Bill of
Exchange and Promissory Notes
By
Asok Nadhani
19.1 Bill of Exchange
i)
When a
person is liable to pay money (i.e. when goods are sold on credit), instead of
giving money instantly, he may give a definite and express order in writing to
pay on a certain date. These written documents are called “Bill of Exchange”.
It is a negotiable instrument which can be transferred to a third party.
ii)
As per
Negotiable Instrument Act, a bill of exchange as “an instrument in writing
containing an unconditional order, signed by the maker, directing a certain
person to pay a certain sum of money only to, or to the order of, a certain
person or to the bearer of the instrument”.
19.1.1
Characteristics of a Bill of Exchange
(i)
It is
a written document.
(ii)
It is
an unconditional order to pay a certain sum of money.
(iii)
It
must be signed by the maker i.e. drawer of the bill.
(iv)
It
must be dated and properly stamped.
(v)
It
must be accepted by the drawee.
19.1.2 Parties Involved in a
Bill of Exchange
Generally there are three parties to the bill of
exchange; as follows:
(i)
Drawer: The person who draws the bill is called the Drawer.
(ii)
Drawee: The person who accepts the order is known as Drawee.
(iii) Payee:
The person to whom the
amount has to be paid is known as the Payee.
Sometimes, Drawee and the Payee can be same person.
Specimen Copy of a Bill of
exchange
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Rs.50,000 /- only
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Kolkata,
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Three months
after pay to M/s. Asok Lal & Sons or order the sum of Rs.Fifty thousands
only, for value received.
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To,
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Rajesh
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13, Balaji Apartments,
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Accepted
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Sd /-
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Pitampura,
Kolkata- 700034
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(Rajesh )
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(Kumar)
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The above specimen of bill of exchange reveals that- Kumar
drew a bill in favour of Asok Lal & Sons which was accepted by Rajesh. Here,
M/s. Asok Lal & Sons is the “Payee”, Rajesh is “Acceptor” and Kumar is “Drawer”.
19.2 Promissory Note
i)
Promissory
Note is also a negotiable instrument. It has only two parties with a promise to
make payment unconditionally.
ii)
As per
Negotiable Instrument Act, a Promissory Note is “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, or to the order of, a Third
party”.
19.2.1
Characteristics
Characteristics of
a Promissory Note-
(i)
It
must be in writing.
(ii)
It must
contain a clear an unconditional promise to pay.
(iii)
It
must be signed by the maker.
(iv) The amount payable must be certain.
19.2.2 Parties Involved in Promissory Note
There are only two parties to a Promissory Note-
(i)
Promisor: The person who promises to make payment (also called
the maker).
(ii)
Payee: The person on whose order the note is made payable.
Specimen Copy of a Promissory
Note.
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Rs.50,000 /- only
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Mukherjee
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84, Sector- 1,
Saltlake.
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Three months
after date I promise to pay Sanjay or his order the sum of Rs. Fifty thousand
only, for valued received.
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To,
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Sanjay
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Pitampura,
Kolkata- 700034
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(Mukherjee)
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The above specimen copy of Promissory Note reveals
that Mukherjee is the “Promisor” (or “Maker”) of Promissory Note and Sanjay is
the “Payee”.
19.3 Distinction between Bill of Exchange and
Promissory Note
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Nature
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Bill
of Exchange
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Promissory
Note
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1. Drawer
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It is drawn by the seller.
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It is drawn by the purchaser.
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2. Nature
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It is an order to make payment.
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It is a promise to make payment.
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3. Parties involved.
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It has three parties, Drawer, Drawee and Payee.
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It has two parties, Maker and Payee.
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4. Acceptance.
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Acceptance of Bill is necessary.
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Acceptance is not required.
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5. Discounting.
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It can be discounted.
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It can not be discounted.
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19.4 Treatment of a Bill by a drawer
Drawer can treat a
Bill of Exchange in any one of the following ways:-
a)
Bill
is retained by the Drawer up to the date of maturity.
b)
He may
Discount Bill with a Banker (or a third party) to get money instantly.
c)
He may
endorse the bill to a third party.
d)
He may
send the Bill for Collection.
These steps are
discussed respectively.
19.4.1 When the Bill is
retained by the Drawer up to the date of maturity or due date When the bill is retained by the drawer up
to the date of maturity, the following record is made in the books of Drawer
and Drawee:-
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Particulars
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Records
in the books of Drawer
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Records
in the books of Drawee
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1
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For sale of
goods.
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Drawee (Customer)
A/c
To
(
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Dr
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Purchase A/c
To Drawer (Supplier) A/c.
(Purchase of
goods)
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Dr
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2
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On acceptance of
Bill
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Bill Receivable
A/c.
To Drawee A/c.
(The acceptance
received)
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Dr
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Drawer A/c
To Bill Payable A/c.
(The acceptance
given)
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Dr
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3
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Payment the Bill
on the date of maturity
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Cash / Bank A/c
To Bill Receivable A/c
(The receipt of
amount on maturity of Bill Receivable)
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Dr
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Bill Payable A/c
To Cash / Bank A/c
(The payment of
Bill Payable on maturity)
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Dr
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4
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On Dishonour*
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Drawee A/c
To Bill Receivable A/c
(The dishonour of
Bill)
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Dr
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Bill Payable A/c
To Drawer A/c
(The dishonour of
Bill)
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Dr
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* When not sent to Notary.
