Financial Accountancy

Financial
Accounting - II
As per New CBCS Syllabus for 1st Year, 2nd Semester, B.Com., B.Com. (Hons.) of
Osmania University and for All other Universities in Telangana State w.e.f. 2016-17
Dr. (Mrs.) Prashanta Athma

Professor in Commerce,
Vice Principal,
University College for Women,
Koti, Hyderabad, Telangana State.
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Dedicated to my Dad
Preface
The book on “Financial Accounting - II” is tailor-made to meet the requirements of

contents of the new syllabi of B.Com. II Semester (CBCS) of the Universities in
Telangana and also provide requisite knowledge in Accounting.
An earnest and sincere attempt is made to present the information in a non-
technical, simple and lucid manner so as to enable the reader to understand the subject
with ease.
The book contains sufficiently a large number of illustrations for a better grasp in
the subject matter. Wherever necessary, working notes and explanations have been
provided. At the end of each chapter, questions and problems are given for practice.
Suggestions for improvement of the book are solicited.
I express my heartfelt gratitude to my husband Mr. S. Chandra Babu, HR and Legal
Professional, who was a constant source of inspiration, support and encouragement
throughout the completion of the book.
I also thank the publishers for the timely publication and my special thanks to
Mr. Anil Kumar and Mr. Rajkumar for the keen interest taken by them in bringing out
this book.
Dr. (Mrs.) Prashanta Athma

Syllabus
UNIT-I: BILLS OF EXCHANGE

Meaning of the Bill – Definition of the Bill – Parties in the Bill – Features of the Bill –
Advantages of the Bill – Bills of Exchange vs. Promissory Note – Accounting Treatment –
Journal Entries: Bill Honored – Discounting of the Bill – Journal Entries: Bill Dishonored –
Noting Charges – Renewal of Bills – Retiring of Bills under Rebate – Accommodation Bills –
Summary – Glossary – Questions.
UNIT-II: CONSIGNMENT ACCOUNTS

Meaning – Features – Proforma Invoice – Account Sales – Consignment vs. Sale – Accounting
Treatment – Valuation of Consignment Stock – Del-Credere Commission – Invoice Price –
Normal Loss – Abnormal Loss – Summary – Glossary – Questions.
UNIT-III: JOINT VENTURE

Meaning – Features – Joint Venture vs. Partnership – Joint Venture vs. Consignment –
Accounting Procedure – Methods of Keeping Records: No Separate Set of Books are maintained
for the Joint Venture and Separate Set of Books are Maintained for the Joint Venture –
Memorandum Joint Venture – Summary – Glossary – Questions.
UNIT-IV: ACCOUNTS FROM INCOMPLETE RECORDS

Single Entry System: Meaning – Single Entry System: Features – Single Entry vs. Double Entry
Systems – Single Entry System: Defects – Books and Accounts Maintained – Ascertainment of
Profit: Statement of Affairs and Conversion Method – Summary – Glossary – Questions.
UNIT-V: ACCOUNTING FOR NON-PROFIT ORGANISATIONS

Non-profit Organisation: Meaning; Non-profit Organisation: Features; Key Aspects of Non-profit
Organisations; Receipts and Payments Account: Receipts and Payments Account vs. Cash Book,
Steps in the Preparation of Receipts and Payments Account, Proforma of Receipts and Payments
Account – Income and Expenditure Account: Receipts and Payments Account vs. Income and
Expenditure Account, Income and Expenditure Account vs. Profit and Loss Account, Steps in the
Preparation of Income and Expenditure Account, Proforma of Income and Expenditure Account
and Ascertainment of Subscriptions for the Current Year – Balance Sheet: Preparation of the
Balance Sheet and Preparation of the Financial Statements – Summary – Glossary – Questions.
Contents
1. Bills of Exchange 1 – 37
2. Consignment Accounts 38 – 69
3. Joint Venture 70 – 96
4. Accounts from Incomplete Records 97 – 120
5. Accounting for Non-profit Organisations 121 – 149
1
Bills of Exchange
Objectives
The objectives of this Unit are to:
 Understand the concept of Bills of Exchange
 Appreciate the need for Bills of Exchange
 Learn the accounting treatment when the bills are honored and dishonored
 Differentiate Trade Bills from Accommodation Bills
Structure
 Meaning of the Bill
 Definition of the Bill
 Parties in the Bill
 Features of the Bill
 Advantages of the Bill
 Bills of Exchange vs. Promissory Note
 Accounting Treatment
 Journal Entries: Bill Honored
 Discounting of the Bill
 Journal Entries: Bill Dishonored
 Noting Charges
 Renewal of Bills
 Retiring of Bills under Rebate
 Accommodation Bills
 Summary
 Glossary
 Questions
Meaning of the Bill

Negotiable Instruments are of three types, i.e., Bills of Exchange, Promissory Note and Cheques.
Bill of exchange is a financial instrument showing the money owed by the buyer towards the seller of
2 Financial Accounting - II
goods. It is generally drawn by the creditor on his debtor and it has to be accepted by the debtor. It is
just a draft till it is accepted. A bill of exchange is a binding agreement by one party to pay a fixed
amount of cash to another party on a predetermined date or on demand.
A bill of exchange is in writing by a party (Maker or Drawer) ordering another (Drawee) to pay a
certain amount to a third party (Payee). It is also referred to as a draft. If the bill of exchange is drawn
on a bank, it is called as a Bank Draft. If it is drawn on another party, it is called as a Trade Draft. A
bill of exchange drawn on a bank account is a “Cheque.”
According to Negotiable Instruments Act of 1881, “a cheque is a bill of exchange drawn on a
specified banker and not expressed to be payable otherwise than on demand”.
Definition of the Bill

According to Negotiable Instruments Act of 1881, “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 to the order of, a certain person, or to the bearer of the instrument”.
Parties in the Bill

The parties involved in the bill are Drawer, Drawee and Payee:
 Drawer is a person who draws the bill on the other party.
 Drawee is the person on whom the bill is drawn.
 Payee is the person to whom the bill amount is paid.
Features of the Bill

The features of the bill can be listed as below:
 Parties: The parties involved in the bill are Drawer, Drawee and Payee.
 Term of the bill/period of credit: The period as to when the bill will mature is to be mentioned
in the bill.
 Grace days: 3 grace days will be added to ascertain the due date of the bill.
 Amount: The amount for which the bill is drawn has to be stated in the bill.
 Stamp: The bill must be stamped sufficiently, the value of which depends upon the value of
the bill.
 Acceptance of the bill: The bill drawn has to be sent to the drawee for acceptance. The bill is
called as draft before acceptance and after acceptance; the drawee becomes the acceptor of
the bill.
 The bill is an asset to the Drawer of the bill and it is ‘Bill Receivable’ to him.
 The bill is a liability to the Drawee (Acceptor of the Bill) and it is ‘Bill Payable’ to him.
 The primary responsibility is of the Drawee/Acceptor.
 The person to whom the bill is endorsed is known as ‘Endorsee’ and the person who endorses
the bill is called as ‘Endorser’.
 All the endorsers including the Drawer are equally responsible for the ‘holder in due course’.
 The number of days for the payment of the bill would be calculated by excluding the day of
making the bill but the day of payment would be included.
 The drawer can either retain the bill till the date of maturity or discount the bill with his
banker or endorse the bill to the other party or send the bill to his bank for collection.
Bills of Exchange 3
Advantages of the Bill

The merits of Bills of Exchange are as follows:
 Bill is a negotiable instrument and is easily transferable for the settlement of claims and debts
and transmission of money from place to place will also become easy.
 If there is any dispute among the parties about the payment or satisfaction of that claim, the
bill can be produced in a court of law as a written evidence, i.e., it is a conclusive proof of
indebtedness.
 The trader/drawer need not wait till the due date as the bill can be discounted with his banker.
 The bill is for a particular period and as such it cannot be further endorsed beyond the period
of the bill.
 Endorsement Sans Recourse relieves the endorser from all the liabilities to the subsequent endorsees.
Bills of Exchange vs. Promissory Note

