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 Revision Notes
Class - 11 Accountancy
Chapter 8 - Bill Of Exchange

Definition
A bill of exchange is an instrument in writing, which consists of an unconditional
order duly signed by the maker of the bill directing to pay a specific sum of money
only to or to the order of a specific person or the bearer of the instrument.

Features of bills of exchange:

● It must be in written form and it should bear the signature of the party giving the
bill.
● It must contain an unconditional order to make payment.
● The amount of the bill of exchange must be definite with a fixed date.
● It must be signed by the maker (known as the drawer) of the bill.
● It must be signed by the acceptor (known as drawee) of the bill.

Parties to bills of exchange:-

1. Drawer: The drawer is the party that issues a bill of exchange. He is the seller of
goods entitled to receive money from someone
2. Drawee or acceptor: He/she is the purchaser of goods on whom the bill is drawn
and has to pay the amount that is mentioned in the bill.
3. Payee: The person who is entitled to get the payment is known as the payee. The
drawer himself or a other party may be the payee of the bill.

Class XI Accountancy www.vedantu.com 1

Advantages of bills of exchange
● It is helpful for a person in the purchase and sale of goods on credit and also helps
in availing mko discounting facility.
● Legal evidence.
● Endorsement is possible in the bill of exchange.
● It provides relief from sending reminders.
● Helpful in planning cash operations.
● Convenient means of making foreign payments.
● Saving money in circulation.
● Convenience for the purchaser.

Promissory note
The purchaser of the goods or debtor by himself prepares a note, signs it and gives
it to the seller of the goods. It is known as a promissory note. A promissory note is
an instrument in writing, which consists of an unconditional undertaking duly signed
by the maker to pay a certain sum of money to, or to the order of, a certain person.

Class XI Accountancy www.vedantu.com 2

Features
1. It must be in writing and the amount to be paid must be specified.
2. It must be signed by the maker of the bill also known as the promisor.
3. The name of the payee must be mentioned in the note.
4. It must be duly stamped according to its value as per the Stamp Duty Act.

Parties to a promissory note:

1. Maker: Those people who write a promissory note and sign it.
2. Payee: Those people who are entitled to get the payment.

The distinction between a bill of exchange and a promissory note:

Basis Bill of exchange Promissory note

1. Parties There may be three There are two parties to

parties, the drawer, the it, i.e. the maker is the
acceptor, and the payee. person who draws the
note and signs it and the
payee to whom the
specific amount is
payable.

2. Drawer Bill of exchange is Promissory note is

drawn by the purchaser drawn by the debtor
who purchased goods
on credit.

3. Order and Bill of exchange is an It is a promise to make

promise order to make payment. payment in the future.

Class XI Accountancy www.vedantu.com 3

 4. Payee The drawer of the bill A maker of a
can be the payee of the promissory note cannot
bill. be the payee of it.

Accounting Treatment:
For accounting, bills are divided into two categories:
(A) Bills receivable
(B) Bills payable

Different uses of bills receivable:-

1. He may keep it till the date of maturity.
2. He may discount the bill with the banker before the maturity date.
3. He may endorse to some other party before the date of maturity.
4. He may transfer it to his banker for collection.

● When the bill is retained by the drawer in his possession till the date of
maturity:

Transaction Books of drawer Books of drawer

( suppose X) ( suppose Y)

When X sold goods Y a/c Dr. Purchases a/c Dr.

to Y
To sales a/c To X a/c
( goods sold on ( Goods purchased on
credit) credit)

When X received a Bills receivable. Dr. X a/c Dr.

