FEDERAL UNIVERSITY DUTSIN-MA KATSINA STATE

FACULTY OF MANAGEMENT SCIENCE

DEPARTMENT OF BUSINESS MANAGEMENT

Course Title: Introduction to Financial Accounting II

Course Code: ACC 212

Name:

Mat No: MAN/2021/

Question: Bill of Exchange Accounting

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 BILL OF EXCHANGE ACCOUNT.

INTRODUCTION

Meaning

A bill of exchange is a binding agreement by one party to pay a fixed amount of cash to another
party as of a predetermined date or on demand. Bill of exchanges are primarily used in
international trade.

Definition

According to negotiable instrument act 1881, sec 5, Bill of exchange is defined as an instrument
in writing, containing an unconditional order, signed by the maker, directing to a certain person,
to pay a certain sum of money, only to or to the order of certain person, or to the bearer of the
instrument.

Features of Bill of Exchange

 Bill of exchange must be in writing.

 Bill of exchanges are not a request to pay an order to pay.

 The order must be signed by the maker or seller.

 The order must be for the payment of money only.

 The money payable not vague and must be certain.

 It must be payable to a certain person mentioned in the instrument or to his order or to the
bearer of the document.
 The order must be unconditional.

 It facilitates credit sales and credit purchases.

 It must be stamped as per the requirement of law.

 Delivery of document is essential

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Parties to a Bill of Exchange

1. Drawer: Drawer is a person who writes/makes the Bill of Exchange. He is generally the
creditor who had sold goods on credit.
2. Drawee: Drawee is a person upon whom the bill is drawn. He is generally the debtor to
whom goods have been sold on credit. Bill is generally signed and accepted by the
Drawee.
3. Acceptor: He is the person who accepts the bill of exchange. Generally debtor/ drawee is
the acceptor but sometimes a bill of exchange may be accepted by some one also on
behalf of the debtor/drawee. Normally the drawee and acceptor are the same parties.
4. Payee: Payee is the person named in the Bill of exchange. The amount in the bill is paid
to the payee. In most cases Drawer and the payee will be the same.

What Does a Bill of Exchange Format Include?

The format of a bill of exchange includes the following details:

 The name of the person who writes the bill and authorises the recipient to make a
payment.
 The date on which the payment is to be made
 The details of the recipient
 Details of the payee
 An identification number
 Signature of the Drawer, i.e. the person who makes the bill.
 Stamp

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 SPECIMEN OF A BILL OF EXCHANGE

Types of Bill of Exchange?

There are several types of this bill. These are as follows:

1. Documentary bill of exchange – Such a bill is validated with specific documents that

affirm the trade transaction between the supplier and the beneficiary. This bill is again
categorised into two, i.e.:

a. Documents against payment

b. Documents against acceptance
2. Demand bill – As the name suggests, the payment is made when the demand bill is
provided to the recipient.
3. Inland bill – True to its name, such a bill can be made by a resident of India and is
payable within the territory of India only and not overseas.
4. Clean bill – This involves a higher interest rate when compared to other bills as it is free
of all documents.
5. Usance bill – A time frame binds this type of bill, and the payment has to be made by the
said date.

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 6. Foreign bill – When payments stated in a bill of exchange are made outside India's
boundaries; it is referred to as a foreign bill.
7. Accommodation bill – This type of bill of exchange is made and drawn without any
specific conditions. It is drawn to furnish monetary support and is agreed upon by both
the provider and the beneficiary. It does not include any commerce transactions of
products.
8. Promissory note – The debtor draws this type of instrument, and it states a promise
made by the debtor for making a specific payment within a specific time frame.

Advantages of Bill of Exchange

Following are the advantages of the bill of exchange:

1. Purchase and sale of goods on credit.

2. Discounting facility.

3. Easy to recover the amount.

4. Proof of debt.

5. Easily transferred.

6. Safely transferred.

7. Endorsable to other parties.

8. Certainty as to payment.

Accounting Treatment

For the person who draws the bill of exchange and gets it back after its due acceptance, it is a
bill receivable. For the person who accepts the bill, it is a bills payable. In case of a promissory
note for the maker it is a bills payable and for the person in whose favour the promissory note is
drawn it is a bills receivable. Bills receivables are assets and Bills payable are liabilities. Bills
and Notes are used interchangeably.