According to Negotiable Instruments Act of 1881, “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 only to, or to the order of, a certain person, or to the bearer
of the instrument.” It is a written document in which the debtor is promising the creditor that the
amount due will be paid at a future specified date.
Sr. No. Points of Difference Bills of Exchange Promissory Note
1 Section It is defined in Section 5 of the It is defined in Section 4 of the
Negotiable Instrument Act, 1881 Negotiable Instrument Act, 1881
2 Creator It is created by the Creditor It is prepared by the Debtor
3 Parties There are three parties, viz., the There are only two parties, viz.,
Drawer, the Drawee and the Payee Maker and Payee
4 Nature of Payment There is an unconditional order to There is an unconditional
pay promise to pay
5 Acceptance An acceptance of the Drawee is It does not require any
required before it is presented for acceptance as it is signed by the
payment person who is liable to pay
6 Liability The liability of a Drawer of bill is The liability of the Maker is
secondary and conditional primary and absolute
7 Notice of dishonor Notice of dishonor must be given Notice of dishonor to the Maker
by the holder to all the persons is not necessary
liable to pay
8 Maker’s Position The Drawer of a bill is in The Maker stands in immediate
immediate relationship with the relationship with the Payee
Acceptor and not the Payee
9 Nature of Bill of Exchange can be accepted A Promissory Note can never be
Acceptance conditionally conditional
10 Copies A Bill of Exchange can be drawn A Promissory Note cannot be
in sets drawn in sets
11 Payable to Bearer A Bill of Exchange can be so A Promissory Note cannot be
drawn provided it is not payable to made payable to a Bearer
bearer on demand
12 Payable to Maker The Drawer and the Payee may be The Maker cannot pay to
one person himself
13 Protest Foreign Bills must be protested No protest is required
for dishonor when such protest is
required by the law of the place
where they are drawn
However, both the two instruments are not payable to the bearer on demand as per RBI Act, 1934.
Accounting Treatment
The accounting aspects of a bill of exchange includes bill drawn and accepted; bill discharged;
bill endorsed to a third party; bill discounted with the banker; bill sent to the banker for collection; bill
dishonored; noting charges levied; bill renewed; bill retired under rebate; and accommodation bills.
Journal Entries: Bill Honored
A bill is said to be discharged when the acceptor of the bill makes the actual payment of the bill
on the maturity date. The following journal entries are to be passed in the books of the parties involved
in the bill when the bill is drawn by the drawer and honored by the acceptor on the due date.
Sr. No. Transaction Books of Drawer Books of Drawee
1 Bill drawn and Bills Receivable A/c……….Dr. Drawer A/c………………...Dr.
accepted To Drawee A/c To Bills Payable A/c
2 Retained bill honored Cash A/c…….……………..Dr. Bills Payable A/c…………..Dr.
by the Acceptor on due To Bills Receivable A/c To Cash A/c
date
3 Bill endorsed by the Endorsee A/c………………Dr. No Entry
Drawer to his Creditor To Bills Receivable A/c
4 Endorsed bill honored No Entry Bills Payable A/c…………..Dr.
The amount of the bill will be To Cash A/c
received by the Endorsee
5 Bill discounted with Bank A/c………..……….…Dr. No Entry
Bank by the Drawer Discount A/c …………..…..Dr.
To Bills Receivable A/c
6 Discounted bill No Entry Bills Payable A/c…………..Dr.
honored The amount of the bill will be To Bank A/c
received by the Bank
7 Bill sent to Bank for Bill for Collection A/c…….Dr. No Entry
collection by the Drawer To Bills Receivable A/c
8 Bill sent to Bank for Bank A/c…………………..Dr. Bills Payable A/c…………..Dr.
collection honored To Bill for Collection A/c To Cash A/c
In the books of the Endorsee, the following entries would be passed when the bill is endorsed by
the drawer and honored by the acceptor.
Transaction Books of Endorsee
Bill Endorsed by the Drawer Bills Receivable A/c……….....Dr.
To Endorser A/c
Endorsed bill honored Cash A/c…….………………...Dr.
Bills of Exchange 5
Illustration 1: On 1st July 2015, ‘A’ purchased from ‘B’ goods worth ` 10,000 on credit. In
settlement of the transaction, a bill for ` 10,000 was accepted by A on the same date payable after
3 months. The bill was duly honored on the due date. Pass necessary entries in the books of A and B.
Solution:
Journal Entries in the Books of B (Drawer)
Date Particulars L.F. Debit Credit
Amount (`) Amount (`)
2015
July 1 A’s A/c...……………….……………...Dr. 10,000
To Sales A/c 10,000
(Being credit sales to A)
July 1 Bills Receivable A/c...………………....Dr. 10,000
To A’s A/c 10,000
(Being the acceptance received from A)
Oct 4 Cash A/c...……………….………….....Dr. 10,000
(Due To Bills Receivable A/c 10,000
Date) (Being the retained bill honored by A)
Journal Entries in the Books of A (Drawee)
2015
July 1 Purchases A/c...…….………..…….....Dr. 10,000
To B’s A/c 10,000
(Being credit purchases from B)
July 1 B’s A/c...………………..…………….Dr. 10,000
To Bills Payable A/c 10,000
(Being the bill drawn by B accepted)
Oct 4 Bills Payable A/c...…………………...Dr. 10,000
(Due To Cash A/c 10,000
Date) (Being the bill honored on due date)
Illustration 2: On 1st July 2015, Chandra & Co. drew a bill upon Shanti & Co. for ` 5,000 at
4 months date. This was duly accepted. After acceptance, the bill was endorsed to Lakshmi & Co. On
the due date, the bill was honored. Pass necessary entries in the books of all the parties.
Solution:
Journal Entries in the Books of Chandra & Co. (Drawer)
Date Particulars L.F. Debit (`) Credit (`)
2015
July 1 Bills Receivable A/c...……………….Dr. 5,000
To Shanti & Co. A/c 5,000
(Being the bill drawn on Shanti & Co.)
July 1 Lakshmi & Co. A/c...………………..Dr. 5,000

To Bills Receivable A/c 5,000
(Being the bill endorsed)
Journal Entries in the Books of Shanti & Co. (Drawee)
2015
July 1 Chandra & Co. A/c...……………......Dr. 5,000
(Being the bill drawn accepted)
Nov 4 Bills Payable A/c...…………………..Dr. 5,000
Journal Entries in the Books of Lakshmi & Co. (Endorsee)
2015
To Chandra & Co. A/c 5,000
(Being the endorsement accepted)
Nov 4 Cash A/c...……………….…………..Dr. 5,000
Date) (Being the retained bill honored)
Illustration 3: Madhu sells goods worth ` 2,000 to Jasmine on August 1, 2014. On the same date,
Jasmine accepted a bill for 3 months for ` 2,000. Assuming that Jasmine honored the bill on maturity,
give journal entries in the books of both the parties if:
(a) The bill was retained by Madhu till maturity.
(b) The bill was endorsed by Madhu to Rama on 24th August 2014.
Solution:
Journal Entries in the Books of Madhu (Drawer)
2014
Aug 1 Jasmine A/c...………………………...Dr. 2,000
To Sales A/c 2,000
(Being credit sales to Jasmine)
Aug 1 Bills Receivable A/c...……………….Dr. 2,000
To Jasmine A/c 2,000
(Being the bill drawn on Jasmine)
Bills of Exchange 7
Nov 4 Cash A/c...……………….…………..Dr. 2,000

Aug 24 Rama A/c...………………….……….Dr. 2,000
Journal Entries in the Books of Jasmine (Drawee)
2014
Aug 1 Purchases A/c...…….………..……....Dr. 2,000
To Madhu A/c 2,000
(Being credit purchases from Madhu)
Aug 1 Madhu A/c...………………………...Dr. 2,000
(Being the bill drawn by Madhu accepted)
Journal Entries in the Books of Rama (Endorsee)
2014
To Madhu A/c 2,000
Nov 4 Cash A/c...……………….…………..Dr. 2,000
Illustration 4: Srikanth sold goods worth ` 10,000 to Ravikanth on August 1, 2014 and draws a
bill on him on the same date for the amount at 3 months. Srikanth purchased goods from Krishnakanth
on August 24, 2014 for ` 10,000 and endorses Ravikanth’s acceptance to Krishnakanth on the same
day in settlement of the account. The bill is finally honoured on the date of maturity. Pass the
necessary entries in the books of all the parties.
Solution:
Journal Entries in the Books of Srikanth (Drawer)
2014
Aug 1 Ravikanth A/c...…………………......Dr. 10,000
To Sales A/c 10,000
(Being credit sales to Ravikanth)

To Ravikanth A/c 10,000
(Being the bill drawn on Ravikanth)
To Krishnakanth A/c 10,000
(Being credit purchases from Krishnakanth)
Aug 24 Krishnakanth A/c...………………….Dr. 10,000
Journal Entries in the Books of Ravikanth (Drawee)
2014
To Srikanth A/c 10,000
(Being credit purchases from Srikanth)
Aug 1 Srikanth A/c...………………………..Dr. 10,000
Journal Entries in the Books of Krishnakanth (Endorsee)
2014
Aug 24 Srikanth A/c...…………………..........Dr. 10,000
To Sales A/c 10,000
(Being credit sales to Srikanth)
To Srikanth A/c 10,000
Nov 4 Cash A/c...……………….…………..Dr. 10,000
Discounting of the Bill