Class XI Accountancy www.vedantu.com 4

 bill duly accepted by To Y a/c To bills payable
Y a/c
( Acceptance
received) ( Acceptance given)

When the bill is Bank a/c Dr. Bills payable a/c

retained by X till the Dr.
To bills receivable
date of maturity and
a/c To bank a/c
Y pays the amount of
the bill on maturity ( The amount of bill ( The amount of bill
received on maturity) paid on maturity)

● When the bill is discounted from the bank:

Transaction Books of drawer Books of drawer

( suppose X) ( suppose Y)

When X discounts the Bank a/c Dr. No entry

bill from the bank
Discounting charges
a/c
To B/R a/c
( Bill discounted)

When Y pays the bill No entry Bills payable a/c

amount on the due Dr.
date
To bank a/c
( The amount of the
bill paid to the bank)

Class XI Accountancy www.vedantu.com 5

● Negotiation of a bill
Negotiation means the transfer of a bill of exchange to another person in such a
manner that the transferee of the bill becomes its holder, who has the right to possess
the bill in his own name and to recover the amount mentioned therein from
concerned parties.

● Modes of negotiations
1. Negotiation by delivery.
2. Negotiation by endorsement and delivery.

● Endorsement of a bill
Endorsement means signing the bill of exchange to transfer it to another.

Transactions Journal of X Journal of Y Journal of Z

If X endorsed a Z a/c Dr. No entry B/R a/c Dr.

bill in favour of
To B/R a/c To X
Z
( B/R endorsed ( B/R received)
to Z)

Y pays the No entry B/P a/c Dr. Bank a/c Dr.

amount of the
To bank a/c To B/R a/c
bill on the due
date ( The amount of ( The amount of
the bill paid on the bill received
due date) )

Class XI Accountancy www.vedantu.com 6

Retiring a bill under rebate
Retiring the bill is a case where the drawer makes the payment of a bill before its
due date.
In such a case, the holder of the bill usually allows him a discount, technically called
a rebate.
The rebate is a gain to the party making the payment and an expense of the party
receiving the payment.

Transactions Journal of X (drawer) Journal of Y (drawer)

If Y retires his Bank a/c Dr. B/P a/c Dr.

acceptance before the due
Rebate on bill a/c Dr. To bank a/c
date
To B/R a/c To rebate on bill a/c
( Amount received before ( Amount paid before the
the due date and rebate due date and rebate
allowed) received )

Dishonour of a bill
In case when the acceptor of a bill refuses to pay the due amount of the bill on it's
maturity date or if he becomes insolvent, this is known as dishonour of the bill.

Noting charges
The notary officer charges a minimum fee for the services of warning the drawer of
the bill to get clear in a specific period of time. This is known as noting charges.

Class XI Accountancy www.vedantu.com 7

 Transactions Drawer (X) Drawee( Y)

When ' Y ' the acceptor of Y a/c Dr. B/P a/c Dr.
the bill dishonours the
To B/R a/c To X a/c
bill on the due date
( Bill dishonoured or ( Bill dishonoured or
cancelled ) cancelled )

When 'X' pays noting Y a/c Dr. Noting charges a/c Dr.
charges
To cash a/c To X a/c
( Noting charges paid on ( Noting charges payable
Y's behalf) to X)

Usually, a compound Y a/c Dr. B/P a/c Dr.

entry is passed for the
To B/R a/c Noting charges a/c Dr.
two entries passed as
above To cash a/c To X a/c
(Bill dishonoured and ( Bill dishonoured and
noting charges paid) noting charges paid by X)

Renewal of bill
In case when the acceptor is unable to pay the bill amount on the due date. In that
case he/she may request the holder of the bill to cancel the original bill and draw a
new bill in replacement of the old one.

Transactions Drawer (X) Drawee(Y)

An entry is passed for Y a/c Dr. B/P a/c Dr.

the cancellation of the old
To B/R a/c To X a/c
bill.

Class XI Accountancy www.vedantu.com 8

 (Bill cancelled) (Bill cancelled)

When Y pays the amount Cash a/c Dr. Interest a/c Dr.
of interest in cash.
To interest a/c To cash a/c
(The amount of interest (The amount of interest
received in cash) paid in cash)

When Y does not pay the Y a/c Dr. Interest a/c Dr.
amount of interest in
To interest a/c To X a/c
cash.
(Interest receivable from (Interest payable to X)
Y)

When a new bill is B/R a/c Dr. X a/c Dr.

received from Y.
To Y To B/P
(New acceptance (New acceptance given)
received)

In case the bill discounted from the bank is dishonoured

In case if the bill is discounted from the bank and is dishonoured in that case noting
charges has to be paid by the bank. The noting charges are ultimately borne by the
acceptor as the bank recovers the noting charges from the person who discounted
the bill from the bank.

