Bills of Exchange Accounting

8/12/2019 Bills of Exchange Accounting

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CBSE-iSECBSE-i

Shiksha Kendra, 2, Community Centre, Preet Vihar, Delhi-110 092 India

Student's Material

ACCOUNTANCY

ACCOUNTING FOR BILLS OF EXCHANGE

CLASS

XIUNIT-6





Shiksha Kendra, 2, Community Centre, Preet Vihar, Delhi-110 092 India

CBSE-i

CLASS

UNIT-6

IXStudent's Material

ACCOUNTANCY

ACCOUNTING FOR BILLS OF EXCHANGE



The CBSE-International is grateful for permission to reproduce

and/or translate copyright material used in this publication. The

acknowledgements have been included wherever appropriate and

sources from where the material may be taken are duly mentioned. In

case any thing has been missed out, the Board will be pleased to rectify

the error at the earliest possible opportunity.

All Rights of these documents are reserved. No part of this publication

may be reproduced, printed or transmitted in any form without the

prior permission of the CBSE-i. This material is meant for the use ofschools who are a part of the CBSE-International only.





Advisory Conceptual Framework

Ideators Classes XI and XII

Shri Vineet Joshi, Chairman, CBSE Shri G. Balasubramanian, Former Director (Acad), CBSE

Dr. Sadhana Parashar, Director (Training), CBSE Ms. Abha Adams, Consultant, Step-by-Step School, NoidaDr. Sadhana Parashar, Director (Training), CBSE

Prof. A K Bakshi Ms. P Rajeshwari Dr. Niti Nandini Chatnani Ms. Neeta Rastogi

Dr. N K Sehgal Ms. Gyatri Khanna Dr. Anil K Bali Dr. Anshu

Prof. Kapil Kapor Mrs. Anita Makkar Dr. Preeti Tewai Dr. Rajesh Hassija

Ms. Renu Anand Prof. Biswajit Nag Dr. Deeksha Bajpai Ms. Mukesh Kumar

Dr. Barkatullah Khan Dr. Jacqueline Symss Mr. S K Agarwala Dr. Om Vikas

Ms. Avnita Bir Ms. Usha Sharma

English :

Chemistry :

Ms. Gayatri Khanna

Ms. Renu Anand

Ms. P Rajeshwary

Ms. Sandhya Awasthi

Ms. Manna Barua

Ms. Veena Bhasin

Ms. Urmil Guliani

Ms. Sudha Ravi

Mr. Anil Kumar

Ms. Vijaylaxmi Raman

Ms. Neerada Suresh

Ms. Himaal Handoo

Dr. G S Sodhi

Dr. Vimal Rarh

Dr. Shalini Baxi

Dr. Vinita Arora

Dr. Vandana Soni

Ms. Charu Maini

Ms. Rashmi Sharma

Ms. Kavita Kapoor

Biology :

Physics :

Mathematics :

Dr. Ranjana Saxena

Dr. Neeraja Sood

Dr. P Chitralekha

Ms. Mridula Arora

Ms. Lucy Jad

Ms. Priyanka Choudhury

Ms. Prerna Gosain

Ms. Malini Sridhar

Dr. B. Biswal

Ms. Namarata AlwadhiMr. Dhirender Sharma

Ms. Vandana Banga

Mr. Vivek

Dr. Sushil Kumar

Mrs. Monica Talwar

Mrs. Charu Dureja

Mrs. Seema Juneja

Dr. H K Bhatia

Dr. Sushma Bansal

Geography:

Economics:

Ms. K Jaya

Dr. Preeti Tewari

Ms. Rupa Das

Ms. S Fazal Daoud Firdausi

Ms. Neena Phogat

Ms. Sujata Sharma

Ms. Deepa Kapoor

Ms. Bharti Malhotra

Ms. Isha Kaushik

Mr. Riyaz Khan

Mr. S K Agarwala

Ms. Ambika Gulati

Ms. Nidhi Singh

Ms. Malti Modi

Ms. Sapna Das

Ms. Ingur Agarwal

Ms. Shankar Kulkarni

Accountancy :

Business Studies :

ICT :

Mr. S S Sehrawat

Dr. K Mohna

Dr. Balbir Singh

Ms. Bhupendra Kriplani

Ms. Shipra Vaidya

Mr. Sandeep Sethi

Dr. S K Bhatia

Ms. Meenu Ranjan Arora

Mrs. Shegorika

Mr. Sandeep SethiMs. Usha Sharma

Ms. Komal Bhatia

Ms. Ravisha Aggarwal

Mr. Mukesh Kumar

Ms. Nancy Sehgal

Ms. Purvi Srivastava

Ms. Gurpreet Kaur

Material Production Groups: Classes XI-XII

Cheif - Coordinators: Dr. Srijata Das, E.O

Acknowledgements

Coordinators:

Ms. Sugandh Sharma, EO

Ms. Madhu Chanda, RO (Inn)

Shri R. P. Sharma,Consultant (Science)

Dr Rashmi Sethi, EO

Shri Al Hilal Ahmed, AEO

Ms. Neelima Sharma,Consultant (English)

Ms. S. Radha Mahalakshmi, EO

Ms. Anjali Chhabra, AEO

Ms. Reema AroraConsultant (Chemistry)

Mr. Navin Maini, RO (Tech)

Shr. R. P. Singh, AEO

Mr. Sanjay Sachdeva, S O



Contents Preface

Acknowledgment

1. Activity 1

2. Negotiable Instruments 7

3. Parties to a bill of exchange 8

4. Promissory Note 10

5. Parties to a Promissory Note 12

6. Distinction between a Bill of Exchange and a Promissory Note 12

7. Advantages of bill of exchange / promissory note 14

8. Due Date or Date of Maturity and Grace Days 16

9. Recording of Bill Transactions 24

10. Books of acceptor/promisor 26



1

Student’s Material

ACTIVITY

You are familiar with using cash and cheques as means of payment for purchased

goods and services available. The cheques which are accepted in place of cash, are

deposited in your bank account.

You are also familiar with goods being sold on credit, where the seller collects his

payment on a later date.

Visualize the times when banks were not there, trade was being conducted, maybe with

cash or any other means prevailing in that era. How were the credit transactions beingconducted?