The drawer/holder of the bill instead of waiting till the maturity date of the bill can get the bill
discounted with the Bank and receive the amount from the Bank immediately. It is the bank which
collects the bill amount from the acceptor on the due date. The Bank deducts some amount from the
bill called discount for the service rendered by it. Therefore, the holder of the bill who discounts with
the bank will not receive the full amount of the bill and the discount is a loss for him.
Illustration 5: Srirama purchases goods worth ` 1,20,000 from Srikrishna on 1st October 2014.
He pays ` 40,000 immediately in cash and sends his acceptance for 3 months to Srikrishna for the
balance. Srikrishna gets the bill discounted at 6% p.a. Pass journal entries assuming that the bill was
met on the due date.
Bills of Exchange 9
Solution:
Journal Entries in the Books of Srikrishna (Drawer)
2014
Oct 1 Srirama A/c...……………….……... .Dr. 80,000
Cash A/c...………………….……......Dr. 40,000
To Sales A/c 1,20,000
(Being cash and credit sales)
Oct 1 Bills Receivable A/c...……………….Dr. 80,000
To Srirama A/c 80,000
(Being the bill drawn on Srirama)
Oct 1 Bank A/c...……………….…………..Dr. 78,800
Discount A/c ………………………...Dr. 1,200
(Being the bill discounted with bank @ 6%
6 3
p.a. – 80,000 ×  )
100 12
Journal Entries in the Books of Srirama (Drawee)
2014
Oct 1 Purchases A/c...…….………..……....Dr. 1,20,000
To Srikrishna A/c 80,000
To Cash A/c 40,000
(Being purchases from Srikrishna)
Oct 1 Srikrishna A/c...……..……………... Dr. 80,000
2015
Jan 4 Bills Payable A/c...…………………..Dr. 80,000
To Bank A/c 80,000
(Being the bill honored on due date)
Illustration 6: Jaya draws a bill on 1st January 2015 on Bhavani for ` 5,000 at 2 months and
discounts the bill on the same day with her banker for ` 4,900. The bill is honoured on the due date.
Pass necessary entries in the books of both the parties.
Solution:
Journal Entries in the Books of Jaya (Drawer)
2015
Jan 1 Bills Receivable A/c...……………….Dr. 5,000
To Bhavani A/c 5,000
(Being the bill drawn on Bhavani)
Jan 1 Bank A/c...……………….…………..Dr. 4,900

Discount A/c ………………………...Dr. 100
(Being the bill discounted)
Journal Entries in the Books of Bhavani (Drawee)
2015
Jan 1 Jaya A/c...……..………………….....Dr. 5,000
Mar 4 Bills Payable A/c...…………………..Dr. 5,000
To Bank A/c 5,000
Illustration 7: On 1st January 2015, Rani drew a bill on Nani for ` 3,000 at 3 months. On
1st February 2015, Rani purchased goods worth ` 3,000 and endorsed Nani’s acceptance to Kalyani.
On the same date Kalyani discounted the bill with her bankers at 6% p.a. On the due date, the bill is
honoured. Pass necessary entries in the books of all the parties.
Solution:
Journal Entries in the Books of Rani (Drawer)
2015
To Nani A/c 3,000
(Being the bill drawn on Nani)
Feb 1 Purchases A/c...…….………..……....Dr. 3,000
To Kalyani A/c 3,000
(Being credit purchases from Kalyani)
Feb 1 Kalyani A/c...………….…………….Dr. 3,000
Journal Entries in the Books of Nani (Drawee)
2015
Jan 1 Rani A/c...…………….……………...Dr. 3,000
Apr 4 Bills Payable A/c...…………………..Dr. 3,000
(Due To Bank A/c 3,000
Bills of Exchange 11
Journal Entries in the Books of Kalyani (Endorsee)

2015
Feb 1 Rani A/c...…………………...............Dr. 3,000
To Sales A/c 3,000
(Being credit sales to Rani)
Feb 1 Bills Receivable A/c...……………….Dr. 3,000
To Rani A/c 3,000
Feb 1 Bank A/c...……………….…………..Dr. 2,970
Discount A/c ………………………...Dr. 30
(Being the bill discounted with bank @ 6%
2
p.a. – 3,000 × 6% × )
12
Illustration 8: Journalize the following transactions in the books of Chandra.
Date Transaction
2015 Mar
1 Received Bills Receivable from Ravi for ` 1,500
3 Purchased goods from Raghu worth ` 1,200
5 Sold to Rao goods ` 2,000
8 Accepted a bill in favor of Raghu for ` 1,200
10 Drawn on Rao a bill for ` 2,000 at 2 months which he accepted
15 Received from Surya his acceptance at 3 months for ` 4,000
20 Gave an acceptance for ` 3,400 to Rajgopal
25 Received from Guru his acceptance for ` 1,300
30 Drew a bill on Ramesh at 3 months for ` 1,100
Solution:
Journal Entries in the Books of Chandra
2015
Mar 1 Bills Receivable A/c...……………….Dr. 1,500
To Ravi A/c 1,500
(Being the bill drawn on Ravi)
Mar 3 Purchases A/c...…….………..……....Dr. 1,200
To Raghu A/c 1,200
(Being credit purchases from Raghu)
Mar 5 Rao A/c...……………...………….....Dr. 2,000
To Goods A/c 2,000
(Being goods sold to Rao)
Mar 8 Raghu A/c...………….……………....Dr. 1,200

(Being the bill drawn by Raghu accepted)
To Rao A/c 2,000
(Being the bill drawn on Rao)
To Surya A/c 4,000
(Being Surya’s acceptance received)
Mar 20 Rajgopal A/c...……….……………...Dr. 3,400
(Being acceptance given to Rajgopal)
To Guru A/c 1,300
(Being Guru’s acceptance received)
To Ramesh A/c 1,100
(Being bill drawn on Ramesh)
Bill Sent to Bank for Collection

Illustration 9: Harish purchases goods from Girish on credit for ` 20,000 on 31st December,
2014. On 1st January 2015, in settlement of the above account, Harish accepted a bill for the amount
payable 3 months after date. The bill was sent to the bank by Girish on due date for collection. The
bankers reported that the bill was duly honored by payment. Pass necessary entries in the books of
both the parties.
Solution:
Journal Entries in the Books of Girish (Drawer)

2014
Dec 31 Harish A/c...…………...……………...Dr. 20,000
To Sales A/c 20,000
(Being credit sales to Harish)
2015
Jan 1 Bills Receivable A/c...………………..Dr. 20,000
To Harish A/c 20,000
(Being the bill drawn on Harish)
Apr 4 Bank for Collection of Bills A/c...……Dr. 20,000
(Being the bill sent to bank for collection)
Apr 4 Bank A/c...……………….…………...Dr. 20,000
To Bank for Collection of Bills A/c 20,000
(Being the bill honored)
Journal Entries in the Books of Harish (Drawee)

2014
Dec 31 Purchases A/c...…….………..……....Dr. 20,000
To Girish A/c 20,000
(Being credit purchases from Girish)
2015
Jan 1 Girish A/c...…..………………….......Dr. 20,000
To Bank A/c 20,000
Illustration 10: Shreya draws a bill on Varsha for ` 40,000 on 1st January 2015 for 2 months
and sends the bill to the bank for collection. The bill was duly honored on the date of maturity, i.e.,
after 2 months. Pass necessary entries in the books of both the parties.
Solution:
Journal Entries in the Books of Shreya (Drawer)
2015
To Varsha A/c 40,000
(Being the bill drawn on Varsha)
Jan 1 Bank for Collection of Bills A/c...…...Dr. 40,000
(Being the bill sent to bank for collection)
Mar 4 Bank A/c...……………….…………..Dr. 40,000
To Bank for Collection of Bills A/c 40,000
Journal Entries in the Books of Varsha (Drawee)
2015
Jan 1 Shreya A/c...…..………………….....Dr. 40,000
To Bank A/c 40,000
Journal Entries: Bill Dishonored

