Accounting For Bills of Exchange: Chapter-7

CHAPTER-7

ACCOUNTING FOR BILLS OF EXCHANGE

Learning objectives
After studying this chapter, students shall be able to:
 Explain the concept of Bill of Exchange and Promissory Note.

 Distinction between Bill of Exchange and Promissory Note.

 Define Important terms of Bill Exchange and Promissory Note.
 Record the Accounting Treatment of Bill of Exchange under different

Circumstances
Suggested Methodology
Illustration-cum-Explanation Method.
A Bill of Exchange and Promissory Note both are legal Instruments which
facilitate the credit sale of goods by assuring the seller that the amount will be
recovered after a certain. Both of these are legal instruments under the
Negotiable Instruments Act, 1881.
BILL OF EXCHANGE
“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 the order of, a certain person or to the bearer of the
instrument.”
Section 5 of the Negotiable instrument Act, 1881
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Features of a Bill Exchange are
1. A Bill of Exchange must be in writing
2. It must contain an order (and note a request) to make payment.
3. The order of payment must be unconditional.
4. The amount of bill of exchange must be certain.
5. The date of payment should be certain.
6. It must be signed by the drawer of the bill.
7. It must be accepted by the drawee by signing on it.
8. The amount specified in the bill exchange in payable either on demand

on the expiry of a fixed period.
9. The amount specified in the bill is payable either to a certain person or
to his order or to the bearer of the bill.
10. It must be stamped as per legal requirements.
PARTIES TO A BILL OF EXCHANGE
1. Drawer : Drawer is the person who makes or writes the bill of exchange.
Drawer is a person who has granted credit to the person on whom the
bill of exchange is drawn. The drawer is entitled to receive money from
the drawee (acceptor).
2. Drawee : Drawee is the person on whom the bill of exchange is drawn
for acceptance. Drawee is the person whom credit has been granted by
the drawer. The drawee is liable to pay money to the creditor/drawer.,.
3. Payee : Payee is the person who receives the payment from the drawees.
Usually the drawer and the payee are the same person. In the following
cases, drawer and payee are two different persons.
(i) When the bill is discounted by the drawer from his bank-payee
in the bank.
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(ii) When the bill is endorsed by the drawer to his creditors, payee
is the endorsee.
Specimen of Bill of exchange
Rs. 50,000 4 New Delhi

6th August,2013
Stamp 4
2 Three months after day pay to me or my order, the sum of
3 Fifty thousand only for Value received
“Accepted,,
6
(Signed)
(Mukesh Chand.)
(Signed)
To
Mukesh Chand SANT KANWAR
D-24, Sector-15 5 151-, Sector-9
Rohini Delhi-39 Rohini Delhi-39
CONTENTS OF BILL OF EXCHANGE
1. Date : The date on which a bill is drawn, is written on the top right
corner of the bill. It helps in determining the date of maturity of the
bill.
2. Term/Tenure : Term specifies the time period for which a bill is written.
It should be specified in the body of the bill.
3. Amount : Amount in figure should be mentioned in the top lelf corner

and amount in words should be mentioned in body of the bill.
4. Stamp : Stamp of proper value depending upon the amount of bill

must be affixed on the bills of exchange.
5. Name of Parties : The name and addresses of the drawer and the
drawee should be mentioned in the bill of exchange.

6. For Value Received : It means the bill has been issued in exchange of
some consideration. These words are very important because law does
not consider those agreements which have been made without
considerations.
ADVANTAGES OF BILL OF EXCHANGE
1. It helps in purchases and sales of goods on credit basis.

2. It is a legally valid Document in the eyes of law. It assures uneasier
recovery to the drawer if drawee fails to make the payments.
3. A Bill can be discounted from the bank before its date maturity. By
discounting with the bank, drawer can get the money before due date
if required.
4. It can be easily transferred from one person to another by endorsement.
5. It helps in recovery of debt without sending reminders to the debtor.
6. It assures the seller about the timely recovery of debt. So a drawer and
drawn can plan about its cash management.
PROMISSORY NOTE
A Promissory note is an instrument in writing (not beings a bank note or

a currency note) containing an unconditional undertaking signed by the maker
to pay a certain sum of money only or to the order of a certain person or to
be the bearer of the instrument.
FEATURES OF PROMISSORY NOTE
1. There must be an unconditional promise to pay a certain sum of money

on a certain date.
2. It must be signed by the maker.
3. The name of the payee must be mentioned on it.