In the Books of Drawer/Promissor

A bill receivable can be treated in the following four ways by its receiver.

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1. He can retain it till the date of maturity, and
a. get it collected on date of maturity directly, or
b. get it collected through the banker.
2. He can get the bill discounted from the bank.

3. He can endorse the bill in favour of his Creditor.

The accounting treatment in the books of receiver under all the four alternatives is given
below under the assumption that the bill is duly honoured on maturity by the acceptor.

1. When the bill of exchange is retained by the receiver with him till date of its maturity:

On receiving the bill

Bills Receivable A/c Dr.
To Debtors A/c

On maturity of the bill

Cash/Bank A/c Dr.
To Bills Receivable A/c

However, when the bill of exchange is retained by the receiver with him and sent to bank for
collection a few days before maturity, the following two entries are recorded:
On sending the bill for collection
Bills Sent for Collection A/c Dr.
To Bills Receivable A/c

On receiving the advice from the bank that the bill has been collected

Bank A/c Dr.

To Bills Sent for Collection A/c

2. When the receiver gets the bill discounted from the bank:
On receiving the bill
Bills Receivable A/c Dr.

To Debtors A/c

On discounting the bill

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 Bank A/c Dr.

Discount A/c Dr.

To Bills Receivable A/c
On Maturity
No entry is recorded because the bill becomes the property of the bank, therefore, the bank
collects the amount of the bill from the acceptor and no journal entry is recorded in the books
of the drawer.
3. When the bill is endorsed by the receiver in favour of his creditor:
On receiving the bill
Bills Receivable A/c Dr.

To Debtor’s A/c
On endorsing the bill
Creditor’s A/c Dr.

To Bills Receivable A/c

On Maturity
No entry is recorded because the bill has been transferred in favour of the creditor, therefore
the creditor becomes its owner and will receive the payment on maturity. Hence, no entry is
recorded in the books of drawer or endorser.

In the Books of Acceptor/Promissor

The following journal entries are recorded in the books of the acceptor or promisesor under all
the four alternatives. It makes no difference whether the bill is retained discounted, endorsed or
pledged.
On accepting the bill
Creditor’s A/c Dr.
To Bills Payable A/c
On Maturity of the bill
Bills Payable A/c Dr.
To Bank A/c

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1. When the drawer retains the bill with him till the date of its maturity and gets the same
collected directly
Transaction Books of Creditor/Drawer Books of Debtor/

Acceptor
Sale/Purchase of goods Debtor’s A/c Dr. Purchases A/c Dr.

To Sales A/c To Creditor’s A/c

Receiving/Accepting the bill Bills Receivable A/c Dr. Creditor’s A/c Dr.

To Debtor’s A/c To Bills Payable A/c

Collection of the bill Cash/Bank A/c Dr. Bills Payable A/c Dr.

To Bills Receivable A/c To Cash/Bank A/c

Terms in Bill of Exchange

1. Date : It is the date on which the payment of the bill becomes due.

2. Days of Grace : To ascertain the period of the bill, three extra days are added, which can be
called as ‘Days of Grace’ to calculate the date of maturity.

3. Bill at Sight : Bills which are payable on presentation to the Drawee are known as ‘Bill at
Sight or Demand’.

4. Bill After Date : The period is counted from the date of acceptance of the bill in ‘Bill After
Date’.

5. Discounting of Bill : The process of receving the bill amount at a date earlier than the due
date from the bank, is known as ‘Discounting the Bill’. When the bill is discounted the bank
credits the trader’s account after decucting some discount. The discount is calculated at the
lending rate of the bank for the period that extends between the date of discounting of the
bill to the date of maturity.

6. Terms of the Bill : Bills is generally drawn for a certain period, say for two months or three
months. Bills may be drawn payable at sight on demand, on presentation, after date and so
on.

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7. Date of Maturity : It is the date of which the payment of the bill is due. It is calculated by
adding three days of grace. For example a bill drawn on 1.1.2013 for a period of two months
will mature on (2 months + 3 days) 3rd March, 2013.

8. Dishonour of a Bill : Dishonour means that the bill is not paid by a Drawee on the due date.
It arises when the acceptor refuses or is unable to pay the amount of bill, i.e., Bill of
Exchange, Promissory Note or cheque.