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19.4.2 Dishonour of Bills: If the drawee fails to meet the bill on the
due date, then the bill is said to be dishonoured. If only a part of amount is received (due to
insolvency etc.), cash account will be debited by the amount received, and the
personal account of the debtors will be credited. The remaining irrecoverable
amount should be written off as bad debt.
19.4.2.1 Noting: If there is a chance of dishonour, the bill
is handed over to “Notary Public”, who presents the bill for payment the money
to the original party. If the bill is again dishonoured, the fact of dishonour
is noted and the bills are returned to the client. This process is called
“Noting”. It is the authentic and official proof of dishonour of bill and for
this service of “Noting”; notary charges a nominal fee called “Noting
Charges”.
19.4.2.2 Journal Entries for
Dishonour of Bill
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Records
in the books of Drawer
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Records
in the books of Drawee
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(a)
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When the bill is retained
till due date:-
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Drawee A/c
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Dr.
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Bills Payable A/c
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Dr.
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To Bill Receivable A/c.
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Noting Charges A/c
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Dr.
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To Cash A/c.
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To Drawer A/c
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(Drawee’s A/c is debited with the amount of bill and
the noting charges paid in cash.)
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(Drawer’s A/c is credited with the amount of bill and
the noting charges to be reimbursed.)
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(b)
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When the bill is discounted
with the bank:-
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Drawee A/c
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Dr.
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Bills Payable A/c
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Dr.
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Noting charges A/c
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Dr.
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Noting Charges A/c.
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Dr.
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To Bank A/c
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To Drawer A/c
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(Amount of bill and noting charges paid by bank on
dishonour of bill.)
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(Drawer A/c is credited by the bill amount and the
noting charges.)
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(c)
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When the bill is endorsed:-
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Drawee A/c
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Dr.
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Bills Payable A/c.
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Dr.
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To Endorsee A/c
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Noting Charge A/c
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Dr.
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To Drawer A/c.
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(With the bill amount and the noting charges paid by
the endorsee.)
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(With the amount of bill and noting charges paid.)
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Entry in the books of
Endorsee:-
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Drawer (Endorser) A/c
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Dr.
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To Bills Receivable A/c.
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To Cash (Noting Charges) A/c.
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(d)
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When the bill is sent for
collection:-
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Drawee A/c
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Dr.
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Bills Payable A/c.
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Dr.
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To Bills sent for Collection A/c.
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Noting Charges A/c
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Dr.
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To Bank (Noting Charges) A/c.
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To Drawer A/c.
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(A dishonour bill sent to Bank for collection.)
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(Being the bill dishonoured and noting charges paid.)
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Example:
C draws a bill on B a sum of Rs.1,000 payable after 3
months. C gets it discounted with his bankers for Rs.950. On the due date the
bills is dishonoured, the bank paying Rs.15 as per noting charges. B then pays
Rs.250 in cash and accepted a bill of exchange drawn on him for the balance
together with Rs.30 as interest. This bill of exchange is for 2 months and on
the due date the bill is again dishonoured. C pays Rs.15 as noting charges.
Show the necessary journal Entries to be passed in C’s Books.
Solution:
Journal Entries in the Books
of C (Drawer)
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Dr.
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Cr.
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Date
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Particulars
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L.F.
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Rs.
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Rs.
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Bills Receivable
A/c
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Dr.
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1,000
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To B A/c
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1,000
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(The bill drawn
for 3 months.)
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Bank A/c
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Dr.
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950
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Discount A/c
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Dr.
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50
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To Bill Receivable A/c.
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1,000
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(The bill
discounted with the bank.)
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B A/c
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Dr.
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1,000
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Noting Charges
A/c
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Dr.
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15
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To Bank A/c.
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1,015
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(The payment of
noting charges to Bank on behalf of B on dishonour of the bill by him.)
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Bank A/c
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Dr.
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250
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To B A/c.
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250
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(The receipt of a
portion of the bills Rs.250)
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Bills Receivable
A/c
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Dr.
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795
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To B A/c.
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750
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To Noting Charges A/c.
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15
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To Interest A/c.
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30
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(A new bill drawn
on B for the balance due, noting chargers and interest.)
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B A/c
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Dr.
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795
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To Bills Receivable A/c
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795
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(The dishonour of the bill.)
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Noting Charges
A/c.
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Dr.
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15
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To Bank A/c
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15
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(The payment of
the noting charges)
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B A/c
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Dr.
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15
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To Noting Charges A/c.
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15
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(The noting
charges due to B.)
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19.4.3 Discounting of Bill
When the bill is given
to bank before maturity & get immediate cash against the bill (called
discounting of bill), the bank deducts a small amount as Discount. Discount is
profit of the bank. On maturity, the bank presents it before the drawee and
takes the full money from him. If the bill is dishonoured, bank charges from
the drawer along with Noting charges (if any). Journal entry for discounting of
bill as follows-
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Records
in the books of Drawer
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Records
in the books of Drawee
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Discounting
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Bank A/c
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Dr.
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Discount on Bill
A/c
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Dr.
