Ch # 06 Bills of Exchange

Important Definitions and Concepts:

1. Bills of Exchange:
It is an unconditional order sent by the creditor to the debtor to pay a certain sum of money on a
fixed date to the holder of the bill.

MCQ: Bills of exchange is drawn under Negotiable Instrument Act – 1881

2. Parties of Bills of Exchange:

Drawer: A person who draws a bills of exchange is known as Drawer.

Drawee: A person who accept the bills of exchaged is known as Drawee

Payee: A person who will receive the amount of bills of exchange will become a
payee.

3. Types of Bills of Exchange:

1) Trade Bills: All those bills which are drawn and accepted against the sale and
purchase of goods are called trade bills.
2) Accommodation Bills: All those bills which are drawn and accepted without any
sale and purchase of goods but for the help of both or one party.
3) Inland Bills: All those bills which are drawn and accepted within the same
country are called inland bills. It means drawer and drawee both belong to the
same country.
4) Foreign Bill: All those bills which are drawn in one country and accepted and
payable in another country are called foreign bills. It means drawer and drawee
belongs to two different countries.
5) Term Bills: All those bills which are drawn and accepted for a specific period of
time and are payable at the end of that specific period are called term bills.
6) Demand Bills: All those bills which are drawn and accepted without any define
maturity but these are payable on the demand of its holder are called demand
bills.

Specific Terms used in Bills of exchange

4. Tenor: Tenor is the period of time after which a bill becomes payable. e.g. 2 months or
3 month.
MCQ: The legal tenor of a bill is 90 days.
 5. Maturity: Maturity is the due date at which the amount of the bill will be paid or
received.

6. Days of Grace: The three additional days which are allowed to drawee for the payment
of bill after its maturity are days of grace or grace days.

7. Endorsement of Bill: The process of transferring a bill from one party to another party
for the settlement of debt is called endorsement of bill.

8. Dishonor of a Bill: When the acceptor of the bill refuses to pay the amount of bill at its
maturity that is called dishonor of bill.

9. Noting Charges: A small fee which the notary public receives from the holder of bill in
case of dishonor of a bill.
MCQs: Noting charges are always paid by the Holder of bill
Noting charges are always the expense of Drawee

10. Discounting of a bill: When a drawer is in a need of fund before the maturity of a bill,
he goes to the bank and ask to the banker for the amount and banker transfer the amount
of bill to the drawer or holder account after deducting small fee called discount, that
process is called discounting of bills of exchange.

11. Renewal of a Bill: The cancellation of the old bill before its maturity in return for a new
bill for an extended period is called renewal of a bill.

12. Retiring of Bill: Retiring of bill means to pay the amount of the bill before due date
under a concession called rebate.

13. Rebate: Rebate is the concession in the amount of a bill if its drawee pays before its
maturity.
MCQs Rebate is Revenue for the drawee and is an Expense for the drawer.

14. Insolvency of a person: When a person is unable to pay his debts he is known as
insolvent and his position is known as insolvency position.
It means his liabilities are more than his assets.

15. Promissory Note: It is an unconditional promise signed by the maker to pay a certain
sum of money on a fixed date to its holder.
Journal Entries in the books of Drawer and Drawee
For Explanation we assume A Sold goods to B.
Here,
 A is Seller and he will draw a bill and will become a Drawer. He is also known as creditor of B.
 B is buyer and will accept the bill and will become a Drawee. He is also known as Debtor of A

Journal Entries
1. When goods are sold and purchased.
For example: A sold goods to B
A’s Book (Seller-Drawer-Creditor) B’s Book (Buyer-Drawee-Debitor)
B Account Dr Purchase Account Dr
Sales Account Cr A Account Cr

2. When Bill is drawn and accepted.

For example: A drew and B accepted a bill for three months and return it to A.
A’s Book (Seller-Drawer-Creditor) B’s Book (Buyer-Drawee-Debitor)
Bills Receivable Account Dr A Account Dr
B Account Cr Bills Payable Account Cr

After receiving back the Acceptance or Bill from B, Drawer has four possible options.
a. Retain (keep) the bill with himself and receive the amount at maturity.
b. Got the bill discounted from bank and bank will receive the amount at maturity
c. Endorse the bill to his creditor for settlement of his debt and 3 rd party will receive the amount at
maturity.
d. Sent the bill to bank for collection and bank will collect the amount of bill at maturity and
transfer the amount in Drawer’s bank account.
After accepting the bill Drawee has also four options.
a. Honored his acceptance (bill). It means he will pay the amount of bill at maturity.
b. Dishonored his acceptance (bill). It means he will not pay the amount of bill at maturity.
c. Make a request for renewal of bill. It means to make a request for the cancellation of old bill and
to accept a new bill
d. Got the bill retired under a rebate. It means he will pay the amount of bill before its maturity and
will receive a discount (rebate) from drawer.

3. When bill is with drawer and honored at maturity.

For example: B met his acceptance at maturity
A’s Book (Seller-Drawer-Creditor) B’s Book (Buyer-Drawee-Debitor)
Cash Account Dr Bills Payable Account Dr
Bills Receivable Account Cr Cash Account Cr
 4. When bill is with drawer and dishonored at maturity.
For example: B refuses to pay his acceptance at maturity
A’s Book (Seller-Drawer-Creditor) B’s Book (Buyer-Drawee-Debitor)
B Account Dr Bills Payable Account Dr
Bills Receivable Account Cr A Account Cr

If Noting charges are also paid by A.