4. It must be stamped according to its value.

PARTIES TO PROMISSORY NOTE
1. The maker : The maker is the person who makes the promise to pay
the amount on a certain date. Maker of a bill must sign the promissory
note before giving it to the payee.
2. The Payee : The payee is the person who is entitled to get the payment
from the maker of promissory note. Payee is the person who has granted
the credit.
Rs. 2,00,000
New Delhi
7th Aug.2013
Stamp
To
(Signed)
GulabSingh Rajiv Verma
18, Paschim Vihar 95,Sector-16
New Delhi-63 Rohini Delhi-85
Distinction between Bills of Exchange and Promissory Note:

Basis of difference Bills of Exchange Promissory Note
1. Drawer The Drawer is the creditor. The Drawer is the debtor.
2. No. Of Parties It has three parties namely: It has two parties namely:
• The drawer • The Maker
• The drawee • The payee
3. Order or It contains an order to It contains a promise to
Promise Make the payment. make the payment
4. Acceptance It is valid only when It does not require any
accepted by the drawee. acceptance from the drawee.
5. Payee It case of bill of exchange, Drawer or maker cannot
drawer can be the payee the payee of
of the bill Promissory note.
6. Noting It case of dishonour of bill Noting is not necessary
Noting becomes important. in case of dishonour of
7. Liability The liability of the drawer promissory note.
arises only if the drawee The liability of the drawer
fails to make payment (maker) is primary

IMPORTANT TERMS
1. Term of Bill :.The period intervening between the date on which a bill
is drawn and the date on which it becomes due for payment is called
“Term of Bill’.
2. Due Date : Due date is the date on which the payment of the bill is
due.
(i) In case of ‘Bill at Sight’
Due date is the date on which a bill is presented for the payment
(ii) In case of ‘Bill after date’-
Due Date - Date of Drawing + Term of Bill.
(iii) In case of ‘Bill after sight’-
Due date - Date of Acceptance +Term of Bill.
3. Days of Grace : Drawee is allowed three extra days after the due
date of bill for making payments. Such 3 days are know as ‘Days of
Grace’. It is a custom to add the days of grace.
4. Date of Maturity : The date which comes after adding three days
of grace to the due date of a bill is called “Date of maturity’.
Illustration 1 : A bill of exchange for Rs. 25,000 is drawn by A on B on 1st
April, 2013 for 3 Months, B accepted the bill on 10th April, 2013.
Find the DUE DATE and DATE OF MATURITY if
Cash I : The bill is Bill After date
Cas II : The bill is Bill After Sight
Solution:
Due Date Date of Maturity
Case I -When the Bill is

“Bill After date” 1st July 2013 4th July, 2013

Case II-When the Bill is
“Bill After Sight” 10th July 2013 13th July, 2013
• In case a bill is “Bill after Sight” term of bill starts from the date of
acceptance.
5. Discounting of Bill : When the bill is encashed from the bank before
its due date, it is known as discounting of bill. Bank deducts its charges
from the amount of bill and is disburses the balance amount.
Illustration 2 : Ram sold goods to shyam for Rs. 30,000 at credit on 1st April,
2013 Ram discounts the bill with his bank on 4th May 2013 @ 9% per annum
find out :
(i) The amount of discounting charges.
(ii) The amount that Ram will receive from his bank at the time of
discounting the bill.
Solution :
(i) Discounting Charges =
Rate
Amount of Bill Discounted   Unexpired Period
100
9 2
 30, 000    Rs. 450
100 12
(ii) Ram will receive from his bank Rs. 29,550 (i.e. Rs.30,000–Rs. 450) at
the time of discounting the bill.
6. Endorsement of Bill : Endorsement of bill means the Process of

transferring the title of bill from the drawer or holder to their
creditors. The person transferring the title is called “ Endorser” and
the person to whom the bill is transferred called “Endorsee’. The
endorsee can further endorse the bill in favour of his creditors.
Endorsement is executed by putting the signature at the back of the
bill.

