ from the point of view of the
holder and ‘Deficiency’ from the point of view of the acceptor of the bill.

Accounting Treatment:
In case of insolvency of the acceptor, the holder would get the
proportionate amount of what is due from the bill. In this case, entries
shall be recorded in the books of both the parties in two phases. In the
first phase, entry for cancellation of the bill shall be passed in the books
of both the parties. This entry shall be same as would be passed at the
time of dishonouring of the bill. In the second phase, entry for recording
the amount received (if any) and amount that could not receive, shall be
recorded.

The journal entries for this in the books of debtor and creditor
are as follows:
Illustration 7. (Insolvency of Debtor)
On Jan. 1, 2010 R. Singh drew upon S. Singh for goods sold, a bill at 3
months for Rs 12,000. R Singh discounted the bill with his bankers, who
charges Rs 200 for discount. On the due date, the bill was dishonoured
and the bank paid Rs 50 for Noting charges. On April 10, S. Singh
accepted a new bill for Rs 6,000 payable after 3 months and paid the
balance in cash. On July 1, before the bill matured S. Singh was declared
insolvent and a first and final dividend of 50 paise in a rupee was
received from his private estate on 31s‘ July, 2010. Make Journal entries
in the books of both R. Singh and S. Singh.
 Home ››
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