Taking an example of market where you have

1. Manufacturers (seller) shoes



2

2. Traders (buyer)

The shoe manufacturer brings his load full of shoes for the market, goes from one

shop to the other selling, his deals materialize more in credit than in cash.

The traders may take a credit facility from him for a week or ten days, the traders signs

a small piece of paper given to them by the manufacturer wherein they accept that they

will pay after a week or as decided.

The manufacturer goes back home with the documents with him but he needs cash to

pay his expenses, he needs to buy raw material, pay his staff and even look after his

personal expenses.

What should he do?

You need to understand the need of the bill.

For that we take another example.

Laying stress on the fact that the market trades in credit, but there will be someone in

the link who needs to be paid cash.

Take a product example Bread,



3

The channels used in making and distribution of bread.

You get the bread from the retailer for cash or on credit.

The retailer buys the bread from the wholesaler for cash or on credit.

The wholesaler buys the bread from the manufacturer for cash or on credit.

The manufacturer buys the raw material from the suppliers for cash or on credit.

The suppliers buy wheat from the farmer in cash.

This means that the supplier of raw material buys in cash and sell in credit.

How much would the suppliers have to invest for these activities?

What could be the source of funds for him?

Think about the solution to this problem.



4

What if the manufacturer gives in writing that he would pay to the supplier in one

month?

The document is prepared by the manufacturer.

The manufacturer accepts the condition and signs it.

The documents may be

i) kept by the supplier for a month and presented for payment to the

manufacturer.

ii) given to the bank, who will collect the payment on behalf of the supplier.

iii) given to the bank who gives the money to the supplier on the same date.

The bank deducts a discounting charge, and collects the money from the

manufacturer on the due date.



5

iv) he can pass the bill to his creditor for payment.

Can you identify the following from the above.

The drawer.

The drawee.

The payee.

The endorsee.

Discounting charge.

Due date.

Debtor being converted into bill receivable.

The bills of exchange / promissory notes are negotiable instruments. In India

these are governed by the ‘Negotiable Instrument Act 1881’. Similarly in other countries

there may be related laws/acts which may be governing the transactions related to bills

of exchange and promissory notes.

Example

When goods were sold on credit, the seller would merely ask the buyer to sign on a

piece of paper.

The buyer would commit a time and on the due date the seller would come and collect

the payment and return the slip to the buyer, who would tear the slip.

The sellers could also send someone on his behalf for the same.

You may act as a debtor and ask a friend of your to be a creditor.



6

One may draw a bill. Other students may be asked to act as other parties to a bill and

record bill transactions in their respective books of accounts and construct themselves

the understanding of the bill transactions.

. ‘Hundis’ are bills of exchange written in Indian language.

Business transactions can either be in cash or on credit. When goods are sold or bought

on credit involving large amounts the seller has to ensure the recovery of his debt and

needs security and evidence over the dealings. Here the bills of exchange solve the

problem of the seller.

Besides, this when the number of credit transactions with an individual buyer increase,

credit may be allowed and payment may be received after some time.



7

In such cases it is better that the transactions are put in writing so that there is no

possibility of any misunderstanding between the buyer and the seller, besides the

amount may be paid in time as agreed.

If such an instrument is in proper form, the buyer and seller are in sound positions in

relation to each other. These credit instruments can even be transferred from one person

to another. These instruments are known as

Negotiable Instruments.

Bill of Exchange – definition and characteristics : A bill of exchange is an instrument in

writing, signed by the maker, containing an unconditional order, 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 for value received.

The following features of a bill of exchange can be made out of this definition:



8

1. A bill of exchange must be in writing.

2. It must be dated and stamped.

3. It must be signed by the maker.

4. It contains an order to make payment and the order is unconditional.

5. The payment to be made must be certain.

6. The date on which payment is to be made must be certain.

7. The amount of the bill is payable to a certain person, or to his order or to the bearer

of the instrument.

8. It must be stamped as per the requirement of the law of the country in which it is

drawn.

9. It must be accepted by the debtor or someone else on his behalf.

10. Bills of exchange are drawn for value received i.e. for the buyer having received

goods of the value mentioned in it.

Parties to a bill of exchange

There are three parties to a bill of exchange. These are :

1. Drawer: The person who draws on writes the bill is called drawer. He is the

maker of the bill. A seller/creditor who is entitled who is entitled to receive the

money from the buyer/debtor can draw the bill of exchange upon the later. The

drawer after writing the bill has to sign it as the maker of the bill.

2. Drawee : The person upon whom the bill is drawn is known as the drawee. He is

the debtor. He is the person who is ordered by the drawer to make the payment.

Payee:



9

The person who has the right to receive the amount of the bill is called the payee. The

payee may will be the drawer if he keeps the bill with him till the date of its maturity

and the bill has been made payable to the drawer. In such a situation the drawer and

payee is the same person.

The payee may be a third party in the following cases:

(a) When the bill is drawn payable to a person other then the drawer.

(b) When the bill has been discounted before the date of its maturity from the

bank, then bank will become the payee.

(c)

When the bill is endorsed by the drawer in favour of his creditor then thecreditor will become the payee.

Specimen of a bill of exchange is given below:

James New Delhi

Rs. 50,000 March 01, 2012

Three months after date pay to me or my order, the sum of Rupee Fifty

Thousand Only, for value received.

Stamp

Accepted Signed

(Signed) 147, Ashok Road, New Delhi-110001

Noory [To Noory, 1 Gandhi Road, Ahmedabad

1.3.2012

1. Fill in the Blanks

1. A bill of exchange is an ______________ ____________ in writing given by

creditors to the debtors.



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2. The maker of a bill of exchange is called the _____________.

3. The debtor on whom a bill of exchange is drawn is called the _______________.

4.

The person, other than the original creditor, to whom the amount in the bill ismade payable is known as the ______________ of the bill.

2. Write True or False against each of the following statement:

(i) A bill of exchange is a conditional document.

________________

(ii) The person who pays the amount of a bill is known as the payee.

____________________

(iii) There are only two parties in case of bill of exchange.

______________________

(iv) Drawee of a bill of exchange becomes liable on the bill only after he has

accepted it.

___________________________

(v) A bill of exchange before acceptance is called draft.

__________________________

Promissory Note:



11

A promissory note is defined as 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 a certain person or to his order for value received.