7. Bill sent for Collection : It is a process when the bill is sent to bank
with instruction to keep the bill till maturity and collect its amount
from the acceptor on the date of maturity.
8. Dishonour of Bill : When the drawee (or acceptor) of the bill fails
to make payment of the bill on the date of maturity, it is called
Dishonour of Bill.
9. Noting of Bill : To obtain the proof of dishonour of a bill, it is re-sent

to the drawee through a legally authorized persons called Notary Public
charges a small fee for Providing this service known as Noting charges.
Noting charges are paid to the Notary Public first by the holder of
the bill but are ultimately recovered from the drawee, because he
is the person responsible for the dishonour.
10. Retirement of a Bill : When the drawee makes the payment of the
bill before its due date it is called ‘Retirement of a bill’. In such a
case, holder of the bill usually allow a certain amount as Rebate to the
drawee.
Amount of rebate is calculated at a fixed percentage for the unexpired
period only.
Illustration 3 : On 1st January, 2013 A sold good to B for Rs. 30,000 and
drew upon him a bill at 3 months for the amount. B accepted the bill and
returned it to A. On 4th March, Calculate the amount of Rebate.
Solution :
Rate
Rebate = Amount of Bill   Unexpired Period
100
12 1
 30, 000  
100 12
= Rs. 300
B will pay Rs. 29,700 (Rs 30,000–Rs.300) to A at the time of retiring the bill.
11. Renewal of a Bill : Sometimes, the drawee of a bill finds himself

unable to meet the bill on due date. To avoid dishonouring of bill, he

may request the holder of the bill to cancel the original bill and draw
a new bill in place of old one. It the holder agrees, the old bill is
cancelled and a new hill with new terms is drawn on the drawee and
also accepted by him. This process is called ‘Renewal of a bill’.
In this case, Noting of the bill is not required as cancellation of the
bill is mutually agreed upon by both the parties of the bill.
Normally, the drawer charge interest for the period of new bill. The
interest may be paid in cash or may be added in the amount of new bill.
If any part payment is made at the time of renewal of a bill, interest is
calculated only on the outstanding amount.
Illustration 4 : Narender requests Rajnesh to renew his acceptance for
Rs. 25,000 for 3 month together with interest @ 18% p.a.
Calculate the amount of new bill drawn on Narender
Solution :
Amount * Rate Period of
Interest   
Outstanding 100 New Bill
18 3
 25,000    Rs.1,125
100 12
Amount of New Bill =Rs. 25,000 + Rs. 1,125

= Rs. 26,125
* Amount Outstanding = Amount of Bill cancelled- any part payment made
in cash at the time of renewal of bill
ACCOUNTING TREATMENT OF BILL TRANSACTIONS
A. On the Due Date bill is Honoured

The accounting treatment under this heading is based on the assumption
that bills duly honoured at maturity of the bill. The drawer can treat the bill
in the following ways :

Case-I : Bill is retained by the drawer till date of maturity
Transaction In the books of In the books of
Drawer Dravee
1. When Goods Drawee Dr. Purchases A./c Dr.
are sold on Credit To Sales A.c To Drawer
(Being goods Sold (Being goods purchased
on credit)from Drawer)
2. When Bill Bills Receivable A/c Dr. Drawer Dr.
is Drawn To Drawee To Bills Payable A/c
(Being acceptance (Being acceptance
received from drawee) given to drawer)
3. When Bills is Cash/Bank A/c Dr. Bills Payable A./c Dr.
Honoured on To Bills To Cash/Bank A/c
date of Maturity Receivable A/c
(Being payment of Bill (Being payment of bill
received from Drawee) made to drawer)
Case- II When the bill is discounted from the Bank by the Drawer
Drawer Dravee
1. When the bill Bank A.c Dr.
is discounted Discounting
from Bank Charges A/c Dr. No Entry
To Bills
Receivable A/c
(Being bill discounted
for the Bank
2. When the bill Bills Payable A/c Dr.
is honoured on No Entry To Cash/Bank A/c
date of maturity (Being the Payment of
bill made
Note :
• Discounting charges are always recorded (i.e. debited) in the books of
Drawer.

• In the books of Drawee, there is no effect of discounting the bill.
Case III : When bill is endorsed in favour of a creditor

Drawer/Endorser Dravee
1. When bill Endorsee Dr.
is endorsed To Bills
Receivable A/c No Entry
(Being bill receivable
endorsed)
2. When bill is Bills Payable A/c Dr.
Honoured on No Entry To Cash/Bank A/c
dated of maturity (Being the payment of bill
(made)
Transaction In the Books of Endorsee

1. When bill is endorsed Bills Receivable A/c Dr.
To Endorser
(Being bill received from debtor through
endorsement
2. When bill is honoured Cash/Bank A/c Dr.
on date of maturity To Bills Receivable
(Being Bill realised on date of maturity
Case- IV When Bill is sent to the Bank for collection