Refusal by the acceptor to make payment of the bill on the due date of the bill is called ‘dishonor
of the bill’. The following journal entries are to be passed in the books of the parties involved in the
bill when the bill is drawn by the drawer and dishonored by the acceptor on the due date.
Transaction Books of Drawer Books of Drawee/Acceptor
1. Bill drawn and accepted Bills Receivable A/c.....................Dr. Drawer A/c.........................Dr.
and retained To Drawee A/c To Bills Payable A/c
2. Retained bill dishonored Acceptor A/c................................ Dr. Bills Payable A/c................Dr.
by the Acceptor on due date To Bills Receivable A/c To Drawer A/c
3. Bill Endorsed by the Endorsee A/c................................ Dr. No Entry
Drawer to his Creditor To Bills Receivable A/c
4. Endorsed bill dishonored Acceptor A/c.................................Dr. Bills Payable A/c...............Dr.
To Endorsee/Cash A/c To Drawer A/c
5. Bill Discounted with Bank Bank A/c.......................................Dr. No Entry
by the Drawer Discount A/c.................................Dr.
6. Discounted bill dishonored Acceptor A/c.................................Dr. Bills Payable A/c...............Dr.
To Bank A/c To Drawer A/c
7. Bill sent to Bank for Bank for Collection of Bills A/c.....Dr. No Entry
collection by the Drawer To Bills Receivable A/c
8. Bill sent to Bank for Acceptor A/c.................................Dr. Bills Payable A/c...............Dr.
collection dishonored To Bill for Collection A/c To Drawer A/c
In the books of the Endorsee, the following entries would be passed when the bill is endorsed by
the drawer and dishonored by the acceptor.
Transaction Books of Endorsee
Bill endorsed by the Drawer Bills Receivable A/c………..........Dr.
To Endorser A/c
Endorsed bill dishonored Endorser A/c…….………….........Dr.
Illustration 11: Shilpa draws a bill on Sruthi for ` 15,000 on 1st January 2015 for 2 months and
retains the bill with him. The bill was dishonored on the date of maturity, i.e., after 2 months. Pass
necessary entries in the books of both the parties.
Solution:
Journal Entries in the Books of Shilpa (Drawer)
2015
To Sruthi A/c 15,000
(Being the bill drawn on Sruthi)
Mar 4 Sruthi A/c...…………….…………....Dr. 15,000
(Being the bill dishonored)
Journal Entries in the Books of Sruthi (Drawee)

2015
Jan 1 Shilpa A/c...…..………………….......Dr. 15,000
To Shilpa A/c 15,000
(Being the bill dishonored on due date)
Illustration 12: Raju draws a bill on Rani for ` 25,000 on 1st January 2015 for 3 months and
endorses the bill to Bhanu. The bill is dishonored on the due date. The bill is met by Raju. Pass
necessary entries in the books of all the parties.
Solution:
Journal Entries in the Books of Raju (Drawer)
2015
To Rani A/c 25,000
(Being the bill drawn on Rani)
Jan 1 Bhanu A/c...………………………….Dr. 25,000
Apr 4 Rani A/c...…………….…………......Dr. 25,000
To Cash A/c 25,000
(Being the bill dishonored and cash paid to
Bhanu)
Journal Entries in the Books of Rani (Drawee)
2015
Jan 1 Raju A/c...…..……………………......Dr. 25,000
To Raju A/c 25,000
Journal Entries in the Books of Bhanu (Endorsee)
2015
To Raju A/c 25,000
Apr 4 Raju A/c...…………………..……….Dr. 25,000

Apr 4 Cash A/c...……………….…………..Dr. 25,000
To Raju A/c 25,000
(Being cash received from Raju after the bill
was dishonored)
Note: A combined entry for the dishonored bill met on the same date can be written as follows:
Apr 4. Cash A/c...……………….………Dr.
(Being cash received from Raju after the bill was dishonored)
Illustration 13: Lakshmi draws a bill on Bharati for ` 25,000 on 1st January 2015 for 3 months
and endorses the bill to Subadra. The bill is dishonored on the due date. The bill is taken up by
Lakshmi. Pass necessary entries in the books of all the parties.
Solution:
Journal Entries in the Books of Lakshmi (Drawer)
2015
To Bharati A/c 25,000
(Being the bill drawn on Bharati)
Jan 1 Subadra A/c...………………………..Dr. 25,000
Apr 4 Bharati A/c...…………….…………...Dr. 25,000
To Cash A/c 25,000
(Being the dishonored bill met)
Journal Entries in the Books of Bharati (Drawee)
2015
Jan 1 Lakshmi A/c...…..……………….......Dr. 25,000
To Lakshmi A/c 25,000
Journal Entries in the Books of Subadra (Endorsee)

2015
To Lakshmi A/c 25,000
Apr 4 Cash A/c...……………….…………..Dr. 25,000
(Being cash received from Lakshmi after the
bill was dishonored)
Illustration 14: Sreenu draws a bill on Prama on October 1, 2014 for ` 40,000 at 3 months and
discounts it with his bankers at 5%. The bill is dishonored on the due date. Pass journal entries in the
books of both the parties.
Solution:
Journal Entries in the Books of Sreenu (Drawer)
2014
To Prama A/c 40,000
(Being the bill drawn on Prama)
Oct 1 Bank A/c...……………….…………..Dr. 39,500
Discount A/c ………………………...Dr. 500
(Being the bill discounted with bank @ 5% p.a.)
2015
Jan 4 Prama A/c...……………………….....Dr. 40,000
To Bank A/c 40,000
(Being the discounted bill dishonored)
Journal Entries in the Books of Prama (Drawee)
2014
Oct 1 Sreenu A/c...……..……………….....Dr. 40,000
2015
Jan 4 Bills Payable A/c...…………………..Dr. 40,000
To Sreenu A/c 40,000
Illustration 15: Prasanna draws a bill on Praveena on October 1, 2014 for ` 30,000 at 2 months
and sends it to her bankers for collection. The bill is dishonored on the due date. Pass journal entries in
the books of both the parties.
Solution:
Journal Entries in the Books of Prasanna (Drawer)
2014
Oct 1 Bills Receivable A/c...………………..Dr. 30,000
To Praveena A/c 30,000
(Being the bill drawn on Praveena)
Oct 1 Bank for Collection A/c...…………….Dr. 30,000
(Being the bill sent for collection)
Dec 4 Praveena A/c...……………………......Dr. 30,000
To Bank for Collection A/c 30,000
(Being the bill for collection dishonored)
Journal Entries in the Books of Praveena (Drawee)
2014
Oct 1 Prasanna A/c...……..…………….......Dr. 30,000
Dec 4 Bills Payable A/c...…………………..Dr. 30,000
To Prasanna A/c 30,000
Illustration 16: On 1st January 2015, A sold goods to B of the value ` 26,000 and drew upon
him a bill at 4 months for that amount. On 1st February, A purchased from C goods valued ` 52,000
and in payment handed B’s acceptance to C and also Cash ` 25,340, C allowing ` 660 by way of
discount. On maturity, B’s bill was dishonored and A had to take it up. Show the entries in the books
of A, B and C.
Solution:
Journal Entries in the Books of A (Drawer)
2015
Jan 1 B’s A/c...………………….………….Dr. 26,000
To Sales A/c 26,000
(Being goods sold on credit)
To B’s A/c 26,000
(Being the bill drawn on B)
Feb 1 Purchases A/c...……….…………......Dr. 52,000
To C’s A/c 52,000
(Being credit purchases)
Feb 1 C A/c...………………………………Dr. 52,000

To Cash A/c 25,340
To Discount A/c 660
(Being cash paid for credit purchases after
receiving discount and the bill endorsed for the
balance)
May 4 B A/c...………………….…………...Dr. 26,000
To Cash A/c 26,000
(Being the dishonored bill met)
Journal Entries in the Books of B (Drawee)
2015
Jan 1 Purchases A/c...…..………………..........Dr. 26,000
To A’s A/c 26,000
Jan 1 A’s A/c...…………....………………......Dr. 26,000
May 4 Bills Payable A/c...…………………......Dr. 26,000
To A’s A/c 26,000
Journal Entries in the Books of C (Endorsee)
2015
Feb 1 A’s A/c...………………….…………..Dr. 52,000
To Sales A/c 52,000
(Being goods sold on credit)
Feb 1 Bills Receivable A/c...………………...Dr. 26,000
Cash A/c...…………………..………...Dr. 25,340
Discount A/c...………………………...Dr. 660
To A’s A/c 52,000
May 4 Cash A/c...……………….…………....Dr. 26,000
(Being cash received from A after the endorsed
bill was dishonored)
Noting Charges
The fact that the bill is dishonored should be given to the Notary Public for getting it noted.
Noting is done by recording the fact of dishonor, date of dishonor and reasons for dishonor. For the
services rendered, the Notary Public charges the holder of the bill an amount called as Noting Charges.
Later, the holder of the bill collects the amount of noting charges from the drawee.
The following journal entries are to be passed in the books of the parties involved in the bill
when the bill is drawn by the drawer and dishonored by the acceptor on the due date.
Transaction Books of Drawer/Endorsee Books of Drawee
Noting Charges paid on the bill Noting Charges A/c………....Dr. No Entry
dishonored To Cash A/c
Noting Charges transferred to Drawee A/c…….…………....Dr. Noting Charges A/c………....Dr.
the Acceptor To Noting Charges A/c To Drawer A/c
Combined Entry: Drawee A/c……….. Dr.
Instead of two entries, one To Cash A/c
combined entry can be passed.
Illustration 17: Suguna received a bill on January 1, 2015 for ` 10,000 duly accepted by
Darshini. Suguna discounts this bill on the same date for ` 9,600 with her bankers. On the due date
April 4, the bill was dishonored and Suguna paid ` 10,100 including noting charges to the bankers.
Show entries in the books of both the parties.
Solution:
Journal Entries in the Books of Suguna (Drawer)
2015
To Darshini A/c 10,000
(Being the bill drawn on Darshini)
Jan 1 Cash A/c...…………………………...Dr. 9,600
Discount A/c ………………………...Dr. 400
Apr 4 Darshini A/c...………….…………....Dr. 10,100
To Cash A/c 10,100
(Being the bill dishonored including noting charges)
Journal Entries in the Books of Darshini (Drawee)
2015
Jan 1 Suguna A/c...…………………….......Dr. 10,000
Noting Charges A/c...………………..Dr. 100
To Suguna A/c 10,100
(Being the bill dishonored on due date and
noting charges payable)
Illustration 18: Sandhya owes on January 1, 2015 to Gayathri ` 15,000 on account of receiving
cash from her and on the same date, she has to receive ` 18,400 form Haritha. She receives from
Haritha a cheque for ` 400; a bill for ` 15,000 due after 3 months and another bill for ` 3,000 due after
one month. She endorsed to Gayathri the bill for ` 15,000 which was paid on maturity but the second
bill was dishonored and noting charges amounted to ` 200.
Solution:
Journal Entries in the Books of Sandhya
2015
Jan 1 Cash A/c...………………………….Dr. 15,000
To Gayathri A/c 15,000
(Being amount due to Gayathri)
Jan 1 Cash A/c...………………………….Dr. 400
Bills Receivable A/c ……………….Dr. 15,000
Bills Receivable A/c ……………….Dr. 3,000
To Haritha A/c 18,400
(Being cash and bills received)
Jan 1 Gayathri A/c...………..…………….Dr. 15,000
(Being the 1st bill endorsed to Gayathri)
Feb 4 Haritha A/c...………….…………....Dr. 3,200
To Cash A/c 200
(Being the bill dishonored including noting
charges)
Journal Entries in the Books of Gayathri
2015
Jan 1 Sandhya A/c...……………………....Dr. 15,000
To Cash A/c 15,000
(Being loan given)
Jan 1 Bills Receivable A/c...……………....Dr. 15,000
To Sandhya A/c 15,000
Apr 4 Cash A/c...…………….……………..Dr. 15,000
Journal Entries in the Books of Haritha
2015
Jan 1 Sandhya A/c ………………………...Dr. 18,400
To Cash A/c 400
(Being payment made partly in cash and bills
accepted for the balance)
Feb 4 Bills Payable A/c...…………………..Dr. 3,000