A promissory note is drawn by a debtor in favor of his creditor where in the debtor

promises to pay a certain sum of money, since it is a promise by the debtor, the

promissory note does not require any acceptance. In India, the Reserve Bank of India

Act prohibits the issue of promissory notes payable to the bearer.

Following, are the important features of a promissory note :

1. It is must be in writing.

2. It must be contain an unconditional undertaking to pay.

3. It is drawn by the debtor in favour of his creditor.

4. It must be signed by the maker (debtor).

5. The amount payable is always certain.

6. The amount is payable to a certain person or to his order.

7. Promissory notes are drawn for value received.

8. Promissory notes cannot be made payable to the bearer.

9. It must be dated.

10. It must be properly stamped.



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Specimen of a Promissory Note

Rajani New Delhi

Rs. 60,000 01, December 2011

Three months after date I promise to pay Mr. Nortan or order a sum of rupeessixty thousand only for value received.

Stamp Rajani

2, Golf Links,

New Delhi-110002

To Norton

15, Club Road,

Mumbai-12003

Parties to a Promissory Note:

There are two parties to a promissory note as described below:

1. Maker or Drawer : The person who makes or draws the promissory note is

called the maker or drawer. He is also called the promissory.

2. Drawee or Payee : The person in whose favour the promissory note is drawn

is called the drawee or the payee. He is also called the promise.

Generally the drawee is the payee unless, it is otherwise stated in the promissory notes.

In the specimen of the promissory note given above Rajani promised to pay Nortan Rs.

60,000 three months after date. Here Nortan is the payee.

If Nortan endorses the promissory note in favour of Rossy then Rossy will become the

payee and if Nortan discounts the promissory note from the bank then bank will

become the payee.

Distinction between a Bill of Exchange and a Promissory Note:



13

Both a bill of exchange and a promissory note are negotiable instruments. These are

negotiable instruments. These are instruments of credit and the accounting treatment of

both the instruments is the same. However, there are some basic differences between

these two instruments. These differences have been detailed below:

Basis Bills of Exchange Promissory Notes

Drawer It is drawn by the

creditor upon his debtor.

It is drawn by the debtor

in favour of his creditor.

Order/Promise It contains an

unconditional order to

pay.

It contain an

unconditional promise to

pay

Parties Generally there are three

parties to a bill of

exchange viz. drawer,

drawee and payee.

Generally there are two

parties to a promissory

note, the drawer, and the

payee.

Acceptance It requires acceptance by

the drawee or some one

else on his behalf,

It does not require any

acceptance.

Payee Drawer (creditor) and

payee can be the same

party.

Drawer (Debtor) cannot

be the payee.

Notice It case of dishonour due

notice of dishonour is to

be given by the holder to

the drawer.

No notice needs to be

given in case of its

dishonour.

Payable to bearer It can be payable to

bearer

It is not payable to bearer



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JUST CHECKING OT OUT.

1. A promissory note is an ____________ _____________ in writing given by the

debtor to the creditor.

2. The ____________ of a bill and the _______________ of a promissory note are the

persons primarily liable on the bill and the note respectively

Advantages of bill of exchange / promissory notes

Bill of exchange as instrument of credit are in use in the business because of the

following advantages:

1. Helps in undertaking credit transactions - A bill of exchange is an

instrument that provides a basis for credit transactions between the

prospective buyer and the seller.

2. Clear terms and conditions – The term and conditions regarding the amount,

the time of payment, the person to whom payment shall be made are all clear

in the case of a bill of exchange.

3. Suitable means of credit – A bill of exchange enables the buyer to buy the

goods without making payment immediately. It also enables the seller to sell

it to the buyer on credit but to raise credit either by discounting the bill from

the bank or by endorsing it in favour of someone else.

4. Proof of transactions - A bill of exchange is a conclusive proof of the credit

transactions between the seller/creditor and the buyer/debtor. It works as a

legal evidence for a credit transactions.



15

5. Easy transferability – A bill of exchange can be easily transferred by

endorsement and delivery. The holder of the bill of exchange can endorse the

bill of exchange in favour of for somebody else settlement of debt.

6.

Helps in financial planning – Since the date of payment is fixed in the case ofa bill of exchange the debtor knows when he has to make payment and does

necessary planning to arrange funds on the date of payment. Similarly, the

creditor also knows when he is going to get payment and can prepare plans

to utilize the same.

7. Facilities movement of capital – Bills of exchange facilitate movement of

capital because of being instrument of credit.

Important Terms:

There are some important terms which are peculiar to bill of exchange transactions.

These terms are discussed below:

Term of the Bill – It is the period after which the sum mentioned in bills is to be paid.

The term of the bill is agreed upon by the parties to the bill. In the specimen of both the

bill of exchange and promissory given above the term is three months.



16

For example a bill of exchange drawn by. Mathews upon Lilly for a sum of Rs. 10,000 on

01.04.2012; payable after 60 days. Here, the term of the bill is 60 days.

Due Date or Date of Maturity and Grace Days :

The date on which the amount of the bill becomes payable is called ‘due date’ or ‘dateof maturity’. This is the date on which a bill of exchange or promissory note becomes

due for payment.

To calculate due date or date of maturity, three days called ‘Grace Days’ are added to

the date of expiry of the period of the bill. Thus, if a bill dated March 02 is payable 30

days after date, it falls due on April 04, i.e., 33 days after March 02.

But if the bill is payable one month after date, the due date would be April 05.

In case the date of maturity is a public holiday, the instrument will become due on the

preceding business day. In this case if April 05, falls on a public holiday then April 04

will be the date of maturity.

Sometimes because of some unavoidable circumstances the government may declares

an emergent holiday then the date of maturity of the bill will be the next working day

immediately after the holiday.

Bills at Sight : In a bill of exchange, the expressions, ‘at sight’ and on presentation

means that the bill of payable on demand. Bills payable on demand become due as soon

as the bill is presented for payment. In a bill at sight 3 days of graced are not added.

Bill after date : When a bill is payable at a fixed period, after date the period begins

from the date of drawing of the bill. Three days of grace are allowed in case of such

bills.

Discounting of bill : Discounting of bill means enchasing of the bills before the date of

its maturity. Sometimes the holder of a bill of exchange may require money before the

date of maturity, in such a situation he can discount the bill from the bank and can

obtain cash.