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No entry
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To Bills Receivable A/c
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Example: A draws a bill on
B on 1.4.09 for Rs.2, 000 payable after 3 months. A discounted the bill on
4.4.09 @ 5%. Show the journal entries and the necessary ledgers account in the
books of A.
Solution:
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Journal Entries in the books of A (drawer)
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Dr.
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Cr.
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Date
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Particulars
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L.F.
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Rs.
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Rs.
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1.4.09
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Bill Receivable A/c.
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Dr.
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2,000
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To B A/c
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2,000
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(The bill drawn for 3 months.)
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4.4.09
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Bank A/c
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Dr.
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1,975
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Discount on Bill A/c
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Dr.
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25
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To Bills Receivable A/c
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2,000
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(The bill discounted with the banker @ 5% [Rs.2,000 x (3/12) x 5% = Rs.25]
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Bills
Receivable Account
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Dr.
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Cr.
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Date
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Particulars
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Rs.
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Date
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Particulars
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Rs.
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1.4.09
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To B A/c.
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2,000
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4.4.09
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By Bank A/c
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1,975
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4.4.09
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By Discount on Bill A/c
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25
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2,000
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2,000
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Discount on Bill Account
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Dr.
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Cr.
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Date
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Particulars
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Rs.
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Date
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Particulars
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Rs.
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4.4.09
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To Bills Receivable A/c.
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25
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4.4.09
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By Bank A/c
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25
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19.4.4 Endorsement of Bill
A bill of exchange, being a negotiable
instrument can be transferred by the holder to any other person (called endorsee).
It then becomes payable to the endorsee of the bill of exchange.
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Records
in the books of Drawer
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Records
in the books of Drawee
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Records
in the books of Endorsee
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Endorsee’s A/c
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Dr
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Bills Receivable
A/c
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Dr
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To Bills Receivable A/c
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No entry
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To Endorser’s A/c
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Example: taking the above
example, it is supposed the bill is endorsed by A to D in his full settlement
of claim. Show the necessary account in the books of A.
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Journal Entries in the books of A(drawer)
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Dr.
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Cr.
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Date
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Particulars
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L.F.
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Rs.
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Rs.
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D A/c.
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Dr.
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2,000
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To Bill Receivable A/c
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2,000
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(The bill endorsed in favour of D.)
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Bills
Receivable Account
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Dr.
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Cr.
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Date
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Particulars
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Rs.
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Date
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Particulars
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Rs.
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To B A/c.
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2,000
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4.4.09
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By D A/c
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2,000
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2,000
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2,000
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D Account
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Dr.
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Cr.
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Date
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Particulars
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Rs.
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Date
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Particulars
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Rs.
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To Bill Receivable A/c.
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2,000
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4.4.09
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By Purchase A/c
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2,000
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2,000
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2,000
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At maturity D will
represent the bill to B and realize the full amount. In this case no entry is
required to pass in the books of A.
19.4.5 Bills Sent for
Collection
Sometimes drawer sends his bills to Bank for
collecting the amount from drawee on the date of maturity, with instruction
that the bill should be retained till maturity and should be realized on that
date. It is known as “Bill sent for Collections”.
[
Journal Entries
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Records
In the Books of Drawer
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Records In the Books of Drawee
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1.
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When bill is sent for collection:
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Bills sent for
collections A/c
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Dr
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No Entry.
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To Bills Receivable A/c.
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2.
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On due date on realization of amount by banker:
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Bank A/c
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Dr
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Bills Payable A/c
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Dr.
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To Bills sent for collection A/c.
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To Bank A/c.
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3.
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For the collection charges paid to banker:
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Collection
charges A/c
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Dr
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No Entry.
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To Cash/Bank A/c.
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4.
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On Dishonour and Noting charges payable:
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Drawee A/c
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Dr
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Bill Payable A/c
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Dr.
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To Bills sent for collections A/c
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Noting Charges
A/c
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Dr.
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To Bank A/c
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To Drawer A/c
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Example: M gave his acceptance on three months bill of Rs.2, 000 of S. S sent it
to bank for collection on maturity. Pass the necessary journal entries in the
books of S in following situations:
i. When the bill is paid on maturity.
ii. When the bill is dishonored and nothing
charges paid of Rs.170.
Solution:
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Journal Entries in the books of S(drawer)
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i.
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When
the bill is paid on maturity:
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|||||
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Date
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Particulars
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L.F.
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Dr.
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Cr.
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|
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Rs.
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Rs.
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Bill Receivable A/c
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Dr.
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2,000
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To M A/c
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2,000
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(The acceptance received.)
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Bills sent for collections A/c
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Dr.
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2,000
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To Bill Receivable A/c
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2,000
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(Bill sent to bank for collection.)
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Bank A/c
|
Dr.
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2,000
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To Bills sent for collections A/c
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2,000
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(Bill amount collected on maturity.)
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ii.
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When the bill is dishonoured and noting
charges paid. In this case, apart from the above two entries, the following entry
is also passed.
|
|||||
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M A/c
|
Dr.
|
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2,170
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|
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To Bills sent for collections A/c
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2,000
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|
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To Bank A/c
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170
|
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(Dishonour of bill and payment of nothing charges.)