B Account Dr Noting Charges Account Dr
Cash Account Cr A Account Cr

5. When bill is discounted from bank.

For example: A got the bill discounted from his bank @10%p.a
A’s Book (Seller-Drawer- B’s Book (Buyer-Drawee- Banker’s Book
Creditor) Debitor)
Bank Account Dr Bills Receivable A/C Dr
Discount Account Dr A Account Cr
Bills Receivable A/C Cr No Entry Discount A/C Cr

Discount of bill = Amount of Bill X Rate of Discount/100 X Time / 12

6. When bill is discounted from bank and honored at maturity
For example: at maturity B met his acceptance.
A’s Book (Seller-Drawer- B’s Book (Buyer-Drawee- Banker’s Book
Creditor) Debitor)
Bills Payable Account Dr Cash Account Dr
Cash Account Cr Bills Receivable A/C Cr
No Entry
7. When bill is discounted from bank and dishonored at maturity
For example: at maturity B refuses to pay his acceptance.
A’s Book (Seller-Drawer- B’s Book (Buyer-Drawee- Banker’s Book
Creditor) Debitor)
B Account Dr Bills Payable Account Dr A Account Dr
Bank Account Cr A Account Cr Bills Receivable A/C Cr
If noting charges are also paid
by bank:
B Account Dr Noting Charges Account Dr A Account Dr
Bank Account Cr A Account Cr Cash Account Cr
 8. When bill is endorsed to 3rd Party for the settlement of debt:
For example: A endorsed the bill to C for settlement of his debt
A’s Book (Seller-Drawer- B’s Book (Buyer-Drawee- C’s Book
Creditor) (Endorser) Debitor) (Endorsee)
C Account Dr Bills Receivable A/C Dr
Bills Receivable A/C Cr No Entry A Account Cr

9. When bill is endorsed to C and honored at maturity

For example: at maturity B met his acceptance.
A’s Book (Seller-Drawer- B’s Book (Buyer-Drawee- C’s Book
Creditor) Debitor) (Endorsee)
Bills Payable Account Dr Cash Account Dr
Cash Account Cr Bills Receivable A/C Cr
No Entry
10. When bill is endorse to C and dishonored at maturity
For example: at maturity B refuses to pay his acceptance.
A’s Book (Seller-Drawer- B’s Book (Buyer-Drawee- C’s Book
Creditor) Debitor) (Endorsee)
B Account Dr Bills Payable Account Dr A Account Dr
C Account Cr A Account Cr Bills Receivable A/C Cr
If noting charges are also paid
by bank:
B Account Dr Noting Charges Account Dr A Account Dr
C Account Cr A Account Cr Cash Account Cr

11. When bill is sent to bank for collection.

For example: A sent the bill to bank for collection
A’s Book (Seller-Drawer- B’s Book (Buyer-Drawee- Banker’s Book
Creditor) Debitor)
Bank for Collection A/C Dr
Bills Receivable A/C Cr No Entry No Entry
12. When bill is sent to bank for collection and honored at maturity
For example: at maturity B met his acceptance.
A’s Book (Seller-Drawer- B’s Book (Buyer-Drawee- Banker’s Book
Creditor) Debitor)
Cash Account Dr Bills Payable Account Dr Cash Account Dr
Bank for Coll. A/C Cr Cash Account Cr A Account Cr
If bank deduct collection
charges: A Account Dr
Collection charges A/C Dr No Entry Collection charges A/C Cr
Bank Account Cr
 13. When bill is sent to bank for collection and dishonored at maturity
For example: at maturity B refuses to pay his acceptance.
A’s Book (Seller-Drawer- B’s Book (Buyer-Drawee- Banker’s Book
Creditor) Debitor)
B Account Dr Bills Payable Account Dr
Bank for Coll. A/C Cr A Account Cr No Entry
If noting charges are also paid
by bank:
B Account Dr Noting Charges Account Dr A Account Dr
Bank Account Cr A Account Cr Cash Account Cr

Renewal of bills of exchange:

Sometime drawee is not in a position to pay the amount of bill or he may only pay a part of the amount of
the bill, in this case he requests drawer to cancel the old bill and drew a new bill for the balance along
with the interest. This is called renewal of a bill of exchange.
In case of renewal the following entries will be passed.
A) Cancellation of old bill
B) Recording of part payment (if any)
C) Recording of interest
a. Interest paid in cash
b. Interest due (will be included in the amount of new bill)
D) Recording of new bill
14. When a bill is renewed for an extended period
For example: B request A to renew a bill for three months along with the interest
A’s Book (Seller-Drawer-Creditor) B’s Book (Buyer-Drawee-Debitor)
B) Cancellation of old bill
B Account Dr Bills Payable Account Dr
Bills Receivable Account Cr A Account Cr

C) Recording of part payment (if any)

Cash Account Dr A Account Dr
B Account Cr Cash Account Cr

D) Recording of interest
a. If Interest is paid in cash
Cash Account Dr Interest Account Dr
Interest Account Cr Cash Account Cr

b. If Interest is due (will be

included in the amount of new
bill)
B Account Dr Interest Account Dr
Interest Account Cr A Account Cr

D Recording of new bill

Bills Receivable Account Dr A Account Dr
B Account Cr Bills Payable Account Cr

Amount of interest = Total amount due X Rate / 100 X Time of new bill / 12
Retiring the bill under a rebate:
Some times drawee pay the amount of bill before its maturity and draw allow him a concession in the
amount of bill, that is called retiring the bill under a rebate.
 Rebate is an expense to drawer
 Rebate is a revenue for the Drawee
Amount of Rebate = Amount of bill paid X Rate / 100 X Time / 12
15. When a bill is retired under a rebate before its maturity.
For example: B got the bill retired under a rebate of 5%.
A’s Book (Seller-Drawer-Creditor) B’s Book (Buyer-Drawee-Debitor)
Cash Account Dr Bills Payable Account Dr
Rebate Account Dr Cash Account Cr
Bills Receivable Account Cr Rebate Account Cr