17

When a bill is discounted from the bank, then the bank deducts a certain amount of

discount form the value of the bill and pays and balance the person discounting the bill.

The discount is the amount of interest charged by the bank for encashing the bill before

the maturity of discount depends upon the rate of interest and the unexpired period ofthe bill.

Endorsement of Bill : An endorsement is the process by which a bill is transferred from

one person to another. The holder of the bill may use the bill to settle his debt with

another person.

The endorsement is done by signing by the holder, on the face or back of the bill and

thereby transferring his right in favour of someone else.

The person who makes the endorsement is called the ‘Endorser’. The person to whom

the bill is transferred is known as the ‘Endorsee’.

Bill Sent for Collection : Sometimes, the holder of the bill may send the bill to its bank

for its due presentations to the acceptor on the date of its maturity. This is generally

done a few days before the maturity date of the bill.

On the date of maturity the bank presents the bill to the acceptor in case of a bill of

exchange or to the maker in the case of a promissory note. On collecting the amount of

the bill the bank credits the amount in the customer’s account.

ACT IT OUT

Business is done with a lot of trust, but the fact is that a party say a debtor may let

you down by not honoring his commitment.



18

Ask your friends to volunteer as drawer and payee for a role play and ask them to

create a dialogue for reasons of dishonoring a bill, the situation would become

interesting if an endorsee was also introduced who had to collect the money from the

drawee, but the drawee did not ask for payment by presenting the bill.

When the endorsee brings the bill back to the drawer, the drawer along with the

endorsee goes to the drawee for an explaination but the drawee says that the

endorsee did not come.

A similar situation can be created when the drawee refuses to pay and the drawer

goes to court. In the court the drawee pleads that he was willing to pay but the

drawer did not pay.

These two situations will help you to understand the NOTARY to your students, as a

notary will not come without a charge, ask the students to think who would pay for

the notary.

Dishonour of Bill : Dishonour of the bill means the failure of the acceptor of the bill tomake payment on the date of maturity of the bill on its due presentations.

It means when a bill of exchange is duly present to the acceptor and he fails to make

the payment of the amount, this act of non performance of the commitment by the

acceptor is called dishonour of the bill.



19

On the dishonour of the bill the original relationship between the drawer of the bill and

its acceptor is restored i.e. the drawer again becomes the creditor to the extent of the

amount of the bill and the acceptor becomes the debtor to the same extent.

Noting of bill : A bill of exchange should be duly presented for payment on the date of

its maturity. The drawee/acceptor of the bill is absolved of his liability in case the bill is

not duly presented.

The presentation of the bill means that the bill should be presented for payment on the

date of its maturity to the drawee/acceptor of the bill on a working day during business

(working) hours. To establish beyond doubt the fact that the bill was dishonoured,

despite to due presentation, it may be got noted by the Notary Public. The recording ofthe fact of dishonour. On the bill by the ‘Notary Public’ is called ‘Noting’. For this

service, provided by the ‘Notary Public’ he charges some amount which is called.

‘Noting Charges’.

Noting charges are paid to the ‘Notary Public’ by the holder of the bill on the date of

default. Since the acceptor of the bill is liable for the dishonour, the noting charges paid

by the holder are reimbursed by the acceptor. The following facts about the dishonour

of the bill are generally noted by the Notary Public.

(i) Date, facts and reasons of dishonour by the acceptor.

(ii) In case the bill is not expressly dishonoured, the reasons why the Notary

treats it as dishonoured.

(iii) The amount of ‘Noting Charges’ charged by him.



20

Catch up.

1. The posting from the Bill Receivable Book are done to the

debit/credit_____________ of the accounts of individual debtors from whom bills

have been received.

2. The posting from the Bills Payable book are done to the debit/credit___________

of the accounts of individual creditors to whom acceptances have been given.

3. credit

Thinking time again.

Would it be possible for a debtor to offer his payment before the due date?

______________________________________________________________________________

____________________________________________



21

What could your reasons be of retiring a bill before the due date.

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

Retiring of the Bill : When the acceptor of the bill meets the bill before the date of its

maturity, it is called retirement of the bill. This is done by mutual agreement between

the holder of the bill and its acceptor.

It happens when the drawee/acceptor of the bill has funds for meeting the bill and

requests for the same to its holder.

If the holder agrees to do so, the bill is said to have been retired. To encourage the

retirement of the bill, the holder of the bill may allow some discount to the

drawee/acceptor.

This discount is called the rebate.

The rebate is calculated at a certain rate of interest on the unexpired time between the

date of its retirement and the date of its maturity.

Think

What if the debtors requests the drawer to extend the time of the bill. Should there

be a charge for the extended time in the form of interest?

Renewal of the Bill – It happens sometimes that the acceptor of a bill is unable to meet

his acceptance on the due date. Under such a circumstance rather then allow such a bill



22

to mature and then dishonour it on presentation, he may approach the drawer of the

bill before the date of its maturity and request him to cancel the original bill and draw a

new bill on him for an extended period.

The acceptor in this case, would, of course, have to pay interest for the extention oftime.

Thus, the cancellation of a bill, already in circulation and before the date of its maturity

in return of another bill is called. ‘Renewal of the Bill’.

Sometimes, the acceptor pays a part of the amount of the bill in cash and requests for

the new bill to be drawn on him for the balance plus interest.

CRISIS

What would happen if the debtor was declared insolvent?

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

What would happen if the bill was:

retained and dishonoured

______________________________________________________________________________

______________________________________________________________________________



23

endorsed and dishonoured?

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

discounted and dishonoured

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

Who would bear the noting charges

______________________________________________________________________________

______________________________________________________________________________

who would be the ultimate loser due to bad debts.

______________________________________________________________________________

______________________________________________________________________________

Insolvency of Acceptor : Insolvency of the acceptor is a situation when he becomes

bankrupt and fails to meet his liabilities. In such a situation he applies to the court to

declare him insolvent. On being declared insolvent his assets are sold and money

realized from this is paid to the creditors in order of their claims as per rules.

In case of the insolvency of the acceptor the bill accepted by him is considered as

dishonoured. When some amount is realized from his property it is debited to

cash/bank account and the unrealized amount is considered as bad debt for the holder

of the bill and ‘deficiency’ for the acceptor.