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|
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|
||
19.5 Renewal of Bills
Sometimes the acceptor is unable to pay the amount and
he may request the drawer for extension of time for paying the amount of the
bill. In such case, the drawer cancels the old bill, draws a new bill. This is
known as renewal of bill. For renewal of bill, interest is charged by the
drawer for the period of new bill (which may be paid in cash or added to the
amount of old bill).
19.5.1 Journal entries for cancellation and renewal of
a bill are as follows
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|
Records
In the Books of Drawer
|
|
Records
In the Books of Drawee
|
|
|
1.
|
For Cancellation of old bill :-
|
|
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|
|
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Drawee A/c
|
Dr.
|
Bills Payable A/c
|
Dr.
|
|
|
To Bills Receivable A/c.
|
|
To Drawer A/c.
|
|
|
2.
|
For the part-payment received :-
|
|
|
|
|
|
Cash / Bank A/c
|
Dr.
|
Drawer A/c
|
Dr.
|
|
|
To Drawee A/c.
|
|
To Cash / Bank A/c.
|
|
|
3.
|
For interest received on renewal of bill :-
|
|
|
|
|
|
(i) When interest is paid in cash -
|
|
|
|
|
|
Cash A/c
|
Dr.
|
Interest A/c
|
Dr.
|
|
|
To Interest A/c.
|
|
To Cash A/c
|
|
|
|
(ii) When interest is included in the new bill :-
|
|
|
|
|
|
Drawee A/c
|
Dr.
|
Interest A/c
|
Dr.
|
|
|
To Interest A/c.
|
|
To Drawer A/c.
|
|
|
4.
|
For the new bill received:-
|
|
|
|
|
|
Bill Receivable
A/c
|
Dr.
|
Drawer A/c
|
Dr.
|
|
|
To Drawee A/c.
|
|
To Bills Payable A/c.
|
|
Example: Renewal of Bills
M sold goods to N on
1st July, 2009
for Rs.2,400. N immediately accepted a 3 months bill. On due date, N requested
that the bill be renewed for a fresh period of 2 months. M agrees on the
condition that interest at 10% was paid immediately in cash. To this, N agreed.
The second bill was met on due date. Give Journal entries in the books of M.
Solution:
Journal Entries in the Books
of M
|
|
|
|
Dr.
|
Cr.
|
|
Date
|
Particulars
|
|
Rs.
|
Rs.
|
|
2009
|
|
|
|
|
|
July. 1
|
N A/c
|
Dr.
|
2,400
|
|
|
|
To Sales A/c
|
|
|
2,400
|
|
|
(Sales of goods
to N.)
|
|
|
|
|
|
Bill receivable
A/c
|
Dr.
|
2,400
|
|
|
|
To N A/c
|
|
|
2,400
|
|
|
(3 months
acceptance received from N for the amount due from him.)
|
|
|
|
|
Oct. 4
|
N A/c
|
Dr.
|
2,400
|
|
|
|
To Bill Receivable A/c
|
|
|
2,400
|
|
|
(N’s acceptance
cancelled because of renewal.)
|
|
|
|
|
|
N A/c
|
Dr.
|
40
|
|
|
|
To Interest A/c
|
|
|
40
|
|
|
(Interest @ 10%
on Rs.2,400 due from N for 2 months because of renewal.)
|
|
|
|
|
|
Bill Receivable
A/c
|
Dr.
|
2,400
|
|
|
|
Cash A/c
|
|
40
|
|
|
|
To N A/c
|
|
|
2,440
|
|
|
(New acceptance
for 2 months for Rs.2,400 and Cash received Rs.40 as interest from N.)
|
|
|
|
|
Dec. 7
|
Cash A/c
|
Dr.
|
2,400
|
|
|
|
To Bill Receivable A/c
|
|
|
2,400
|
|
|
(Cash received
against N’s second acceptance)
|
|
|
|
19.6 Accommodation Bills
Sometimes bills
are drawn and accepted for the purpose of helping one or both the parties
involved, without any genuine business transaction between them. These bills
are known as accommodation bills (or Fictitious
Bills).
In such case, additional
entries are to be passed for sending the remittance to the other party, and
also for debiting the other party with the requisite amount of discount.
There are two
types of accommodation, as follows-
1. When the bill
is drawn and accepted only for the accommodations of the drawer and
2. When the bill
is draw and accepted for the accommodation of the drawer and drawee.
19.6.1 Bill drawn and accepted only for the
accommodation of the drawer – In this case, one party draws a bill on another. The drawer discounts
the bill and remits the required amount to the drawee, so that the drawee can honour
the bill on maturity date.
Example: X approached Y to accept a bill for Rs.1,800
on 1st January,
2009 for 4 months, Who is in
need of funds temporarily. Y accepted it. The bill was discounted at 10% p.a. On
the due date, X sent the necessary sum to Y who met the bill. Show the
necessary journal entries in the books of both parties.