Noting Charges A/c...………………..Dr. 200
To Sandhya A/c 3,200
(Being the bill dishonored on due date and
To Cash A/c 15,000
(Being the first bill honored on due date)
Renewal of Bills
‘Renewal of the bill’ refers to drawing a new bill when the acceptor approaches the drawer to
cancel the old bill and draw a new bill. In order to renew the bill, the following steps would be followed:
 Cancel the old bill (same entry as in the case of dishonor of the bill)
 Charging of interest by the drawer
 Accepting the new bill with a renewed date by the acceptor/drawee which may be for the
whole amount of the old bill or for a partial amount.
The new bill will be for the amount of the original bill if interest is paid in cash, otherwise, the
new bill should include the amount of interest also along with the original amount.
when the new bill is drawn by the drawer and accepted by the Acceptor/Drawee.
1. Cancellation of the old bill:
(a) Retained bill cancelled Acceptor A/c…….………...Dr. Bills Payable A/c…………..Dr.
To Bills Receivable A/c To Drawer A/c
(b) Endorsed bill cancelled Acceptor A/c….…………...Dr. Bills Payable A/c…………..Dr.
To Endorsee/Cash A/c To Drawer A/c
(c) Discounted bill Acceptor A/c……………....Dr. Bills Payable A/c…………..Dr.
cancelled To Bank A/c To Drawer A/c
(d) Bill sent to Bank for Acceptor A/c………………Dr. Bills Payable A/c…………..Dr.
collection cancelled To Bank for Collection A/c To Drawer A/c
2. Interest charged Acceptor A/c…………..…..Dr. Interest A/c…………….…..Dr.
To Interest A/c To Drawer A/c
3. New bill drawn Bills Receivable A/c………Dr. Drawer A/c…….…………..Dr.
To Acceptor A/c To Bills Payable A/c
4. New bill honored Cash A/c………………..….Dr. Drawer A/c…….…………..Dr.
To Acceptor A/c To Cash A/c
Illustration 19: Sarita purchased goods from Geeta on credit for ` 12,000 on 1st April 2015.
This debt was discharged by accepting a bill dated 15th April 2015 for 3 months. On the due date,
Sarita requested Geeta to accept ` 4,000 in cash and draw a bill for the balance for a further period of
3 months for which Geeta agreed provided that interest for the balance amount is paid in cash at
9% p.a. Sarita agreed to this agreement. On 21st October 2015, Sarita dishonored this second bill and
noting charges amounted to ` 200. Write up the journal entries in the books of both parties.
Solution:
Journal Entries in the Books of Geeta (Drawer)
2015
Apr 1 Sarita A/c...…………………………..Dr. 12,000
To Sales A/c 12,000
(Being credit sales)
Apr 15 Bills Receivable A/c...……………….Dr. 12,000
To Sarita A/c 12,000
(Being the bill drawn on Sarita)
July 18 Sarita A/c…….………………….…...Dr. 12,000
(Being the bill cancelled)
July 18 Cash A/c…….……………………....Dr. 4,000
To Sarita A/c 4,000
(Being cash received)
July 18 Cash A/c…….……………………....Dr. 180
To Interest A/c 180
(Being interest received – 8,000 × 9% × 3/12)
July 18 Bills Receivable A/c...………………Dr. 8,000
To Sarita A/c 8,000
(Being a new bill drawn on Sarita)
Oct 21 Sarita A/c…….………………….…..Dr. 8,200
To Cash 200
(Being the new bill dishonored and noting
charges payable by Sarita)
Journal Entries in the Books of Sarita (Drawee)
2015
Apr 1 Purchases A/c...……………………...Dr. 12,000
To Geeta A/c 12,000
Apr 15 Geeta A/c...………….……………....Dr. 12,000
July 18 Bills Payable A/c…….………….…..Dr. 12,000
To Geeta A/c 12,000
(Being the bill cancelled)
July 18 Geeta A/c…….……………………...Dr. 4,000
To Cash A/c 4,000
(Being cash paid)
July 18 Interest A/c…….…………………....Dr. 180

To Cash A/c 180
(Being interest paid)
July 18 Geeta A/c...………….……………....Dr. 8,000
(Being the new bill drawn accepted)
Oct 21 Bills Payable A/c...………………….Dr. 8,000
Noting Charges A/c...……………….Dr. 200
To Geeta A/c 8,200
(Being the new bill dishonored on due date and
Illustration 20: On December 1st 2014, Ramu sold goods to Deepu worth ` 50,000 for which he
drew a bills payable after 3 months. The bill was duly accepted by Deepu and then discounted by
Ramu with his bank for ` 49,500. On maturity, the bill was dishonored and taken up by Ramu who
had to pay ` 200 as noting charges. Deepu then accepted a new bill for ` 50,500 (including ` 300 for
interest) payable after 2 months. Pass necessary entries in the books of both the parties.
Solution:
Journal Entries in the Books of Ramu (Drawer)
2014
Dec 1 Deepu A/c...…………………………Dr. 50,000
To Sales A/c 50,000
(Being credit sales)
Dec 1 Bills Receivable A/c...………………Dr. 50,000
To Deepu A/c 50,000
(Being the bill drawn)
Dec 1 Cash A/c…….………………….…...Dr. 49,500
Discount A/c ………………………..Dr. 500
2015
Mar 4 Deepu A/c……………………….…..Dr. 50,200
To Cash A/c 50,200
(Being the discounted bill dishonored and
noting charges recorded)
Mar 4 Deepu A/c…….…………………......Dr. 300
To Interest A/c 300
(Being interest charged)
Mar 4 Bills Receivable A/c...………………Dr. 50,500
To Deepu A/c 50,500
(Being a new bill drawn with noting charges
and interest )
Journal Entries in the Books of Deepu (Drawee)

2014
Dec 1 Purchases A/c...……………………..Dr. 50,000
To Ramu A/c 50,000
Dec 1 Ramu A/c...…..……….……………..Dr. 50,000
2015
Mar 4 Bills Payable A/c…….………….…..Dr. 50,000
To Ramu A/c 50,000
Mar 4 Ramu A/c...………………………….Dr. 50,000
Noting Charges A/c...……………….Dr. 200
Interest A/c…….……………….…...Dr. 300
(Being the new bill accepted with noting
charges and interest payable)
Retiring of Bills under Rebate