Accounting Treatment of Bill transactions:

The creditor/drawee of a bill of exchange when receives the bills of exchange after its

due acceptance by the debtor/drawee for him the bill is called ‘Bills Receivable’. Similar

is the situations in the case of a promissory note. When after writing the promissory

note the maker sends it to the creditor it becomes a ‘Bills Receivable’ for the creditor.

The same bill are called as ‘Bills Payable’ for the acceptor in the case of a bills of



24

exchange and for the maker in case of a promissory note. Bills Receivables are assets

and Bills Payables are liabilities.

Recording of a bill transactions

Books of Drawer/Promissor

The bills receivable can be treated in any one of the following ways by its receiver:

1. He may retain it till the date of its maturity and

a. Presents it himself and collects the amounts.

b. Sends it to his bank for collection

2. He may discount from the bank.

3. He may endorse the bill before the date of its maturity.

The accounting treatment under all the above cases assuming that the bill was duly met

by the acceptor on the date of its maturity is given below:



25

(A) When the bills is retained by the receiver with him till the date of its maturity.

a. On receiving the bill

Bill Receivable A/c Dr.

Debtor’s A/c b. On Maturity of the bill

On maturity of the bill the bill will be presented to the acceptor and the acceptor will

make the payment.

The following entry will be made.

(2) Cash/Bank A/c Dr.

Bills Receivable A/c

(B) When the bill is sent for collection to the bank and the bank collects the amounton behalf of the holder.

1. On receiving the bill.

Bills Receivable A/c Dr.

Debtors A/c

2. Sending the bill to bank.

Bill sent for collection A/c Dr.


3. On Receiving the amount by bank

Bank A/c Dr.

Bills sent for collection

(C) When the bill is discounted from the bank the following entries will be made :

(1) On receiving the bill


Debtor’s A/c

(2) On discounting the bill

Bank A/c Dr.

Discount A/c Dr.




26

Note : No entry will be passed on the date of maturity because now the bill has become

the property of the bank and the bank will present it to the acceptor and collect the

amount.

(D) When the bill is endorsed in favour of the creditor.(1) On receiving of the bill.


Debtor’s A/c

(2) On endorsing the bill in favour of Creditor

Creditor’s A/c Dr.


Note : No entry will be made on the maturity of the bill because now the bill is theproperty of the creditor. The creditor will present it on the date of maturity and collect

the amount.

Books of the Acceptor/Promissor

The following journal entries will be passed in the books of the acceptor under all the

four circumstances. It makes no difference for the acceptor whether the bill is retained,

sent for collections, discounted or endorsed.

(1) On accepting the Bill :

Creditor’s A/c Dr.

Bills Payable A/c

(2) On meeting the bill on its date of maturity.

Bills Payable A/c Dr.

Bank A/c



27

BREAK TIME.

4. A bill of exchange is called a ___________ ____________ by one who is entitled to

received the amount due on it.

5.

A bill of exchange is called a ____________ ____________ by one who is liable topay it on the due date.

6. The drawer of a bill can ___

__________ it in his possession, or

__________ it to the bank for collection, or

__________ it to a third party.

7.

The drawer/payee of a bill can get the amount of the same before its due date bygetting the same ____________ .

8. When a bill is endorsed by the drawer, he is called an _____________.

9. A person to whom the drawer endorses a bill is known as an ______________.

10. When a bill is not paid on its due date, it is said to be ________________.

11. When a bill is dishonored, it is customary to get it _____________ by a

____________.

12. the fee charged for getting the bill noted after dishonour is called _____________

___________.

13. the renewal of a bill before dishonour implies that the _____________

_____________ must be first cancelled.

14. When a bill is sought to be paid before its date of maturity, the holder allows

_______________ to the acceptor.

Illustrations 1. On Jan. 01, 2012 X sold goods of Rs. 50,000 to Y on credit. X drew a bill of

exchange upon Y payable after three months. Y accepted the bill and returned it to X.

On the date of maturity Y met his acceptance. Pass necessary journal entries in the book

of X and Y under the following circumstances.



28

(i) X retained the bill with him till the date of its maturity and collected the amount

directly.

(ii) X sent the bill for collection on April 01, 2012 and the bank collected the amount.

(iii)

X discounted the bill at 12% p.a. from his bank on the same day.(iv) X endorsed the bill on the same date in favour of his creditor Z.

Books of X

(1) When the bill is retained by X

Journal

Date Particulars L.F. Debit

AmountRs.

Credit

AmountRs.

2012

Jan. 1

Y’s A/c Dr.

Sales A/c

(Sold goods to Y on credit)

50,000

50,000

Jan. 1 Bills Receivable A/c Dr.

Y’s A/c

(Received Y’s acceptance for

three months)

50,000

50,000

April’04 Bank A/c Dr.

Bills Receivable

(Y met his acceptance on

maturity)

50,000

50,000



29

(ii) When the bill was sent for collections to the bank.

Journal


AmountRs.

Credit

AmountRs.

2012

Jan. 1

Y’s A/c Dr.

Sales A/c


50,000

50,000


Y’s A/c


three months)

50,000

50,000

April’04 Bill sent for collections A/c

Dr.


(Y’s acceptance sent to bank for

collection)

50,000

50,000


Bills Sent for Collections

(Y’s acceptance collection by

bank)

50,000

50,000



30

(iii) When the bill is discounted from the bank.

Journal


AmountRs.

Credit

AmountRs.

2012

Jan. 1

Y’s A/c Dr.

Sales A/c


50,000

50,000


Y’s A/c


three months)

50,000

50,000

Jan. 1 Bank A/c Dr.

Discount A/c Dr.


(Y’s acceptance discounted with

bank)

48,500

1,500

50,000

(iv) When the bill is endorsed in favour of Z.

Journal


Amount

Rs.

Credit

Amount

Rs.

2012

Jan. 1

Y’s A/c Dr.

Sales A/c


50,000

50,000


Y’s A/c

50,000

50,000



31


three months)

April’05 Z’s A/c Dr.

Bills Receivable A/c(Y’s acceptance in our favour

endorsed in favour of Z)

50,000

50,000

Books of Z Journal


Amount

Rs.

Credit

Amount

Rs.