Solution:
Journal Entries in the Books
of X
|
|
|
|
|
Dr.
|
Cr.
|
|
Date
|
Particulars
|
|
L.F.
|
Rs.
|
Rs.
|
|
2009
Jan.1
|
Bill receivable
A/c
|
Dr.
|
|
1,800
|
|
|
|
To Y A/c
|
|
|
|
1,800
|
|
|
(Bill accepted by
Y on request.)
|
|
|
|
|
|
|
Bank A/c
|
Dr.
|
|
1,740
|
|
|
|
Discount on Bill A/c (Rs.1,800 x 10% x 4/12)
|
Dr.
|
|
60
|
|
|
|
To Bills Receivable A/c
|
|
|
|
1,800
|
|
|
(The bill discounted with the banker @ 10%)
|
|
|
|
|
|
May 4
|
Y A/c
|
Dr.
|
|
1,800
|
|
|
|
To Bank A/c
|
|
|
|
1,800
|
|
|
(Remittance to Y to met the bill amount.)
|
|
|
|
|
Journal Entries in the Books
of Y
|
|
|
|
|
Dr.
|
Cr.
|
|
Date
|
Particulars
|
|
L.F.
|
Rs.
|
Rs.
|
|
2009
Jan.1
|
X A/c
|
Dr.
|
|
1,800
|
|
|
|
To Bills payable
A/c
|
|
|
|
1,800
|
|
|
(Acceptance given
to X on his request.)
|
|
|
|
|
|
May 4
|
Bank A/c
|
Dr.
|
|
1,800
|
|
|
|
To X A/c
|
|
|
|
1,800
|
|
|
(Amount received from X.)
|
|
|
|
|
|
May 4
|
Bills payable
A/c
|
Dr.
|
|
1,800
|
|
|
|
To Bank A/c
(The acceptance to X met.)
|
|
|
|
1,800
|
19.6.2 Bill drawn and
accepted for the accommodation of the drawer and drawee – In this
case, both parties draw bill on each other. Both can discount the bill and keep
the proceed to themselves. On maturity date, each will honour other’s bill.
Example:
M and C were both in need of funds temporarily. On 1st April, 2009 .
M accepted C’s bill for Rs.3,000 for two months. On the same date C accepted a
bill of exchange payable to M for Rs.3,000 for two months. Both the bills were
discounted at 10% p.a. On the due date both parties meet their acceptances.
Give journal entries in the books of both the parties.
Solution:
|
Journal entries in the Books of M
|
|||||
|
|
|
|
|
Dr.
|
Cr.
|
|
Date
|
Particulars
|
|
L.F.
|
Rs.
|
Rs.
|
|
1.4.09
|
Bill Receivable A/c
|
Dr.
|
|
3,000
|
|
|
|
To C A/c
|
|
|
|
3,000
|
|
|
(Acceptance received from C for Rs.3,000 for 2
months.)
|
|
|
|
|
|
,, ,,
|
C A/c
|
Dr.
|
|
3,000
|
|
|
|
To Bill Payable A/c
|
|
|
|
3,000
|
|
|
(Acceptance given to C for Rs.3,000 for 2 months.)
|
|
|
|
|
|
,, ,,
|
Bank A/c
|
Dr.
|
|
2,950
|
|
|
|
Discount A/c (Rs.3,000 x 10% x 2/12)
|
|
|
50
|
|
|
|
To Bills Receivable A/c
|
|
|
|
3,000
|
|
|
(C’s acceptance discounted at 10% p.a.)
|
|
|
|
|
|
4.6.09
|
Bills Payable A/c
|
Dr.
|
|
3,000
|
|
|
|
To Bank A/c
|
|
|
|
3,000
|
|
|
(The acceptances given to C meet.)
|
|
|
|
|
|
Journal entries in the Books of C
|
|||||
|
|
|
|
|
Dr.
|
Cr.
|
|
Date
|
Particulars
|
|
L.F.
|
Rs.
|
Rs.
|
|
1.4.09
|
Bill Receivable A/c
|
Dr.
|
|
3,000
|
|
|
|
To M A/c
|
|
|
|
3,000
|
|
|
(M’s acceptance for Rs.3,000 received.)
|
|
|
|
|
|
,, ,,
|
M A/c
|
Dr.
|
|
3,000
|
|
|
|
To Bill Payable A/c
|
|
|
|
3,000
|
|
|
(Acceptance given to M for Rs.3,000 for 2 months.)
|
|
|
|
|
|
,, ,,
|
Bank A/c
|
Dr.
|
|
2,950
|
|
|
|
Discount A/c (Rs.3,000 x 10% x 2/12)
|
|
|
50
|
|
|
|
To Bills Receivable A/c
|
|
|
|
3,000
|
|
|
(M’s acceptance discounted at 10% p.a.)
|
|
|
|
|
|
4.6.09
|
Bills Payable A/c
|
Dr.
|
|
3,000
|
|
|
|
To Bank A/c
|
|
|
|
3,000
|
|
|
(Acceptances given to M meet.)
|
|
|
|
|
Example:
Mad accepted on1st May,
2009, Sad’s bill for Rs.4,000 at 3 months for their mutual accommodation. Sad
got the bill discounted at 15% p.a. and remitted half proceeds to Mad. On the
due date Sad sent to Mad the amount due to him and Mad met the bill. Show
journal entries & ledger account in the books of both the parties.