Journal of X (Drawer) Journal of Y (Drawee)

Y a/c Dr. B/P a/c Dr.

To bank a/c Noting charges a/c Dr.
(Bill dishonoured and noting charges To X a/c

Class XI Accountancy www.vedantu.com 9

 paid by the bank) (Bill dishonoured and noting charges
payable)

When the bill endorsed to a third party is dishonoured

In such a case, the noting charges must have been paid by the endorsed.
The acceptor bears the noting charges ultimately as the endorsee will recover the
noting charges from the endorser.

Transactions Journal of Journal of Journal of

drawer drawer endorsee
(Suppose X) (Suppose Y) (Suppose Z)

Suppose, a bill Y a/c B/P a/c X a/c Dr.

that was received Dr. Dr.
To B/R a/c
by X and Y, and
To Z a/c Noting charge a/c
was subsequently To cash a/c
endorsed to Z, is (Bill dishonoured To X a/c
(Bill dishonoured
dishonour due and the amount of
(Bill dishonoured and noting charges
date. bill + noting
and noting charges paid in cash)
charges receivable
payable to X)
from Y and
payable to Z)

Bills may be of two types:

(I) Trade bill
(II) Accommodation bills

Class XI Accountancy www.vedantu.com 10

Trade Bill
When a bill is accepted to settle a trade debt it is known as a trade bill.

Accommodation Bill
Sometimes, to oblige a friend, a bill may be accepted without consideration. Such a
bill is known as an accommodation bill or kite or windmill.

The distinction between an ordinary Bill (trade bill) and an accommodation

bill:-

Basis of distinction Trade Bills Accommodation Bills

Object These bills are drawn These bills are drawn for
against trade transactions financial assistance.
of sale and purchases.

Consideration These bills are drawn These bills are drawn

against proper without consideration.
consideration.

Proof of debt These bills are proof of These bills are not proof
debt. of debt because the
drawer is not a debtor.
The drawer is a debtor.

Let’s practice with some questions:-

On April 15, 2016, Suraj sold goods for Rs. 70,000 to Parmesh and drew upon
later a bill for the same amount payable after 3 months. The bill was accepted
by parmesh. Suraj discounted the bill from the bank for Rs. 67,000 on 30th April
2016.
On maturity, the bill was dishonoured. Parmesh agreed to pay Rs. 30,000 in

Class XI Accountancy www.vedantu.com 11

cash including Rs. 2,000 interest and accepted a new bill for 3 months. The new
bill was endorsed to Rajesh in full settlement of his account Rs. 45,000.
It was duly met on maturity. Pass entries in the books of Suraj.
Ans: In the Books of Suraj
Journal Entries
For the year ended 31st March 2017
Date Particulars L. Debit Credit
F (in Rs.) (in Rs.)
2016
April Parmesh a/c Dr. 70,000
15 To sales a/c 70,000
(Being goods sold to parmesh)
April Bills Receivable a/c Dr. 70,000
15 To parmesh a/c 70,000
(Acceptance received )
April Bank a/c Dr. 67,000
30 Discounting charges a/c 3,000
To Bills receivable a/c 70,000
( B/R discounted)
July 18 Parmesh a/c Dr. 70,000
To bank a/c 70,000
(Bill dishonoured )
July 18 Parmesh a/c Dr. 2,000
To interest a/c 2,000
(Interest due)
July 18 Cash /bank a/c Dr. 30,000
To parmesh a/c 30,000
(Cash received )
July 18 Bills Receivable a/c Dr. 42,000
To parmesh a/c 42,000
(New acceptance received )
July 18 Rajesh a/c Dr. 45,000
To bills receivable a/c 42,000
To Discount received a/c 3,000
(Bill endorsed in full settlement)