The Acceptor of bills of exchange sometimes desires to meet the bill before its maturity if he has
sufficient funds at his disposal and approaches the holder of the bill to accept the payment before the
due date. If the holder accepts the proposal, he will withdraw the bill and such a withdrawal is called
“retirement of a bill of exchange”.
The holder of the bill generally allows the Acceptor, a rebate or discount for the unexpired period
of the bill which is an expense for the holder and revenue for the acceptor of the bill. The accounting
treatment is similar to cash discount.
when the bill is retired under rebate.
Bill drawn Bills Receivable A/c…….…..Dr. Drawer A/c…………..……..Dr.
To Acceptor A/c To Bills Payable A/c
Bill met before the due date Cash A/c………………..…...Dr. Bills Payable A/c…….……..Dr.
Rebate A/c…….……....….....Dr. To Cash A/c
To Bills Receivable A/c To Rebate A/c
Illustration 21: Prama draws a bill for 2 months on January 1, 2016 for ` 20,000 on Sreenu who
accepts and returns it to Prama. Sreenu meets the bill one month before the due date for which a rebate
of ` 1,000 is received. Give Journal Entries.
Solution:
Journal Entries in the Books of Prama (Drawer)
2016
Jan 1 Bills Receivable A/c...………………Dr. 20,000
To Sreenu A/c 20,000
Feb 4 Cash A/c…….………………….…....Dr. 19,000
Rebate A/c …………………………..Dr. 1,000
(Being the bill met before the due date and
rebate given)
Journal Entries in the Books of Sreenu (Drawee)
2016
Jan 1 Prama A/c...…..……….…………….Dr. 20,000
Feb 4 Bills Payable A/c…….………….…..Dr. 20,000
To Cash A/c 19,000
To Rebate A/c 1,000
rebate received)
Illustration 22: Das accepted a bill for 3 months for ` 50,000 drawn on him by Seetha on
July 1, 2016 for a debt he owed to Seetha. The bill was discounted on the same date by Seetha at 5% p.a.
A day prior to the due date of the bill, Das intimated Seetha of his inability to honor the bill.
Seetha agreed to renew the bill for 2 months provided Das would pay ` 32,000 in part settlement
including ` 2,000 by way of interest.
On Das agreeing to the above conditions, Seetha drew a new bill for the balance due for 2 months
and this bill was accepted by Das. This new bill was retired one month before the due date, rebate
being ` 3,000. Pass necessary Journal Entries.
Solution:
Journal Entries in the Books of Seetha (Drawer)
2016
To Das A/c 50,000
July 1 Cash A/c...………………….………..Dr. 49,375
Discount A/c ………………………...Dr. 625
(Being the bill discounted – 50,000 × 5% × 3/12)
Oct 3 Das A/c...…………………………….Dr. 50,000

To Bank A/c 50,000
(Being the discounted bill dishonored)
Oct 3 Cash A/c...…………………………...Dr. 32,000
To Interest A/c 2,000
To Das A/c 30,000
(Being interest and a part of the value of the bill
received)
To Das A/c 20,000
(Being the new bill drawn for the balance
amount due)
Nov 6 Cash A/c…….………………….…....Dr. 17,000
Rebate A/c ……..…………………. ..Dr. 3,000
(Being the bill met one month before the due
date and rebate given)
Journal Entries in the Books of Das (Drawee)
2016
July 1 Seetha A/c...…..……….……………..Dr. 50,000
Oct 3 Bills Payable A/c…….………….…...Dr. 50,000
To Seetha A/c 50,000
Oct 3 Seetha A/c...…..……….…………….Dr. 30,000
Interest A/c...…..…..….……………..Dr. 2,000
To Cash A/c 32,000
(Being the settlement of a part of the value of
the bill and interest paid)
Oct 3 Seetha A/c...…..……….…………….Dr. 20,000
Nov 6 Bills Payable A/c…….………….…..Dr. 20,000
To Cash A/c 17,000
To Rebate A/c 3,000
rebate received)
Accommodation Bills
Generally, a bill of exchange is drawn by a creditor on his debtor to settle a trade debt and
therefore, the bill is said to be a Trade Bill. On the other hand, Accommodation Bill is a bill of
exchange which is drawn, accepted and endorsed by businessmen without any consideration in order
to oblige a friend or to give him a temporary assistance or to provide him a loan or to accommodate
one or more parties. By accepting such a bill, the acceptor is able to lend his name and is liable to the
third party; and the other party (Drawer) taking advantage of the reputation of the acceptor, gets it
discounted with his bank and receives cash immediately. The Drawer, before the maturity date, is
required to provide the Acceptor with funds to honor the bill on the due date.
Trade Bill vs. Accommodation Bills
Sr. No. Points of Difference Trade Bills Accommodation Bills
1 Drawer Creditors draw the bill and are Drawn and accepted to
accepted by the Debtors oblige a friend
2 Purpose Trade Bills are drawn for trade Accommodation bills are
purposes drawn and accepted for
financial assistance
3 Discounting Trade Bills can be retained, Accommodation bills should
discounted, endorsed or sent to be compulsorily discounted
bank for collection with the bank
4 Consideration Proper consideration is required No consideration
5 Liability Trade Bill is a proof of debts Accommodation bill is not a
proof of debts
6 Legality Drawer can resort to legal action No legal action can be taken
against the Drawee for recovering for recovering the amount
the debt due against these bills by the
immediate parties
The accounting treatment of Accommodation Bills is similar to that of the Trade Bills. An
accommodation bill can be drawn in three different ways.
(a) Bill Drawn for the Accommodation of Drawer only
Bill is drawn by the person (Drawer) for his own benefit. Accommodation is made by the Drawee
to help the drawer financially.
Illustration 23: Ananth who is in need of funds persuades Padmaja to help him by accepting an
accommodation bill for ` 40,000 at 3 months. Padmaja accepted the bill on 3rd March 2016. On the same
date, Ananth got the bill discounted with his bankers at 9% p.a. On the due date, Ananth sent the amount
of the bill to Padmaja who honored the bill. Give Journal Entries in the books of both the parties.
Solution:
Journal Entries in the Books of Ananth (Drawer)
2016
To Padmaja A/c 40,000
Mar 3 Cash A/c…….………………….…...Dr. 39,100
Discount A/c ………………………..Dr. 900
Jun 6 Padmaja A/c…….……….…….…....Dr. 40,000
To Cash A/c 40,000
(Being the amount of the bill sent to Padmaja to
enable her to meet her acceptance)
Journal Entries in the Books of Padmaja (Drawee)

2016
Mar 3 Ananth A/c...…..……….…………….Dr. 40,000
Jun 6 Cash A/c…….…………………..…...Dr. 40,000
To Ananth A/c 40,000
(Being the amount of the bill received to honor
the bill)
Jun 6 Bills Payable A/c…….………….…...Dr. 40,000
To Cash A/c 40,000
(b) Bill Drawn for the Benefit of Both the Parties

Here, the bill is drawn by one of the parties and the proceeds of the bill are shared by both the
parties.
Illustration 24: On 2nd February, Harish draws a bill on Sirish for ` 18,000 payable after
3 months. The bill is discounted on 5th February 2016 at 10% per annum. On the same date, Harish
remitted half the proceeds of the bill to Sirish. On 2nd May, Harish remitted ` 9,000 to Sirish to
enable the latter meet his acceptance on the date of maturity. Sirish met the bill on the due date.
Journalise.
Solution:
Journal Entries in the Books of Harish (Drawer)
2016
Feb 2 Bills Receivable A/c...……………….Dr. 18,000
To Sirish A/c 18,000
Feb 5 Cash A/c…….………………….…....Dr. 17,550
Discount A/c ………………………...Dr. 450
Feb 5 Sirish A/c…….……….…….……....Dr. 9,000
To Cash A/c 8,775
To Discount A/c 225
(Being half of the proceeds remitted to Sirish)
May 2 Sirish A/c…….……….…….….…...Dr. 9,000
To Cash A/c 9,000
(Being the remittance of the balance due)
Journal Entries in the Books of Sirish (Drawee)

2016
Feb 2 Harish A/c...…..……….…………….Dr. 18,000
Feb 5 Cash A/c…….…………………..…...Dr. 8,775
Discount A/c ………………………...Dr. 225
To Harish A/c 9,000
(Being half of the proceeds received and
discount charged)
May 2 Cash A/c…….……………………….Dr. 9,000
To Harish A/c 9,000
(Being the receipt of balance amount due)
May 5 Bills Payable A/c…….………….…...Dr. 18,000
To Cash A/c 18,000
Illustration 25: Harish draws a two months bill for ` 36,000 on Swetha on January 1, 2016 who
accepts the bill for the mutual accommodation for both to the extent of 2/3 and 1/3 respectively.
Harish immediately discounts the same for ` 33,840 and remits 1/3rd of the proceeds to Swetha.
Before the due date, Harish did not forward his portion of the bill but Geetha meets it on the due date.
Solution:
Journal Entries in the Books of Harish (Drawer)
2016
To Swetha A/c 36,000
Jan 1 Cash A/c…….………………….…....Dr. 33,840
Discount A/c ………………………...Dr. 2,160
Jan 1 Swetha A/c…….……….…….……...Dr. 12,000
To Cash A/c 11,280
To Discount A/c 720
(Being1/3 of the proceeds remitted to Swetha)
Mar 4 Swetha A/c…….……….…….….…..Dr. 24,000
To P & L A/c 24,000
(Being the amount transferred to P & L
Account)
Journal Entries in the Books of Swetha (Drawee)