Drawer Dravee
1. When bill is Bills Sent for
sent for Collection A/c Dr.
collection To Bills No Entry
to Bank Receivable A/c
(Being bill sent for collection)
2. When the Bank A/c Dr. Bill Payable A/c Dr.
amount is To Bill Sent To Cash/Bank A/c
realised on for Collection A/c (Being bill paid
Date of (Being the bill sent for on date maturity.)
Maturity collection realised on
Maturity)

Note :
• There will be no effect in the books of Drawee either the bill is
discounted from the bank or endorsed to a creditor or sent to the bank
for collection. The drawee makes the payment in normal manner.
• It is only in the books of drawer where an additional entry is passed to
record the effect of the above transaction.
Illustration 5 : X sold goods to Y on 1st April, 2013 for Rs. 20,000 on credit
and drew upon him a bill for the same amount payable after 3 months. Y
accepted the bill and returned it to X. On the date of maturity bill was presented
to Y for the payment and he honoured it.
Pass the Journal Entries in the books of both the parties when:
Case I :Bill is retained by the X till the date of maturity.
Case II : Bill is discounted by X from his bank on 4th April @ 6% per annum.
Case III : Bill is endorsed in favour of Z on 4th May, 2013.
Case IV : Bill is sent to Bank for collection on 1st July, 2013.
Also record the Journal Entries in the books of Z (Case-III)
Solution :
In the book of X (Drawer)
Journal
Date Particulars L.F. Dr. Rs. Cr. Rs.
2013
April, 1 Y Dr. 20,000
To Sales A/c
(Being goods sold to Y on credit) 20,000
April, 1 Bills Receivable A/c Dr. 20,000
To Y
(Being acceptance received from Y) 20,000
Case-1 When bill is retained by X
till the date of maturity

July, 4 Cash/Bank A/c Dr. 20,000
To Bills Receivable A/c 20,000
(Being amount received from B
against bill)
Case-II When bill is discounted by
X from his bank
April, 4 Bank A/c Dr. 19,700
Discounting Charges A/c Dr. 300
(Being the bill discounted
from the bank, discounting
charges are
6 3
 20,000    Rs.300
100 12
Case-III when bill is Endorsed
in favour of Z
Z Dr. 20,000
May, 4 To Bills receivable A/c 20,000
(Being bill endorsed in favour of Z)
Case-IV When bill is sent to
bank for collection

July, 1 Bills Sent for Collection A/c Dr. 20,000
(Being bill sent for collection to bank)
July, 4 Bank A/c Dr. 20,000
To Bill sent for
Collection A/c 20,000
(Being amount realised
from bill sent for Collection)
Note :
1. First two entries passed on April 1,2013 will be same in the books of
X (Drawer) in all the 4 cases.
2. If a bill is honoured on the date of maturity.

NO ENTRY is passed on the date of maturity in the books drawer, if.
• Bill is discounted from the bank ; or
• Bill is endorsed in favour of creditor.
(in all 4 cases)
In the Books of Y (Drawee)
Journal
2013
April,1 Purchases A/c Dr. 20,000
To X 20,000
(Being goods purchased
from X on credit)
April,1 X Dr. 20,000
To Bills Payable A/c 20,000
(Being the acceptance
given to X)
July,4 Bills Payable A/c Dr. 20,000
To Cash /Bank 20,000
(Being payment made
on date of maturity)
(cases-III)
In the Books of Z (Endorsee)
Journal
2011
May,4 Bills Receivable A/c Dr. 20,000
To X 20,000
(Being bill received from X
through endorsement)
July,4 Cash/Bank A/c Dr. 20,000
To Bills Receivable A/c
(Being payment received 20,000
against bill)

B. When Bill is dishonoured on date of maturity.
Case I : Bill is retained by the drawer till date of maturity.
Transaction In the Books of Drawer In the Book of Drawee

When bill is Drawee Dr. Bills Payable A./c Dr.
dishonoured To Bills Noting charges A/c Dr.
Receivable A/c To Drawer
To cash A/c (with (Being bill dishonoured)
noting charges)
(Being bill dishonoured
Note :
Entry passed in the book of Drawee will be SAME in all cases.
Case II : Bill is discounted from the Bank
In the books of Drawer
Drawee Dr.
To Bank A/c
(Including noting charges)
(Being bill discounted from
bank dishonoured)
Case III- When bill is endorsed in favour of a creditor
(At the time of Dishonour of a Bill)