2012

Jan. 1

Purchases A/c Dr.

X’s A/c

(Purchased good on credit from

X)

50,000

50,000

Jan. 1 X’s A/c Dr.

Bills Payable A’c

(Accepted X’s draft payable after

three months)

50,000

50,000

April’04 Bills Payable A/c Dr.

Bank

(Met on acceptance in favour of

X on maturity)

50,000

50,000

Accounting treatment on dishonour of a bill:

In the event of dishonour of a bill of exchange the parties to a bill of exchange return to

the same position in which they were before its acceptance, sending to bank the

collection, discounting it from bank or endorsing it & in favour of a creditor. The



32

following journal entries will be made in the books of different parties on the dishonour

of the bill.

(A) Book of Drawer/Promissor

(i) When the bill is retained by the drawer with him till maturity.Debtor’s A/c Dr.

Bills Receivable

(B) When the bill was sent for collection to the bank

Debtor’s A/c Dr.

Bill sent for collection

(C) When the bill was discounted from the bank

Debtor’s A/c Dr.Bank A’c

(D) When the bill was endorsed in favour of Creditor

Debtor’s A/c Dr.

Creditor’s A/c

Illustrations : Let us take the example of illustrations 01 and suppose that on the date of

maturity the bill was dishonoured by Y. The following journal entries will be made in

the books of X under all the four situations:

(i) When the bill was retained by X till the date of maturity

Journal of X


Amount

Rs.

Credit

Amount

Rs.

2012

Jan. 1

Y’s A/c Dr.


(Y dishonoured his acceptance on

maturity)

50,000

50,000



33

(ii) When the bill was sent by X to his bank for collections.

Journal of X

Date Particulars L.F. DebitAmount

Rs.

CreditAmount

Rs.

2012

April04

Y’s A/c Dr.

Bills sent for collections A/c

(Y’s acceptance sent for collection tobank dishonoured)

50,000

50,000

(iii) When the bill was discounted from bank.

Journal of X


Amount

Rs.

Credit

Amount

Rs.

2012

April

04

Y’s A/c Dr.

Bank A/c

(Y’s acceptance discounted from

bank dishonoured)

50,000

50,000

(iv) When the bill was endorsed by X in favour of Z


Amount

Rs.

Credit

Amount

Rs.

2012

Jan. 1

Y’s A/c Dr.

Z’s A/c

(Y acceptance in our favour

endorsed in favour of Z,

dishonoured)

50,000

50,000



34

Books of acceptor

Whatever might had happened to the bill before the date of maturity i.e. whether it was

retained by the drawer or sent to bank for collections, or discounted from bank orendorsed by him in favour of his creditor on the date of dishonour the acceptor again

becomes the debtor of the drawer equal to the amount of the bill. The following journal

entry will be made in all such cases.


Drawer’s A/c

Journal of Y

Date Particulars L.F. DebitAmount

Rs.

CreditAmount

Rs.

2012

April

04


X’s A/c

(Our acceptance in favour of X

dishonoured)

50,000

50,000

Accounting treatment of Noting Charges:

As discussed earlier in the event of dishonour of a bill of exchange the holder may get

the ‘Noting’ done on the bill by a ‘Notary Public’. For his servicesd the ‘Notary Public’

takes some charges and such charges are termed as ‘Noting Charges’. Noting Charges

are recoverable by the holder from the acceptor. The following journal entries will be

pass in the books of the drawer under the four different situations for Noting Charges.

(A) When the bill is retained by the drawer with him till the date of its maturity

and he pays Noting Charges

Drawer’s A/c / Acceptor’s A/c Dr.



35

Bank A/c

(B) When the bill was sent for collection to the bank

Drawee’s / Acceptor’s A/c Dr.

Bank A/c

(C) When the bill was discounted by the bank from the bank


Bank A/c

(D) When the bill was endorsed by the bank drawer in favour of his creditor.


Bank A/c

Illustrations 3 : Let us suppose that in case of illustrations I the bill was dishonoured.

On the date of maturity and Rs. 100 noting charges were paid by the holder of the bill.

The following journal entries will be made in four situations.

(i) When bill was retained by X with him and he paid Rs. 100 Noting Charges.

Journal of X


Amount

Rs.

Credit

Amount

Rs.

2012

April 04

Y’s A/c Dr.

Bills Receivable

Cash

(Y’s acceptance in our favour

dishonoured & paid noting

charges)

50,100

50,000

100



36

(ii) When the bill was sent for collection and bank paid Rs. 100 as noting charges.

Journal of X


AmountRs.

Credit

AmountRs.

2012

April 04

Y’s A/c Dr.

Bills sent for collection

Bank

(Y’s acceptance sent for collection

dishonoured and bank paid noting

charges)

50,100

50,000

100

(iii) When the bill was discounted by X from bank and bank paid noting charges.

Journal of X


Amount

Rs.

Credit

Amount

Rs.

2012

April 04

Y’s A/c Dr.

Bank

(Y’s acceptance in our favour

discounted from bank

dishonoured & bank paid noting

charges)

50,000

50,000



37

(iv) When the bill was endorsed in favour of Z and Z paid Rs. 100 noting charges

Journal of X


AmountRs.

Credit

AmountRs.

2012

April 04

Y’s A/c Dr.

Z/s A/c on acceptance

favour of endorsed in favour of Z

dishonored & Z paid noting

charges)

50,100

50,100

Books of acceptor/promisor

Noting Charges have to be born by the acceptor to the bill it is because of the fact that

these charges are paid because of the failure of the acceptor to meet the bill on the date

of its maturity. Therefore, the acceptor opens ‘Noting Charges Account’ in his books for

recording these charges. Following journal entry will be padded by the acceptor

whatever the Noting Charges are paid by any of the parties of the bill.

Noting Charges A/c Dr.

Drawer’s A/c

In the case of the above illustrations the following journal entry will be made in the

books of Y when the bill was dishonoured by him and Noting Charges Rs. 100 were

paid either by X, by bank or by Z.

Journal of Y


Amount

Rs.

Credit

Amount

Rs.

