Accounting for Bills of Exchange
A bill of exchange is a written instrument containing an unconditional order to pay a specified sum to a specified person on a specified date. Bills formalise credit transactions and provide negotiable instruments for payment.
Key Terms
Drawer: writes the bill (creditor). Drawee: must pay (debtor). Payee: receives payment (may be drawer or third party). Acceptance: drawee signs agreeing to pay. Due date: date of bill + term + 3 days grace. Promissory note: written by debtor promising to pay (two parties only).
Entries for Drawer
Drawing bill: Bills Receivable Dr, To Debtor. Receiving payment: Cash/Bank Dr, To Bills Receivable. Dishonour: Debtor Dr, To Bills Receivable (+ noting charges). Discounting with bank: Bank Dr, Discount Charges Dr, To Bills Receivable.
Entries for Drawee
Accepting: Creditor Dr, To Bills Payable. Payment: Bills Payable Dr, To Cash/Bank. Dishonour: Bills Payable Dr, To Creditor (debt revives).
Endorsement
Endorsement transfers the bill to a third party. Drawer's entry: Creditor (new payee) Dr, To Bills Receivable. Bills circulate as payment, reducing cash needs.
Discounting
Holder discounts bill with bank before maturity, receiving cash minus discount charge. If drawee later dishonours, bank recovers from endorser/drawer. Useful for managing cash flow.
Renewal and Retirement
Renewal: new bill for remaining amount plus interest when drawee can't pay on due date. Retirement: early payment with rebate/discount.
Summary
Bills of exchange formalise credit with defined payment dates. Drawer/drawee entries, endorsement, discounting, dishonour, renewal, and retirement are essential accounting skills.
Worked Example: Complete Bill of Exchange Transaction
Scenario: On 1 Baisakh 2081, Sita sold goods worth Rs 50,000 to Gita on credit. Sita drew a bill on Gita for Rs 50,000 payable after 3 months. Gita accepted the bill. On due date (1 Shrawan + 3 days grace = 4 Shrawan), Gita paid the bill.
Journal Entries in Sita’s Books (Drawer)
| Date | Entry | Dr (Rs) | Cr (Rs) |
|---|---|---|---|
| 1 Baisakh | Gita A/c Dr To Sales A/c (Goods sold on credit) | 50,000 | 50,000 |
| 1 Baisakh | Bills Receivable A/c Dr To Gita A/c (Bill drawn on Gita, accepted) | 50,000 | 50,000 |
| 4 Shrawan | Cash/Bank A/c Dr To Bills Receivable A/c (Bill matured, payment received) | 50,000 | 50,000 |
Journal Entries in Gita’s Books (Drawee)
| Date | Entry | Dr (Rs) | Cr (Rs) |
|---|---|---|---|
| 1 Baisakh | Purchases A/c Dr To Sita A/c (Goods purchased on credit) | 50,000 | 50,000 |
| 1 Baisakh | Sita A/c Dr To Bills Payable A/c (Bill accepted by Gita) | 50,000 | 50,000 |
| 4 Shrawan | Bills Payable A/c Dr To Cash/Bank A/c (Bill paid on maturity) | 50,000 | 50,000 |
What Happens If Bill Is Dishonoured?
If Gita fails to pay on 4 Shrawan:
Sita’s entry: Gita A/c Dr 50,000 + Noting Charges Dr 500; To Bills Receivable 50,000; To Cash 500. (The original debt revives plus noting charges.)
Gita’s entry: Bills Payable A/c Dr 50,000; Noting Charges A/c Dr 500; To Sita A/c 50,500. (Liability revives with additional charges.)
Summary of All Bill Situations
| Situation | Drawer Entry | Drawee Entry |
|---|---|---|
| Acceptance | B/R Dr; To Debtor | Creditor Dr; To B/P |
| Payment at Maturity | Cash Dr; To B/R | B/P Dr; To Cash |
| Dishonour | Debtor Dr; To B/R | B/P Dr; To Creditor |
| Discounting | Bank Dr; Discount Dr; To B/R | No entry until maturity |
| Endorsement | New Creditor Dr; To B/R | No entry (payee changes) |
Exam Tips
Tip 1: Always show BOTH drawer’s and drawee’s books side by side — they’re mirror images. Tip 2: Due date = Date of bill + Term + 3 days grace. Tip 3: On dishonour, the original debt REVIVES plus noting charges. Tip 4: Bills Receivable is an ASSET (drawer’s book); Bills Payable is a LIABILITY (drawee’s book). Tip 5: The summary table above covers every possible exam scenario — memorise it.