Drawee Dr
To Endorsee
(Including noting charges)
(Being bill dishonoured,
Earlier endorsed in favour
of creditor

Endorser Dr
To Cash A/c (Noting charges)
(Being bill dishonoured, received
through endorsement)
Case IV : When bill is sent for collection to Bank

Drawee Dr
To Bills Sent for
Collection A/c
To Bank A./c (Noting charges)
(Being bill sent to bank for
collection, dishonoured)
Notes :
1. Same Entry is passed in the books of Drawee at the time of dishonour
of a bill/
2. In the books of Drawer
(At the time of Dishonour of Bill)
Drawee Dr. (In all Cases)
To Bills Receivable A/c (Case-I)
To Cash A/c (Noting Charges)
OR
To Bank A/c (case -II)
(Including Noting Charges)
OR
To Endorsee A/c (case-III)
(Including Noting charges)

OR
To Bills Sent for Collection A/c (case-IV)
To Bank A/c (Noting Charges)
Illustration 6 : A sold good to B on April 1, 2013 for Rs. 20,000 on credit

and drew upon him a bill for the same amount payable after 3 months. B
accepted the bill and returned into to A. On the due date bill was dishonoured.
Case I : Bill is retained by A till the date of maturity.
Case II : Bill is discounted by A from his bank on 4th April, 2013 @ 6% per
annum.
Case III : Bill is endorsed in favour of C on April, 4th, 2013.
Case IV : Bill is sent to bank for collection on July 1, 2013.
Solution:
In the books of A (Drawer)
Journal
2013
April, 1 B Dr 20,000
To Sales A/c 20,000
(Being goods sold to B
on credit)
April,1 Bill Receivable A/c Dr. 20,000
To B 20,000
(Being bill received from B)
Case-I : When bill is retained by A
July, 4 B Dr. 20,000
(Being bill received from B
dishonoured)
Case -II : When bill is discounted
from the Bank

April, 4 Bank A/c Dr. 19,700
(Being bill discounted from the
Bank ; discounting charges are
6
2000    300)
100
July, 4 B Dr. 20,000
To Bank 20,000
(Being bill discounted from,
dishonoured on date of maturity)
Case-III : When bill is endorsed in
favour of ‘C’
April, 4 C Dr. 20,000
(Being bill endorsed in favour of C)
July, 4 B Dr. 20,000
To C 20,000
(Being bill received from B and
endorsed to C dishonoured on
maturity date)
Case - IV : When bill sent for
collection
July, 1 Bill Sent for Collection A/c Dr. 20,000
To Bills Received A/c 20,000
(Being bill received from B sent
for collection)
July, 4 B Dr. 20,000
To Bills Sent for Collection A/c 20,000
(Being bill sent for collection to bank,
dishonoured on date of maturity.
In the Books of (Drawee) (In All Cases)

2013
April, 1 Purchases A/c Dr 20,000
To A 20,000
(Being goods purchased on credit)

April, 1 A Dr. 20,000
To Bill Payable A/c 20,000
(Being acceptance give to A)
July, 4 Bills Payable A/c Dr. 20,000
To A 20,000
(Being bill Payable to
A dishonoured on date of Maturity)
Illustration 7 : A sold goods to B on May 1st, 2013 for Rs. 30,000 on credit
and drew upon him a bill for the same amount payable after 2 months. B
accepted the bill and returned it to A. On date of maturity, B fails to make
payment of bill. Noting charges amounted to Rs.100.
Pan Journal Entries in the books of A and B if.
Case 1: A retains the bill till the date of maturity and also paid the noting
charges.
Case 2: A discounts the bill from his bank on 4th June @12% per annum.
Noting charges has been paid by bank.
Case 3: A endorses the bill in favour of C on June 1. C paid the noting
charges.
Case 4: A sent the bill to his bank for collection on July 1. Bank paid the
noting charges.
Solution
In the Books of a (Drawer)
2013
May, 1 B Dr 30,000
To Sales A/c 30,000
(Being goods sold to B on Credit)
May, 1 Bills Receivable A/c Dr. 30,000
To B 30,000
(Being acceptance received from B)
Case 1 : When A retains the bill