Solution:
|
Books of Sad
|
|||||
|
|
Journal Entries
|
|
|
Dr.
|
Cr.
|
|
Date
|
Particulars
|
|
L.F.
|
Rs.
|
Rs.
|
|
1.5.09
|
Bill Receivable A/c
|
Dr.
|
|
4,000
|
|
|
|
To Mad A/c
|
|
|
|
4,000
|
|
|
(Mad’s acceptance for Rs.4,000 received for mutual
accommodation.)
|
|
|
|
|
|
,, ,,
|
Bank A/c
|
Dr.
|
|
3,850
|
|
|
|
Discount A/c (Rs.4,000 x 15% x 3/12)
|
Dr.
|
|
150
|
|
|
|
To Bill Receivable A/c
|
|
|
|
4,000
|
|
|
(Mad’s acceptance discounted at 15% for 3 months.)
|
|
|
|
|
|
,, ,,
|
Mad A/c
|
Dr.
|
|
2,000
|
|
|
|
To Bank A/c
|
|
|
|
1,925
|
|
|
To Discount A/c
|
|
|
|
75
|
|
|
(Half the proceeds of the bill remitted to Mad who is
also debited with half the discount.)
|
|
|
|
|
|
4.8.09
|
Mad A/c
|
Dr.
|
|
2,000
|
|
|
|
To Bank A/c
|
|
|
|
2,000
|
|
|
(The amount sent Mad to meet the bill.)
|
|
|
|
|
|
Bills Receivable A/c
|
|
||||
|
Dr.
|
Cr.
|
||||
|
Date
|
Particulars
|
Rs.
|
Date
|
Particulars
|
Rs.
|
|
1.5.09
|
To Mad A/c
|
4,000
|
1.5.09
|
By Bank A/c
|
3,850
|
|
|
|
|
|
By Discount A/c
|
150
|
|
|
|
4,000
|
|
|
4,000
|
|
Mad A/c
|
|
||||
|
Dr.
|
Cr.
|
||||
|
Date
|
Particulars
|
Rs.
|
Date
|
Particulars
|
Rs.
|
|
1.5.09
|
To Bank A/c
|
1,925
|
1.5.09
|
By Bills Receivable A/c
|
4,000
|
|
|
To Discount A/c
|
75
|
|
|
|
|
4.8.09
|
To Bank A/c
|
2,000
|
|
|
|
|
|
|
4,000
|
|
|
4,000
|
|
Bank A/c
|
|
||||
|
Dr.
|
Cr.
|
||||
|
Date
|
Particulars
|
Rs.
|
Date
|
Particulars
|
Rs.
|
|
1.5.09
|
To Bill Receivable A/c
|
3,850
|
1.5.09
|
By Mad A/c
|
1,925
|
|
|
To balance c/d
|
75
|
4.8.09
|
By Mad A/c
|
2,000
|
|
|
|
3,925
|
|
|
3,925
|
|
Journal entries in the books
of Mad
|
|||||
|
|
|
|
|
Dr.
|
Cr.
|
|
Date
|
Particulars
|
|
L.F.
|
Rs.
|
Rs.
|
|
1.5.09
|
Sad A/c
|
Dr.
|
|
4,000
|
|
|
|
To Bills Payable A/c
|
|
|
|
4,000
|
|
|
(Acceptance given to Sad for mutual accommodation.)
|
|
|
|
|
|
,, ,,
|
Bank A/c
|
Dr.
|
|
1,925
|
|
|
|
Discount A/c
|
Dr.
|
|
75
|
|
|
|
To Sad A/c
|
|
|
|
2,000
|
|
|
(Half the proceeds after discounting received from
Sad who is also credited with half the discount.)
|
|
|
|
|
|
4.8.09
|
Bank A/c
|
Dr.
|
|
2,000
|
|
|
|
To Sad A/c
|
|
|
|
2,000
|
|
|
(Amount retained by Sad from the proceeds of the bill
now received from him.)
|
|
|
|
|
|
,, ,,
|
Bills Payable A/c
|
Dr.
|
|
4,000
|
|
|
|
To Bank A/c
|
|
|
|
4,000
|
|
|
(The acceptance to Sad met.)
|
|
|
|
|
|
Bills Payable A/c
|
|
||||
|
Dr.
|
Cr.
|
||||
|
Date
|
Particulars
|
Rs.
|
Date
|
Particulars
|
Rs.
|
|
4.8.09
|
To Bank A/c
|
4,000
|
1.5.09
|
By Sad A/c
|
4,000
|
|
Sad A/c
|
|
||||
|
Dr.
|
Cr.
|
||||
|
Date
|
Particulars
|
Rs.
|
Date
|
Particulars
|
Rs.
|
|
1.5.09
|
To Bills Payable A/c
|
4,000
|
1.5.09
|
By Bank A/c
|
1,925
|
|
|
|
|
|
By Discount A/c
|
75
|
|
|
|
|
4.8.09
|
By Bank A/c
|
2,000
|
|
|
|
4,000
|
|
|
4,000
|
|
Bank A/c
|
|
||||
|
Dr.
|
Cr.
|
||||
|
Date
|
Particulars
|
Rs.
|
Date
|
Particulars
|
Rs.
|
|
1.5.09
|
To Sad A/c
|
1,925
|
4.8.09
|
By Bills Payable A/c
|
4,000
|
|
4.8.09
|
To Sad A/c
|
2,000
|
|
|
|
|
|
To balance c/d
|
75
|
|
|
|
|
|
|
4,000
|
|
|
4,000
|
19.6.3 Distinction between
Trade Bills and Accommodation Bills
|
Conditions
|
Trade
Bills
|
Accommodation
Bills
|
|
1.Consideraton
|
The Bills are drawn
and accepted on consideration.