2012

April 04



50,000

100



38

X’s A/c

(Our acceptance in favour of X

dishonored & noting charges were

paid by holder)

50,100

Retirement of the bill : As discussed earlier retirement of the bill means discharging

the liability on the bill by its acceptor before the maturity of the bill. In such a situations

the acceptor gets some discount which is called as rebate. This rebate is an expense for

the holder of the bill who gets the amount of the bill before its maturity and it is an

income for two acceptor because by pays less amount for the bill. The following journal

entry are made in the book of the holder and the acceptor.

Books of Drawer/Holder

Bank A/c Dr.

Rebate A/c Dr.


Books of Acceptor


Bank

Rebate

Illustrations : In case of illustration I let us suppose that Y agreed to retire the bill on

15.3.2012 at a rebate of Rs. 500.

Pass the necessary journal entries in the books of X and Y when the bill was retained by

X with him till the date of its maturity.



39

Solution

Journal of X


AmountRs.

Credit

AmountRs.

2012

Jan. 1

Y’s A/c Dr.

Sales A/c


50,000

50,000


Y’s A/c

(Y accepted on draft)

50,000

50,000

March

15

Bank A/c Dr.

Rebate A/c Dr.


(Y retired his acceptance and the

paid rebate)

49,500

500

50,000


Bills Sent for Collection

(Y’s acceptance collection by

bank)

50,000

50,000



40

Journal of Y


Amount

Rs.

Credit

Amount

Rs.2012

Jan. 1

Purchase A/c Dr.

X’s A/c

(Purchased goods on credit

from X)

50,000

50,000

Jan. 1 X’s A/c Dr.

Bills Payable

(Accepted X’s draft)

50,000

50,000

March

15


Bank A/c

Rebate A/

(Retired our acceptance in

favour of X before maturity and

received rebate)

50,000

49,500

500

Renewal of Bill : Renewal of the bill involves the cancellation of the old bill and

drawing of a new bill as per the agreement between the drawer/holder of the bill and

the acceptor. Since it involves an element of interest the recording of interest is also

done in the books of both the holder and the acceptor. The following steps are taken

when a bill is renewed.

(i) Firstly, the old bill is cancelled and the entries for cancellations are recorded

in the books of both the parties.

(ii) Secondly, the entry for interest if any are recorded.

(iii) Thirdly the recording of cash if any part payment of the amount of the bill is

received/paid (including interest if any) is recorded.

(iv) Lastly, the recording for the new bill is done.



41

Journal entries in the books of drawer/holder of the bill

(1) For cancellation of the old bill

Acceptor’s A/c Dr.

Bills Receivable A/c(2) For recording of interest


Interest A/c

(3) For receiving part payment if any

Bank A/c Dr.

Acceptor’s A/c

(4) For receiving the new billBills Receivable A/c Dr.

Acceptor’s A/c

Illustrations : On 5th January 2012 Charls sold good sRs. 30,000 on credit to Ahdmad.

Ahemad agreed to pay Rs. 10,000 in cash on 15th January and accepted a bill for the

remaining amount immediately payable after two months. On 20th March 2012 Ahemad

neglected Charles to cancel the old bill. He agreed to pay Rs. 5,000 on 20 th March 2012

and accept a new bill for the balance including interest Rs. 600. The new bill shall be

payable after three months. Ahemad met the due bill on maturity.

Pass necessary journal entries in the books of Charles and Ahmead for the above

transactions.



42

Solution:

Books of Charles

Journal


Amount

Rs.

Credit

Amount

Rs.

2012

Jan. 05

Ahemad’s A/c Dr.

Sales A/c

(Sold goods on credit to Ahemad)

30,000

30,000


Ahemad’s A/c (Received Ahemad acceptance)

20,000

20,000

Jan. 15 Bank A/c Dr.

Ahemad’s A/c

(Received from Ahemad on

account)

10,000

10,000

March 20 Ahemad’s A/c Dr.


(Cancelled Old Bill)

20,000

20,000

March 20 Ahemad’s A/c Dr.

Interest

(Entered Charged on Renewal)

600

600

March 20 Bank A/c Dr.

Ahemad’s A/c

(Received Part Payment)

5,000

5,000

March 20 Bills Receivable A/cDr.

Ahemad’s A/c

(Received New Bill from Ahemad)

15,600

15,600



43

July 23 Bank A/c Dr.


(Ahemad Met his new acceptance

on Maturity)

15,600

15,600

Books of Ahemad

Journal


Amount

Rs.

Credit

Amount

Rs.

2012

Jan.05

Purchases A/c Dr.

Charle’s A/c

(Purchases goods on credit from

Charles)

30,000

30,000

Jan. 05 Charle’s A/c Dr.

Bills Payable A/c

(Accepted Charl’s draft)

20,000

20,000

Jan. 15 Charl’s A/c Dr.

Bank

(Paid to Charles on Account)

10,000

10,000

March 20 Bills Payable A/c Dr.

Charles’ A/c

(Charles cancelled the old bill on

our request)

20,000

20,000

March 20 Interest A/c Dr.

Charles’ A/c

(Interest Allowed to Charles)

600

600

March 20 Charle’s A/c Dr. 5,000



44

Bank

(Made part payment to Charles)

5,000

March 20 Charle’s A/c Dr.

Bills Payable A/c(Accepted new bill in favour of

Charle’s)

15,600

15,600

July 23 Bills Payable A/c Dr.

Bank

(Met our new acceptance on

maturity)

15,600

15,600

Insolvency of Acceptor : The accounting treatment of insolvency of the acceptor

involves the cancellation of the bill which the insolvent accept failed to meet. Whatever

amount is received from the estate to the insolvent acceptor that is debited to bank

account and the unrecovered amount is debited to bad debts accounts, whereas in the

books of acceptor the unrecovered amount is recorded as ‘Deficiency’. The following

journal entries are made.

Books of Drawer

(1) For cancellation / dishonour of the bill


Bills Receivable

(2) For receiving the payment from the estate of the insolvent acceptor

Bank A/c Dr.

Bad Debts A/c Dr.

Acceptor’s A/c

Books of Acceptor

(1) For cancellation of the bill on insolvence


Drawer’s A/c



45

(2) For making payment on realization of assets of the insolvent accept

Drawer’s A/c Dr.