July, 4 B Dr. 30,100
To Cash A/c 100
(Being bill dishonored and noting
charges paid by A)
Case 2 : When bill is discounted
from the bank
June, 4 Bank A/c Dr. 29,700
(Being bill discounted from the 30,000
bank, discounting charges amoun t
12 1
to *  30, 000    Rs. 300)
100 12
July, 4 B Dr. 30,100
To Bank A/c 30,100
(Being bill discounted from bank
dishonoured and noting charges
Paid by bank)
Case 3 : When bill is endorsed
in favour of C
June, 1 C Dr. 30,000
collection)
July, 4 B Dr. 30,100
To C 30,100
(Being bill received from B and
endorsed to C dishonoured on
maturity)
Cash 4 : When bill sent for collection
July, 1 Bill Sent for Collection A/c Dr. 30,000
collection)

July, 4 B Dr. 30,100
To Bills Sent for
Collection A/c 30,000
To Bank 100
(Being bill received from B
dishonoured on maturity)
In the Book of B (DRAWEE)

(in all Cases)
2013
May, 1 Purchases A/c Dr 30,000
To A 30,000
(Being goods purchased from A)
May, 1 A Dr. 30,000
(Being acceptance given to A)
July, 4 Bills Payable A/c Dr. 30,000
Noting Charges A/c Dr. 100
To A 30,100
(Being bill dishonoured and
noting charges debited)
C. Renewal of a Bill

Cancelling the Drawee Dr. Bills Payable A./c Dr.
Original Bill To Bills Receivable A/c To Drawer
(Being the cancellation of bill (Being the bill payable cancelled)
receivable)
Recording Drawee Dr. Interest A/c Dr.
Interest for To Interest A/c To Drawer
extended (Being interest charged for (Being interest payable for
Period extended period) extended period)

Part Payment Cash or Bank A/c Dr. Drawer Dr.
Received/made To Drawee To Cash Bank A/c
(Being the part payment (Being the part payment
received) received)
New Bill Bills Received A/c Dr. Drawer Dr.
Drawn To Drawee To Bills Payable A/c
Accepted (Being a new bill drown) (Being a new bill accepted)
Note :
No Entry for Noting charges is passed at the time of cancellation of
original bill because both the parties are mutually agreed the old bill.
Illustration 8 : On 1st April, 2013 Anil accepts a bill drawn by Sunil for 2
months for Rs. 15,000, in payment of a debt. On the date of maturity bill was
dishonoured and Sunil had to pay Rs. 150 as noting charges. On the 4th June
2013, Anil requested to Sunil to draw a new bill for the amount due. Sunil
agreed to draw a new bill for 73 days but he charged interest @ 15% per
annum in cash. This bill is duly met on its maturity.
Pass Journal entries in the books of both the parties.
Solution :
In the books of Sunil
Journal
2013
April, 1 Bills Receivable A/c Dr 15,000
To Anil 15,000
(Being acceptance received)
June, 4 Anil Dr. 15,150
To Bills Receivable A/c 15000
To Cash A/c 150
(Being bill dishonoured and noting
charges paid)

June, 4 Anil Dr. 454.50
To Interest A/c 454.50
(Being interest charged)
15 73
 15150   )
100 365
June, 4 Cash A/c Dr. 454.50
To Anil 454.50
(Being interest received in cash)
June, 4 Bills Received A/c Dr. 15,150
To Anil 15,150
(Being a new bill drown M Anil
and acceptance received)
Aug., 19 Bank A/c Dr. 15,150
(Being amount received on
Maturity of bill)
In the books of Anil (DRAWEE)
Journal
2013
April, 1 Sunil Dr. 15,000
To Bills Payable 15,000
(Being acceptance gave)
June, 4 Bills Payable A/c Dr. 15,000
To Sunil 15,150
noting charges due)
June, 4 Interest A/c Dr. 454.50
To Sunil 454.50
(Being interest payable to Sunil)

June, 4 Sunil Dr. 454.50
To Cash A/c 454.50
(Being interest paid in cash)
June, 4 Sunil Dr. 15,150
(Being acceptance of new bill given)
Aug., 19 Bills Payable A/c Dr. 15,150
To Bank A/c 15,150
(Being bill accepted, paid on
maturity
Illustration 9 : P sold goods to Q for Rs. 10,000 on January 1, 2013 and on

the same day draws a bill on Q for the same amount for 3 months. Q accept
it and returns it to P, who discounts it on 10th January, 2013 with his bank for
Rs. 9850. The acceptance is dishonoured on the due date and the Noting
charges were paid by bank being Rs.50.
On 4th April, Q paid Rs. 2,050 (including Noting charges) in cash and
accepted new bill at 3 months for the amount date P together with interest @
12% per annum.
Make Journal Entries in the books of P and Q to record transaction.
Solution :
Journal of P
2013
Jan., 1 Q Dr. 10,000
To Sales A/c 10,000
(Being goods sold to Q)
Jan., 1 Bills Receivable A/c Dr. 10,000
To Q 10,000
Jan.,10 Bank A/c Dr. 9,850
(Being bill discounted from Bank)