2016
Jan 1 Harish A/c...…..……….…………….Dr. 36,000
Jan 1 Cash A/c…….…………………..…...Dr. 11,280
Discount A/c ………………………...Dr. 720
(Being 1/3rd of the proceeds received)
Mar 4 P & L A/c…….………………………Dr. 24,000
(Being the non-receipt of Harish share)
Mar 4 Bills Payable A/c…….………….…....Dr. 36,000
To Cash A/c 36,000
(c) Mutual Accommodation, When Bills are Drawn on Each Other

Here, both the parties draw bills on each other for their own accommodation and the difference
amount is settled by sending the amount by one party to another.
Illustration 26: For mutual accommodation, Narayana draws a bill on Veena at 4 months for
` 10,000 on January 1, 2016 and Veena draws on Narayana on the same date a bill at 4 months for
` 12,000. The bills are discounted by both the parties at 5% p.a.
On maturity, Veena honors her acceptance and remits the balance ` 2,000 to Narayana to
enable him to meet his acceptance. The bill is met by Narayana on the due date. Pass Journal
Entries.
Solution:
Journal Entries in the Books of Narayana
2016
Jan 1 Bills Receivable A/c...………………..Dr. 10,000
To Veena A/c 10,000
Jan 1 Veena A/c...…..……….……………...Dr. 12,000
Jan 1 Cash A/c…….………………….….....Dr. 9,833
Discount A/c ………………………....Dr. 167
May 4 Cash A/c…….………………………..Dr. 2,000

To Veena A/c 2,000
(Being the balance amount received)
May 4 Bills Payable A/c…….………….…....Dr. 12,000
To Cash A/c 12,000
Journal Entries in the Books of Veena
2016
Jan 1 Narayan A/c...…..……….…………...Dr. 10,000
To Narayan A/c 12,000
Jan 1 Cash A/c…….…………………..…...Dr. 11,800
Discount A/c ………………………...Dr. 200
May 4 Bills Payable A/c…….………….…..Dr. 10,000
To Cash A/c 10,000
Mar 4 Narayana A/c…….…….……….…...Dr. 2,000
To Cash A/c 2,000
(Being the balance amount remitted)
Illustration 27: On 1st May, 2016, Anitha draws a bill on Babitha at 4 months for ` 20,000 and
Babitha draws on Anitha for a similar term but for ` 18,000. Both the bills are accepted and discounted
respectively at 5% p.a. At maturity, Anita meets her own acceptance but Babitha’s acceptance is
dishonored, with the result, Anitha is called upon to take it up. The banker charges ` 160 for the
expenses on the dishonored bill. Babitha then accepts a new bill for 3 months for the amount due by
her. Babitha’s bill account is debited with interest at 5% p.a. later which is included in the new bill and
the new bill is duly met at maturity.
Solution:
Journal Entries in the Books of Anitha
2016
To Babitha A/c 20,000
Jan 1 Babitha A/c...…..…….……………....Dr. 18,000
Jan 1 Cash A/c…….………………….…....Dr. 19,667

Discount A/c ………………………...Dr. 333
To Cash A/c 18,000
May 4 Babitha A/c…….…………………….Dr. 20,000
To Bank A/c 20,000
(Being the bill dishonoured by Babitha)
May 4 Noting Charges A/c…….…………....Dr. 160
To Cash A/c 160
(Being noting charges paid)
May 4 Babitha A/c…….…………………….Dr. 225
To Interest A/c 225
(Being interest charged – 18,000 × 5% × 3/12)
May 4 Bills Receivable A/c...……………….Dr. 18,385
To Babitha A/c 18,385
(Being the new bill drawn including Noting
Charges and Interest)
Aug 7 Cash A/c…….………………….…....Dr. 18,387
(Being the new bill honored) 18,387
Journal Entries in the Books of Babitha
2016
Jan 1 Anitha A/c...…..……….………….....Dr. 20,000
To Anitha A/c 18,000
Jan 1 Cash A/c…….…………………..…...Dr. 17,700
Discount A/c ………………………...Dr. 300
To Anitha A/c 20,000
(Being the bill dishonored and cancelled)
May 4 Noting Charges A/c…………….…....Dr. 160
To Anitha A/c 160
(Being noting charges payable)
May 4 Interest A/c……………….…….…....Dr. 225