9. Notary Public : Notary Public is an officer appointed by the Central or State Government
to exercise the power and functions relating to noting and protesting of negotiable
instruments for dishonour. ‘Noting’ authenticates the fact of dishonour.

10. Renewal of Bill : When the acceptor of a bill is not in a position to meet the bill on due
date, he may, with the consent of the holder accept a fresh bill in place of

Illustration 1

Abu sold goods for N20,000 to Yusuf on credit on Jan 01, 2018. Abu drew a bill of exchange
upon Yusuf for the same amount for three months. Yusuf accepted the bill and returned it to
Abu. Yusuf met his acceptance on maturity. Record the necessary journal entries under the
following circumstances:
(i) Abu retained the bill till the date of its maturity and collected directly
(ii) Abu discounted the bill @ 12% per annum from his bank
(iii) Abu endorsed the bill to his creditor Ankit

(iv) Abu retained the bill and on March 31, 2018 Abu sent the bill for collection to its
bank. On April 05, 2018 bank advice was received.

Solution

Books of Abu Journal

(i) When the bill was retained till its maturity.
Date Particulars L.F. Debit Credit
Amount N Amount N

2018
Jan 01
Yusuf’s A/c Dr. 20,000

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 To Sales A/c 20,000
(Sold goods to Yusuf’s on credit)
Jan 01 Bills Receivable A/c Dr. 20,000
To Yusuf’s A/c 20,000
(Received Yusuf’s acceptance payable after
three months)
Apr.05 Bank A/c Dr. 20,000
To Bills Receivable A/c 20,000
(Yusuf met his acceptance on maturity)

(ii) When the bill was discounted from the book.

Journal
Date Particulars L.F Debit Credit
. Amount N Amount N
2018 Yusuf’s A/c Dr. 20,000
Jan 01
To Sales A/c 20,000
Jan 01 (Sold goods to Yusuf’s) 20,000
Bills Receivable A/c Dr.
To Yusuf’s A/c 20,000
Jan 01 (Received Yusuf’s acceptance three months) 19,400
Bank A/c Dr.
Discount A/c Dr. 600
To Bills Receivable A/c 20,000
(Yusuf’s acceptance discounted with the bank)

(iii) When Abu endorsed the bill in favour of his creditor Ankit.

Journal
Date Particulars L.F. Debit Credit
Amount N Amount
N
2018 Yusuf’s A/c Dr. 20,000
Jan. 01
To Sales A/c 20,000

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 Jan. 01 (Sold goods to Yusuf’s on credit) 20,000
Bills Receivable A/c Dr.
To Yusuf’s A/c 20,000
Jan. 01 (Received Yusuf’s acceptance for 20,000
three months)
Ankit’s A/c Dr.
To Bills Receivable A/c 20,000
(Yusuf acceptance endorsed in favour of
Ankit)

(iv) When the bill was sent for collection by Abu to the bank.

Journal
Date Particulars L.F Debit Credit
. Amount N Amount N
2018 Yusuf’s A/c Dr. 20,000
Jan. 01
To Sales A/c 20,000
Jan. 01 (Sold goods to Yusuf’s on credit) 20,000
Bills Receivable A/c Dr.
To Yusuf’s A/c 20,000
Mar. 31 (Received Yusuf’s acceptance 20,000
payable after three months)
Bills Sent for Collection A/c Dr.
To Bills Receivable A/c 20,000
Apr. (Bills sent for collection) 20,000
05
Bank A/c Dr.
To Bills sent for collection A/c 20,000
(Bills sent for collection collected by the
bank)

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 References:

Meaning of Bill of Exchange: https://ncert.nic.in/textbook/pdf/keac108.pdf

Bill of Exchange: https://nios.ac.in/media/documents/SrSec320NEW/320_Accountancy_Eng/

320_Accountancy_Eng_Lesson11.pdf

FINANCIAL ACCOUNTING 1.BILLS OF EXCHANGE

(https://josephscollege.ac.in/lms/Uploads/pdf/material/FinancialAccountingNotes.pdf)

What is Bill Of Exchange? Features, Examples: https://byjus.com/commerce/class-11-

accountancy-chapter-8-bill-of-exchange/

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