April 4 Q Dr. 10,050
To Bank 10,050
(Being bill discounted from bank
dishonoured and noting charges
Paid by bank)
April 4 Cash A/c Dr. 2,050
To Q 2,050
(Being part payment received in cash)

April 5 Q Dr. 240
To Interest A/c 240
(Being interest charged)
12 3
 Rs. 8000   )
100 12
April 4 Bills Receivable A/c Dr. 8,240
To Q 8,240
(Being a new bill drawn on
Q together with interest)
Journal of Q (DRAWEE)
2013
Jan. 1 Purchases A/c Dr. 10,000
To P 10,000
Jan. 1 P Dr. 10,000
(Being acceptance given to P)
April 4 Bills Payable A/c Dr. 10,000
To P 10,050
charges due)
April 4 P Dr. 2,050
To Cash A/c 2,050
(Being part payment made in cash)

Interest A/c Dr. 240
To P 240
(Interest payable for 3 months)
April 4 P Dr. 8,240
(Being acceptance given to P)
D. Retiring a bill under Rebate

When Drawee Cash/Bank A/c Dr. Bills Payable A./c Dr.
retires the bill Rebate A/c Dr. To Cash/Bank A/c
before date of To Bill Receivable A/c To Rebate A/c
maturity (Being the amount received (Being the amount paid before
before date of maturity and date of maturity and rebate
rebate allowed. received.)
Note :
1. In the books of Drawer, Rebate Account is DEBITED because it is a
loss for Drawer.
2. In the books of Drawee, Rebate Account si CREDITED because it is

a gain for Drawer.
Illustration 10 : Mukesh sold goods to Jitender on July 1,2013 for Rs. 30,000
and drew a bill for the same amount for 3 months. Jitender accepted the bill
and returned it to Mukesh, Jitender retired his acceptance on 4th August, 2013
under rebate of 8% per annum. Give Journal entries in the books of Mukesh
and Jitender.
In the books MUKESH
Journal
2013
July 1 Jitender Dr. 30,000
To Sales A/c 30,000
(Being goods sold on credit)

July 1 Bill Receivable A/c Dr. 30,000
To Jitender 30,000
Aug. 4 Cash A/c Dr. 29,600
Rebate A/c Dr. 400
(Being amount received on bill
before maturity and rebate allowed,
2 8
Rebate  Rs. 30, 000    Rs. 400)
12 100
In the books of JITENDER
Journal
2013
July 1 Purchases A/c Dr. 30,000
To Mukesh 30,000
July 1 Mukesh 30,000
(Being acceptance given to Mukesh
Aug. 4 Bill Payable A/c Dr. 30,000
To Cash A/c 29,600
To Rebate A/c 400
(Being acceptance retired with rebate)
Illustration II : Rajiv sold goods to Pankaj for Rs. 40,000 on January 1st,
2013. On the same date Rajiv drew a bill of the same amounted 3 months on
Pankaj. The bill was accepted by Pankaj. Rajiv discounted the bill with his
bank on 4th February, 2013 @ 12% per annum. On date of maturity, the bill
was dishonoured and Noting charges Rs. 200
Pankaj agreed to Pay Rs. 10,200 and accepted another bill for the remaining
amount for 3 months together with interest @ 9% per annum. On due date
Pankaj make the payment.
Give Journal Entries in the books of Rajiv and Pankaj.