To Anitha A/c 225
(Being noting charges payable)
Mar 4 Anitha A/c...…..……….………….....Dr. 18,385
(Being the new bill drawn accepted)
Aug 7 Bills Payable A/c……….……….…...Dr. 18,385
To Cash A/c 18,385
(Being the new bill honored)
Summary
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 to the order of, a certain
person, or to the bearer of the instrument. The parties involved in the bill are Drawer, Drawee and
Payee.
Bill of exchange is a negotiable instrument and is easily transferable for the settlement of claims
and debts and transmission of money from one place to another place will also become easy. It is a
conclusive proof of indebtedness. The bill can be retained by the drawer or discount it with the bank or
endorse the bill or send the bill for collection.
A bill is said to be discharged, when the acceptor of the bill makes the actual payment of the bill
on the maturity date. Refusal by the acceptor to make payment of the bill on the due date of the bill is
called ‘dishonor of the bill’.
The fact that the bill is dishonored should be given to the Notary Public for getting it noted.
Noting is done by recording the fact of dishonor, date of dishonor and reasons for dishonor. For the
services rendered, the Notary Public charges the holder of the bill some amount called as Noting Charges.
Renewal of the bill refers to drawing a new bill when the acceptor approaches the drawer to
cancel the old bill and draw a new bill. In order to renew the bill, first the old bill is cancelled; the
drawer charges interest and draws a new bill with a renewed date.
Glossary
 Bill of exchange: It 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 to the order of,
a certain person, or to the bearer of the instrument.
 Drawer: A person who draws the bill on the other party.
 Drawee: A person on whom the bill is drawn.
 Payee: A person to whom the bill amount is paid.
 Endorser: The person who endorses the bill.
 Endorsee: The person to whom the bill is endorsed.
 Bill honored: A bill is said to be discharged when the acceptor of the bill makes the actual
payment of the bill on the maturity date.
 Dishonor of the Bill: Refusal by the acceptor to make payment of the bill on the due date.
 Noting Charges: The fee charged for getting noted the fact that the bill is dishonored.
 Renewal of the Bill: Refers to drawing a new bill when the acceptor approaches the drawer
to cancel the old bill and draw a new bill.
Questions
1.What do you understand by ‘bill of exchange’?
2.Who are the parties involved in the bill of exchange?
3.List the features of the bill.
4.How is bill of exchange useful?
5.Give the journal entries for the bills drawn and honored in the books of all the parties.
6.What do you mean by Discounting of Bill?
7.What do you understand by ‘bill discharged’?
8.Explain the term ‘dishonor of the bill’ and give the journal entries in the books of the parties
involved in the bill when the bill is dishonored.
9. What do you mean by ‘Noting charges’? Give the journal entries for the same in the books of
the drawer and the drawee.
10. What are the steps involved in ‘Renewal of Bill’?
Problems
1. (a) Anand draws a bill of ` 5,000 on Bhanu on February 1, 2015 payable after 2 months and
after receiving acceptance, he discounted it for ` 4,900 with his bank on the same date.
(b) Anand also drew a bill of ` 3,000 on Chandra on February 15, 2015 which after acceptance
was endorsed to Dayanand.
(c) Anand has accepted a bill drawn by Gajanan for ` 4,000 of one month on February 20, 2015.
(d) Anand has dishonored the acceptance given to Harish for ` 2,500.
(e) Anand received an acceptance of Jain for ` 2,000 and deposited the same into his bank.
(f) Anand received cash ` 3,500 against the acceptance of Karunakar which was due on that date.
Journalize the above transactions in the books of Anand.
2. Swathi made a bill on Rathi for ` 50,000 on May 3, 2015 to be payable after 2 months. What
would be the entries in the following cases?
(a) Bill is retained till the due date and honored
(b) Bill is discounted and discount charges amounted to ` 250 and honored on the due date
(c) Bill is endorsed to Sathi and honored on the due date
(d) Bill is deposited in the bank for collection and honored on the due date
What would be the entries in the above cases if the bill is dishonored on the due date?
3. Sridevi draws a bill on Suguna for ` 10,000 on May 5, 2015. On return of acceptance by Suguna:
(a) Sridevi discounts the bill with her banker for ` 9,600
(b) Sridevi retains the bill with her
(c) Sridevi sends the bill to the bank for collection
(d) Sridevi endorses the bill to Ratnaprabha
On the due date, the bill is dishonored.
Pass the journal entries in the books of all the parties in each of the above cases.
4. A bill for ` 5,000 is drawn by Pradeep on Padma on March 7, 2015 and accepted by the latter.
The bill is dishonored on the due date. Show what entries would be passed in the books of
Pradeep and Padma under each of the following circumstances.
(a) If he had retained the bill till the due date.
(b) If he had endorsed it over to his creditor Ramu.
(c) If he had discounted it with his bankers for ` 4,850.
(d) If he had sent the same to the bankers for collection.
5. On 1st May 2015, Shanti sold goods to Chandra for ` 20,000 and drew a bill on him at
3 months after date for the amount. After the bill was duly accepted, Shanti endorsed it to
Shakuntala who discounted the bill with her bankers for ` 19,500. The bill was dishonored on
the due date. Noting charges paid by bank being ` 200. Pass the Journal entries in the books
of all the parties.
6. Seetha drew a bill on Gita for ` 10,000 payable after 2 months. After receiving the acceptance
from Gita, bill is endorsed to Sarita who again endorsed the bill to Vanita. Pass necessary
entries in the books of all the parties, when:
(a) Bill is retained by Vanita till the due date and honored
(b) Bill is discounted by Vanita and discount charges amounted to ` 300 and honored on the
due date
What would be the entries in the above cases if the bill is dishonored on the due date and
noting charges amounted to ` 100?
7. Anita purchased goods from Babita on credit for ` 40,000 on 1st March 2015. She accepted a
bill for ` 40,000 payable 2 months after date. On 25th April 2015, Anita approaches Babita
and requests her to cancel the bill and receive ` 24,000 and draw a new bill for the balance
payable after 3 months adding ` 800 for interest. Babita agrees to the proposal. Pass necessary
journal entries in the books of Anita and Babita.
8. On 1st January 2015, Shakuntala drew a bill on Lakshmi for ` 50,000 payable after 1 month.
Before due date, Lakshmi approached Shakuntala requesting her for extension of time by one
month and agreed to pay interest amounting to ` 100 which has been accepted by Shakuntala
and drew a new bill. The bill was accepted by Lakshmi and it was honored on the due date.
9. Hanumanth has drawn a bill of ` 10,000 on Chandra for a period of 2 months. Before due date,
Chandra agreeing to pay half of the amount of the bill and for another half, he requests for
extension of time for a consideration of ` 100 as interest. Hanumanth agreed and draws a new
bill which has been discounted with the bank by paying ` 50 discount and on the due date,
this new bill is dishonored and nothing charges amounted to ` 75.
10. Chandra has drawn a bill of ` 30,000 on Shanta on August 4, 2015 payable after 3 months.
Chandra endorsed the bill to Prama on the same day and Prama endorsed the bill to Darshi on
August, 2015 who has discounted the bill with the bank for ` 100. On the due date, Shanta
approached Chandra and requested for an extension and agreed to pay ` 200 as interest which
was accepted by Chandra. A new bill was drawn by Chandra on Shanta which after
acceptance was discounted by paying ` 25 as discount. On the due date, the bill was honored
by Shanta.
11. Nalini draws a bill for 3 months on January 1, 2016 for ` 35,000 on Dasarath who accepts and
returns it to Nalini. Dasarath meets the bill one month before the due date for which a rebate
of ` 3,000 is received. Give journal entries.
12. Shiva accepted a bill for 4 months for ` 40,000 drawn on him by Neelaveni on January 1, 2016
for a debt he owed to her. The bill was discounted on the same date by Neelaveni at 5% p.a.
A day prior to the due date of the bill, Shiva intimated Neelaveni of his inability to honor the
bill. Neelaveni agreed to renew the bill for 3 months provided Shiva would pay ` 20,000 in
part settlement including ` 2,000 by way of interest.
On Shiva agreeing to the above conditions, Neelaveni drew a new bill for the balance due for
2 months and this bill was accepted by Shiva. This new bill was retired one month before the
due date, rebate being ` 1,000. Pass necessary journal entries.
13. On 2nd February, Anitha draws a bill on Mallika for ` 12,000 payable after 3 months. Anitha
discounts the bill on 5th February and pays ` 300 as discount charges. On 2nd May, Anitha
hands over ` 12,000 to enable Mallika to meet her acceptance. On 5th May, Mallika meets the
bill. Journalise.
14. Sourabh for the accommodation of Moin accepts a two months bill for ` 25,000 drawn by
Moin on 26th February, 2016. Moin discounts the same for ` 24,850. On the due date, Moin
returns the amount to Sourabh who honors the bill. Pass entries.
15. For the mutual accommodation of Prabha and Vinod, Prabha draws a 3 months bill for
` 15,600 on May 1, 2016 which Vinod accepts and returns to Prabha. The bill is then
discounted by Prabha at a discount of ` 300. The proceeds are shared by both in the ratio of
2:1 respectively. On the due date, Prabha pays her share to Vinod who honors the bill.
16. Ramu draws a bill for ` 48,000 on Geetha on May 3, 2016 who accepts the bill for the mutual
accommodation for both to the extent of 2/3 and 1/3 respectively. Ramu discounts the same
for ` 45,120 and remits 1/3rd of the proceeds to Geetha. Before the due date, Ramu did not
forward his portion of the bill but Geetha meets it on the due date.
17. For mutual accommodation, Madhusudhan draws a bill on Sukanya at 4 months for ` 15,000
on January 1, 2016 and Sukanya draws on Madhusudhan on the same date a bill at 4 months
for ` 20,000. The bills are discounted by both the parties at 5% p.a.
On maturity, Sukanya honors her acceptance and remits the balance ` 5,000 to Madhusudhan
to enable him to meet his acceptance. The bill is met by Madhusudhan on the due date. Pass
Journal Entries.
18. On 1st Jan, 2016, Ranganath draws a bill on Usha Kiran at 3 months for ` 35,000 and Usha
Kiran draws on Ranganath for a similar term but for ` 29,000. Both the bills are accepted and
discounted respectively at 5% p.a. At maturity, Ranganath meets his own acceptance but Usha
Kiran’s acceptance is dishonored, with the result, Ranganath is called upon to take it up. The
banker charges ` 3,000 for the expenses on the dishonored bill. Usha Kiran then accepts a
new bill for 3 months for the amount due by her. Usha Kiran’s bill account is debited with
interest at 5% p.a. later which is included in the new bill and the new bill is duly met at
maturity.


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Financial

Dr. (Mrs.) Prashanta Athma

ISO 9001:2008 CERTIFIED

First Edition : 2017

The book on “Financial Accounting - II” is tailor-made to meet the requirements of

Dr. (Mrs.) Prashanta Athma

UNIT-I: BILLS OF EXCHANGE

UNIT-II: CONSIGNMENT ACCOUNTS

UNIT-III: JOINT VENTURE

UNIT-IV: ACCOUNTS FROM INCOMPLETE RECORDS

UNIT-V: ACCOUNTING FOR NON-PROFIT ORGANISATIONS

Meaning of the Bill

Definition of the Bill

Parties in the Bill

Features of the Bill

Advantages of the Bill

Bills of Exchange vs. Promissory Note

July 1 Lakshmi & Co. A/c...………………..Dr. 5,000

Nov 4 Cash A/c...……………….…………..Dr. 2,000

Aug 1 Bills Receivable A/c...……………….Dr. 10,000

Discounting of the Bill

Jan 1 Bank A/c...……………….…………..Dr. 4,900

Journal Entries in the Books of Kalyani (Endorsee)

Mar 8 Raghu A/c...………….……………....Dr. 1,200

Bill Sent to Bank for Collection

Date Particulars L.F. Debit (`) Credit (`)

Journal Entries in the Books of Harish (Drawee)

Journal Entries: Bill Dishonored

Journal Entries in the Books of Sruthi (Drawee)

Apr 4 Raju A/c...…………………..……….Dr. 25,000

Journal Entries in the Books of Subadra (Endorsee)

Feb 1 C A/c...………………………………Dr. 52,000

Feb 4 Bills Payable A/c...…………………..Dr. 3,000

July 18 Interest A/c…….…………………....Dr. 180

Journal Entries in the Books of Deepu (Drawee)

Retiring of Bills under Rebate

Oct 3 Das A/c...…………………………….Dr. 50,000

Journal Entries in the Books of Padmaja (Drawee)

(b) Bill Drawn for the Benefit of Both the Parties

Journal Entries in the Books of Sirish (Drawee)

Journal Entries in the Books of Swetha (Drawee)

Date Particulars L.F. Debit Credit

(c) Mutual Accommodation, When Bills are Drawn on Each Other

May 4 Cash A/c…….………………………..Dr. 2,000

Jan 1 Cash A/c…….………………….…....Dr. 19,667

May 4 Interest A/c……………….…….…....Dr. 225

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