Class XI Accountancy www.vedantu.com 12

Question:
Narayan purchased goods for Rs.50,000 from Ravinder on Feb 1,2017.
Ravinder drew upon Narayan a bill of exchange for the same amount payable
after 30 days. On the due date Narayan dishonoured his acceptance.
Pass the necessary journal entries in the books of reminder in following cases:
(1) When the bill was retained by Ravinder with him till the date of it’s
maturity.
(2) When the bill was discounted by Ravinder immediately with his bank @6%
p.a.
(3) When the bill was endorsed to his creditor ganesha.
(4) When the bill was sent by ravinder to his bank for collection a few days
before it’s maturity.
Ans: In the Books of Ravinder
Journal Entries
For the year ended 31st March 2017
Date Particulars L. Debit Credit
F
2017
Feb.1 Narayan a/c Dr. 50,000
To sales a/c 50,000
( Goods sold to Narayan)
Feb.1 Bill receivable a/c Dr. 50,000
To Narayan a/c 50,000
(Acceptance received)
Case(i) When bill is retained :
March6 Narayan a/c Dr. 50,000
To bills receivable a/c 50,000
(Bill dishonoured)
Case When bill is discounted:
(ii)
Feb.1 Bank a/c Dr. 49,750
Discounting charges a/c 250

Class XI Accountancy www.vedantu.com 13

 To bills receivable a/c 50,000
(Bill discounted)
March 6 Narayan a/c Dr. 50,000
To bank a/c 50,000
(Bill dishonoured)
Case When bill is endorsed:
(iii)
Feb.1 Ganesh a/c Dr. 50,000
To bills receivable a/c 50,000
(Bill endorsed)
March 6 Narayan a/c Dr. 50,000
To Ganesh a/c 50,000
(Bill dishonoured)
Case(iv When the bill is sent for
) collection
……. Bill sent for collection a/c Dr. 50,000
To bills receivable a/c 50,000
(Bill sent for collection)
March 6 Narayan a/c Dr. 50,000
To bills sent for collection 50,000
a/c
(Bill dishonoured)

Question:
Kapil purchased goods for Rs.42,000 from gaurav on 1.2.2017 and accepted a
bill of exchange drawn by gaurav for the same amount. The bill was payable
after one month. On 25.2.2017 Gaurav sent the bill to his bank for collection.
The bill was duly presented by the bank. Kapil dishonoured the bill and the
bank paid Rs.100 as noting charges.
Record the necessary journal entries for the above transactions in the books of
kapil and gaurav.

Class XI Accountancy www.vedantu.com 14

Ans: In the Books of Kapil
Journal Entries
For the year ended 31st March 2017
Date Particulars L. Debit Credit
F
2017
Feb.1 Purchases a/c Dr. 42,000
To gaurav a/c 42,000
(Goods purchased from Gaurav)
Feb.2 Gaurav a/c Dr. 42,000
To bills payable a/c 42,000
(Acceptance given)
Mar.4 Bills payable a/c Dr. 42,000
Noting charges a/c Dr. 100
To gaurav a/c 42,100
(Acceptance dishonoured and
noting charges due)

In the Books of Gaurav

Journal Entries
For the year ended 31st March 2017
Date Particulars L. Debit Credit
F
2017
Feb.1 Kapil a/c Dr. 42,000
To sales a/c 42,000
(Goods sold to kapil)
Feb.1 Bills receivable a/c 42,000
Dr. 42,000
To kapil a/c
(Acceptance received from
kapil)
Feb.25 Bill sent for collection a/c 42,000
Dr. 42,000
To bills receivable a/c

Class XI Accountancy www.vedantu.com 15

 (Bill sent to the bank for
collection)
Mar.4 Kapil a/c Dr. 42,100
To bills sent for collection a/c 42,000
To bank a/c 100
(bill dishonored on due date
and paid the noting charges)

Class XI Accountancy www.vedantu.com 16

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