|
The Bills are drawn
and accepted without any consideration.
|
|
2.Purpose
|
It is drawn for genuine
business transaction.
|
It is drawn for
personal finance.
|
|
3.Discounting
|
It may or may
not be discounted with bank.
|
It is discounted
with bank.
|
|
4. Discounting
charge
|
Discounting
charge is borne by drawer only.
|
Discounting
charge is shared by drawer and drawee.
|
|
5. Legal status
|
Drawer can take
legal action on dishonour of bill.
|
No legal action
can not be taken as there is no consideration.
|
19.7 Insolvency of Drawee of Bill of Exchange
Insolvency means when a
person is unable to pay the amount due by him.
When a drawee becomes
insolvent, any bill accepted by him will be treated as dishonoured bill. The
Accounting treatment will be as follows:
|
|
Records
in the books of Drawer
|
|
Records
in the books of Drawee
|
|
|
1.
|
Drawee A/c
|
Dr
|
Bills payable A/c
|
Dr
|
|
|
To Bills Receivable A/c / Bank A/c / Endorsee A/c /
Bills sent for collection A/c
|
|
To Drawer A/c
|
|
|
|
(The dishonour of
bill on maturity)
|
|
(The dishonour of bill due to insolvency.)
|
|
|
2.
|
Bank A/c
|
Dr
|
Drawer A/c
|
Dr.
|
|
|
Bad Debt A/c
|
Dr
|
To Bank A/c
|
|
|
|
To Drawee A/c
|
|
To Deficiency A/c
|
|
|
|
(Received of part
amount as final dividend and irrecoverable amount is treated as bad debt.)
|
|
(Paid part amount
as final dividend and balance amount is treated as deficiency.)
|
|
Example:
On 1st January,2009 , Kapil sold goods to
Suraj for Rs.5,000. On 4th
January,2009 Kapil received from Suraj Rs.1,000 and drew a bill
receivable 3 months after date for the balance for the balance amount. On the
same date, Kapil endorsed the accepted bill to Ratna for full settlement of a
debt of Rs.4,200. On the due date, the bill was dishonoured and Suraj became
insolvent. He paid only 75% of his acceptance. Show the Journal Entries in the
books of Kapil and Suraj.
Solution
|
Journal entries in the books
of Kapil
|
|||||
|
|
|
|
|
Dr.
|
Cr.
|
|
Date
|
Particulars
|
|
L.F.
|
Rs.
|
Rs.
|
|
2009
|
Suraj A/c
|
Dr.
|
|
5,000
|
|
|
Jan. 1
|
To Sales A/c
|
|
|
|
5,000
|
|
|
(Goods sold to Suraj on credit.)
|
|
|
|
|
|
Jan. 4
|
Cash A/c
|
Dr.
|
|
1,000
|
|
|
|
Bill Receivable A/c
|
Dr.
|
|
4,000
|
|
|
|
To Suraj A/c
|
|
|
|
5,000
|
|
|
(Being the receipt of Rs.1,000 from Suraj and a bill
drawn on him for the balance for 3 months.)
|
|
|
|
|
|
Jan. 4
|
Ratna A/c
|
Dr.
|
|
4,200
|
|
|
|
To Bill Receivable A/c
|
|
|
|
4,000
|
|
|
To Discount Receivable A/c
|
|
|
|
200
|
|
|
(The bill endorsed in favour of Ratna in full settlement
of a debt of Rs.4,200.)
|
|
|
|
|
|
April 7
|
Suraj A/c
|
Dr.
|
|
4,000
|
|
|
|
Discount Receivable A/c
|
Dr.
|
|
200
|
|
|
|
To Ratna A/c
|
|
|
|
4,200
|
|
|
(The bill endorsed in favour of Ratna, now
dishonoured.)
|
|
|
|
|
|
May 5
|
Bank A/c
|
Dr.
|
|
3,000
|
|
|
|
Bad Debt A/c
|
Dr.
|
|
1,000
|
|
|
|
To Suraj A/c
|
|
|
|
4,000
|
|
|
(Being 75% of Saran’s acceptance received.)
|
|
|
|
|
Journal
entries in the books of Suraj
|
|
|
|
|
Dr.
|
Cr.
|
|
Date
|
Particulars
|
|
|
Rs.
|
Rs.
|
|
2009
|
Purchases A/c
|
Dr.
|
|
5,000
|
|
|
Jan. 1
|
To Kapil A/c
|
|
|
|
5,000
|
|
|
(Being the purchase of goods on credit.)
|
|
|
|
|
|
Jan. 4
|
Kapil A/c
|
Dr.
|
|
5,000
|
|
|
|
To Cash A/c
|
|
|
|
1,000
|
|
|
To Bills Payable A/c
|
|
|
|
4,000
|
|
|
(The payment of cash Rs.1,000 and acceptance of a
bill for the balance for 3 months.)
|
|
|
|
|
|
April 7
|
Bills Payable A/c
|
Dr.
|
|
4,000
|
|
|
|
To Kapil A/c
|
|
|
|
4,000
|
|
|
(The bill dishonoured at maturity.)