Bank A/c

Deficiency A/cIllustrations : On 1st January 2012. A sold on credit goods Rs. 80,000 to B and drew a bill

of exchange upon him for the same amount payable after three months. On the maturity

of the bill B dishonored the bill and A paid Rs. 500 at nothing charges. B requested A to

A draw a new bill upon him payable after two months. He agreed to pay the noting

charges and interest of Rs. 1,000 in cash. A agreed to this and drew a new bill upon B.

On the date of maturity of the new bill B became insolvent and an amount of 50% was

received from has estate.Pass necessary journal entries for the above transactions in the books of A and B.

Solutions:

Books of A

Journal


Amount

Rs.

Credit

Amount

Rs.

2012

Jan. 01

B’s A/c Dr.

Sales A/c

(Sold goods on credit to B)

80,000

80,000


B’s A/c

(Received B’s Acceptance)

80,000

80,000

April 3 B’s A/c Dr.


Cash

(B dishonoured his acceptance and

80,500

80,000

500



46

he paid noting charges)

April

03

B’s A/c Dr.

Interest A/c

(Interest Charged from B)

1,000

1,000

April

03

Bank A/c Dr.

B’s A/c

(Received interest and nothing

charges from B)

1,500

1,500

April

03


B’s A/c

(Received a new bill from B)

80,000

80,000

Jan. 06 B’s A/c Dr.


(Cancelled B’s new acceptor his

becoming insolvent)

80,000 80,000

Jan. 06 Bank A/c Dr.

Bad Debts A/c Dr.

B’s A/c

(Received final payment from B’s

estated and recorded the

unrecoverable amount as bad debts)

40,000

40,000

80,000

Books of B

Journal


Amount

Rs.

Credit

Amount

Rs.

2012 Purchases A/c Dr. 80,000



47

Jan. 01 A’s A/c

(Purchased goods on credit from A)

80,000

Jan. 01 A’s A/c Dr.

Bills Payable A/c(Accepted A’s draft)

80,000

80,000

April

03



A’s A/c

(Dishonour of our acceptance and a

paid noting charges)

80,000

500

80,500

April

03

Interest A/c Dr.

A’s A/c

(Allowed interest to A)

1,000

1,000

April

03

Bank A/c Dr.

A’s A/c

(Paid noting charges & interest to D)

1,500

1,500

April

03

A’s A/c Dr.

Bills Payable A/c

(Accepted A’s New draft)

80,000

80,000

Jan. 06 Bills Payable A/c Dr.

A’s A/c

(Cancelled our acceptance in favour

of A on our becoming insolvent)

80,000

80,000

Jan. 06 A’s A/c Dr.

Bank

Deficiency

(Made final payment to A)

80,000

40,000

40,000



48

Work Sheet:

Fill in the blanks with suitable words:

(i)

Bill of exchange is drawn by the ………….. upon his ………….. (ii) A Promissory Note contains an ………….. to pay.

(iii) A ………….. does not require acceptance.

(iv) A sight bill is payable on …………..

(v) Grace days are not allowed in case of ………….. bill

(vi) The amount payable in case of a bill of exchange is always …………..

(vii) Noting Charges are borne by the …………..

(viii) When a bill is met before the date of its maturity it is called ………….. of bill.

(ix) The amount charged by this ‘Notary Public’ for making a noting on the bill is

called…………..

(x) A bill of exchange may be accepted by a person other then the …………..

Worksheets:

On January 01, 2012 Sharma sold goods Rs. 35,000 to Verma on credit and drew upon

him to drew a bill for the same amount payable after two months. Verma accepted the

bill and returned it to Sharma on the same date Sharma discounted the bill from his

bank at 12% p.a. on the maturity of the bill Verma dishonoured the bill and bank paid

Rs. 200 as noting charges Verma requested. Sharrma to drew a new bill upon him

including the noting charges and interest of Rs. 700 payable after two months. Sharma



49

agreed and drew the new bill. On the maturity of the new bill Verma become insolvent

and an amount of 40% was received from him.

Pass necessary journal entries for the above transactions in the books of Sharma andVerma.

Fill in the Blanks

Answers:

1. Unconditional Order

2. Drawer

3. Drawee

4. Payee

5. Unconditional Promise

6. Acceptor and Maker

7. Bill Receivable

8. Bill Payable

9. Retain, Send and endorse

10. Discounted

11. Endorser

12. Endorsee

13. Dishonoured

14. Noted and Notary Public

15. Noting Charges

16. Old Bill

17. Rebate

18. Credit

19. Debit



50

T R Y A G A I N .

Fill in the blanks;

(i)

A bill of exchange is an …………in writing given by the creditor to thedebtor.

(ii) The maker of a bill of exchange is called the ………………

(iii) The debtor on whom a bill of exchanges is called the…………….

(iv) There are……………..parties to a bill of exchange.

(v) The person other than the original creditor, to whom the amount in the bill is

made payable is known as the ……………of the bill.

(vi) The drawer of a bill can

………….it in his possession or

………….it to the bank for collection or

………….it to a third party

(vi) On the acceptance of a bill, the acceptor credits………….a/c.

(vii) The drawer/payee of a bill can get the amount of the same before its due

date by getting the same……………..

(viii) When a bill is not paid, on its due date, it is said to be……………………

(ix) When a bill is dishonored, it is customary to get it ……………..by a

………………

(x) The fee charged for getting the bill noted about dishonor is called

…………….



51

(xi) Whoever pay the noting charges, the amount is borne ultimately by the

…………….

(xii) If noting charges are paid by the drawer himself, the amount is debited

to…………..

(xiii) When a discounted bill is dishonoured,………………account is credited by

drawer.

(xiv) ………………is allowed if a bill of exchange is paid before maturity.

(xv) On the acceptance of a bill, the drawer credits……………..a/c.

(a) Short Answer Questions (Practical)

1. A seller can take one of four steps with a bill. What are these?

2. By what names is each of the following called:

(i) Who endorses the bill of exchange?

(ii) Who accepts the bill of exchange?

(iii) In whose favour the bill of exchange is endorsed.

3. Below is an example of a bill of exchange:

Date: March 9, 2012

Three months after date pay to Daisy or order the sum of twenty five

thousand rupees only for value received.

To D.K.Peter Salim Malik



52

(i) Who is the drawer of the bill?

(ii) Who is the drawer of the bill?

(iii)

Who is the payee of the bill?

(iv) What is the maturity date of the bill?



Documents

Bills of Exchange Accounting