Solution
In the books of RAJIV (DRAWER)
Journal
2013
Jan. 1 Pankaj Dr. 40,000
To Sales A/c 40,000
(Being goods sold on credit)
Jan. 1 Bill Receivable A/c Dr. 40,000
To Pankaj 40,000
Feb. 4 Bank A/c Dr. 39,200
To Bill Receivable A/c 40,000
(Being bill discounted from
bank and discounting charges
are Rs. 800 :
12 2
 40, 000   )
100 12
April 4 Pankaj Dr. 40,200
To Bank A/c 40,200
charges paid by bank).
April 4 Cash A/c Dr. 10,200
To Pankaj 10,200
(Being part payment received
from Pankaj)
April 4 Pankaj Dr. 675
To Interest A/c 675
(Being Interest charged on
remaining amount :
9 3
 30, 000   )
100 12

April 4 Bills Receivable A/c Dr. 30,675
To Pankaj 30,675
(Being new acceptance received)
July 7 Cash A/c Dr. 30,675
(Being bill met on maturity)
In the books of PANKAJ (DRAWEE)

Journal
2013
Jan. 1 Purchases A/c Dr. 40,000
To Rajiv 40,000
Jan. 1 Rajiv Dr. 40,000
(Being acceptance given)
April 4 Bills Payable A/c Dr. 40,000
To Rajiv 40,200
noting charges due)
April 4 Rajiv Dr. 10,200
To Cash A/c 10,200
(Being part payment made)
April 4 Interest A/c Dr. 675
To Rajiv 675
(Being interest due)
April 4 Rajiv Dr. 30,675
(Being the new acceptance
given to Rajiv)
July 4 Bills Payable A/c Dr. 30,675
To Cash A/c 30,675
(Being bill met on maturity)

Points of Remember
1. When calculating Date of Maturity the following point must be
considered:
(i) In case “Bill at Sight” or “Bill on demand” 3 days of grace are
NOT allowed.
(ii) When the term of bill is mentioned in no of days, then

 Date of drawing the bill is not included.
 Date of payment is included in determining date of
maturity.
 If date of maturity falls on a day which is public holiday,
the maturity date of the bill shall be “PROCEEDING
DAY’.
 If maturity date is on an emergent holiday declared under
the Negotiable Installment Act. 1881, the next. working
day immediately after the holiday will be considered as
the date of maturity.
(iii) When the period is stated in months the date of maturity shall
be calculated in terms of calender months ignoring the no. of
days in a month.
2. Noting Charges
(i) Noting charges are not inexpensive for the drawer.
(ii) It is always debited as ‘Noting charges’ in the books of drawee.
(iii) Noting charges are recovered by drawer from drawee.
(iv) Noting charges are paid only when noting of the bill is necessary
at the time of DISHONOUR of bill.
(v) Noting of the bill is NOT required when the bill is CANCELLED
with the mutual consent of both the parties, specially at the time
of RENEWAL of Bill.

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Accounting For Bills of Exchange: Chapter-7

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CHAPTER-7

ACCOUNTING FOR BILLS OF EXCHANGE

 Distinction between Bill of Exchange and Promissory Note.

 Record the Accounting Treatment of Bill of Exchange under different

“A Bill of Exchange is an instrument in writing containing an unconditional

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2. It must contain an order (and note a request) to make payment.

3. The order of payment must be unconditional.

4. The amount of bill of exchange must be certain.

5. The date of payment should be certain.

6. It must be signed by the drawer of the bill.

7. It must be accepted by the drawee by signing on it.

8. The amount specified in the bill exchange in payable either on demand

10. It must be stamped as per legal requirements.

PARTIES TO A BILL OF EXCHANGE

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Rs. 50,000 4 New Delhi

CONTENTS OF BILL OF EXCHANGE

3. Amount : Amount in figure should be mentioned in the top lelf corner

4. Stamp : Stamp of proper value depending upon the amount of bill

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ADVANTAGES OF BILL OF EXCHANGE

1. It helps in purchases and sales of goods on credit basis.

A Promissory note is an instrument in writing (not beings a bank note or

FEATURES OF PROMISSORY NOTE

1. There must be an unconditional promise to pay a certain sum of money

3. The name of the payee must be mentioned on it.

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Distinction between Bills of Exchange and Promissory Note:

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(i) In case of ‘Bill at Sight’

(ii) In case of ‘Bill after date’-

Due Date - Date of Drawing + Term of Bill.

(iii) In case of ‘Bill after sight’-

Due date - Date of Acceptance +Term of Bill.

Case I -When the Bill is

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“Bill After Sight” 10th July 2013 13th July, 2013

6. Endorsement of Bill : Endorsement of bill means the Process of

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9. Noting of Bill : To obtain the proof of dishonour of a bill, it is re-sent

11. Renewal of a Bill : Sometimes, the drawee of a bill finds himself

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Amount of New Bill =Rs. 25,000 + Rs. 1,125

ACCOUNTING TREATMENT OF BILL TRANSACTIONS

A. On the Due Date bill is Honoured

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Transaction In the books of In the books of