|
|
|
|
|
|
May 5
|
Kapil A/c
|
Dr.
|
|
4,000
|
|
|
|
To Bank A/c
|
|
|
|
3,000
|
|
|
To Deficiency A/c
|
|
|
|
1,000
|
|
|
(Being the payment of 75% of dues.)
|
|
|
|
|
19.8 Retiring of Bill
It is a sort of payment
of bill of exchange. If a drawee desires to pay his due amount before its due
date, it is called retiring a bill. In this case, the drawee gets some discount
or rebate from drawer as the amount is paid before its due date. The discount
or rebate is the gain for drawee, and expenses of drawer.
|
|
Records
in the books of Drawer
|
|
Records
in the books of Drawee
|
|
|
1.
|
Bank A/c
|
Dr.
|
Bills payable A/c
|
Dr.
|
|
|
Discount Allowed
/ Rebate on Bill Retired A/c
|
Dr.
|
To Bank A/c
|
|
|
|
To Bills Receivable A/c
|
|
To Discount Received / Rebate on Bill
Retired A/c
|
|
|
|
(Retirement of
Bill before maturity date.)
|
|
(The bill retired
before its maturity date.)
|
|
Example: On 1st January, 2009, A accepted a Bill, drawn on him by B
for Rs.7,000 payable 4 months after sight, against his dues. Having surplus
funds, A paid off the bill on 4th February and was allowed a rebate
6% p.a. Show journal entries in the books of A and B to record these
transactions.
Solution:
Journal entries In the Books of B (Drawer)
|
Date
|
Particulars
|
|
Rs.
|
Rs.
|
|
2009
Jan. 1
|
Bills Receivable
A/c
To A A/c.
(The Bill drawn
on A for 4 months)
|
Dr.
|
7,000
|
7,000
|
|
Feb. 4
|
Bank A/c.
Discount Allowed
A/c. (Rs.7,000 x 6% x 3/12)
To Bill Receivable A/c.
(The Bill retired and discount allowed @ 6%
p.a.)
|
Dr.
|
6,895
105
|
7,000
|
Journal entries in the Books
of A
|
Date
|
Particulars
|
|
Rs.
|
Rs.
|
|
2009
Jan. 1
|
B A/c
To Bills Payable A/c.
(Being the Bill accepted for 4 months)
|
Dr.
|
7,000
|
7,000
|
|
Feb. 4
|
Bills Payable A/c.
To Bank A/c.
To Discount Received A/c.
(Rs.7,000 x 6% x 3/12)
(Being the Bill retired before maturity and discount received @ 6% p.a.)
|
Dr.
|
7,000
|
6,895
105
|
19.9 Bills Payable and Receivable Book
Bills Receivable and Bills Payable entries are made in
journals, to record the details of Bills Payable and Bills Receivable in a
chronological order. When large number of bill transactions take place in an organization,
it is convenient to maintain a separate book, which becomes a part of journal
book.
The total of the Bills Receivable book is posted to
the debit side of the Bills Receivable Account and the total of the Bills
Payable Book is posted to the credit side of the Bills Payable Account. In
respect of each the Bills Receivable, the customer’s account (i.e. drawee) is
credited in the ledger.
Example: Record the following transactions in the Bills Receivable and Bill
Payable Books of the trader.
|
2009 Jan.
|
1
|
Received from X
an acceptance of 2 months for Rs.2,000.
|
|
|
5
|
Our acceptance to
P at 3 months for Rs.8,000.
|
|
|
15
|
Received from Y
an acceptance for 4 months for Rs.4,000.
|
|
|
18
|
Discounted X’s
acceptance for Rs.1,960.
|
|
|
19
|
Received from Z
an acceptance for 2 months for Rs.12,000.
|
|
|
20
|
Our acceptance to
Q at 2 months for Rs.3,000.
|
|
|
21
|
Renewed our acceptance
to P by paying him cash Rs.4,000 and accepted a fresh bill of Rs.4,200 at 4
months Rs.200 being interest charged.
|
|
|
22
|
Y’s acceptance
endorsed in favour of Ram in full settlement of a debt of Rs.4,500.
|
Solution:
Bill Receivable Book
|
Sl.
No.
|
Bill No.
|
Name of the acceptor
|
From whom received
|
Date of Bill
|
Term
(Months)
|
Date of Maturity
|
Amount
(Rs.)
|
Remark
|
|
1.
2.
3.
|
|
X
Y
Z
|
X
Y
Z
|
01.01.2009
15.01.2009
19.01.2009
|
2 Months
4 Months
2 Months
|
04.03.2009
18.05.2009
22.03.2009
|
2,000
4,000
12,000
|
Discounted.
Endorsed.
|
Bill Payable Book
|
Sl.
No.
|
Bill No.
|
Date of Bill
|
Name of the Drawer
|
Payee
|
Term
(Months)
|
Date of Maturity
|
Amount
(Rs.)
|
Remarks
|
|
1.
2.
3.
|
|
05.01.2009
20.01.2009
21.01.2009
|
P
Q
P
|
P
Q
P
|
3 Months
2 Months
4 Months
|
08.04.2009
23.03.2009
24.05.2009
|
8,000
3,000
4,200
|
Renewed
|
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