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Features of Bills of Exchange CA Foundation Notes

Bills of Exchange – CA Foundation, CPT notes, PDF

This article is about the Bills of Exchange for CA foundation CPT students. we also provide pdf file at the end.

Bills of Exchange

Bills of Exchange

What we will study in this chapter:

♦     What are Bills of Exchange & Promissory Note

♦     When & why these are made and the procedure thereof

♦     How the transactions, related to these are recorded (entered) in the account hooks.

STUDY IN THIS CHAPTER IS DIVIDED INTO FOLLOWING SECTIONS

  1. Trade bill (Genuine bill)
  2. Accommodation Bill
  3. TRADE BILL (GENUINE BILL)

INTRODUCTION

Often when goods are sold on credit, the seller would like that the purchaser should give a definite promise in writing to pay the amount of the goods on a certain date. The commercial practice has developed to convert these written promises into valuable instruments of credit. When a written promise is made in proper form and is properly stamped, it is supposed that the buyer has discharged his debt and that the seller has received payment. This is because written promises are often accepted by banks and money is advanced against them. Otherwise, also they can be passed on from person to person. The written promise is either in the form of a bill of exchange or in the form of a promissory note.

♦     In case of credit sale or purchase transactions, the bill of exchange or promissory note may be prepared. Such bills are known as trade bills or genuine bills.

♦     The person who is entitled to recover (Seller) will draw a bill on the purchaser. The purchaser will accept it and return it to the seller.

♦     Seller is the creditor when he draws the bill, he is called the drawer and generally, he will be payee (one who is entitled to receive the amount of bill) or he can name someone else as a payee.

♦     Purchaser is the debtor, he becomes a drawee when a bill is drawn on him and becomes acceptor when he accepts it

The student should not get an impression that against every credit transaction a bill or promissory note is made. It is a need-based thing. A creditor may draw a bill either if it has:

♦     some doubt about recoverability or possibility of future disputes or

♦     if he intends to raise money by discounting or

♦     wants to use it by endorsing it to others to whom he is liable to pay.

10.1     MEANING OF BILLS OF EXCHANGE

A bill of exchange has been defined as:

♦     an instrument in writing

♦     containing an unconditional order

♦     signed by the maker/drawer

♦     directing a certain person (drawee)

♦     to pay a certain sum of money only

♦     to or to the order of a certain person or to the hearer of the instrument, (payee)

Draft of a Bill of Exchange

To,
Mr. BAccepted Signed B
GokulpethStamp
Nagpur
Pay Rs. 5000 (Rupees five thousand only) to me or my order, 30 days after the date of bill, for value received.
15th April 2006Signed by ‘A’
Nagpur

♦     When such an order is accepted by writing on the face of the order itself, it becomes a valid bill of exchange.

♦     A cheque is a bill of exchange but all bill of exchanges are not a cheque.

♦     In the above bill of exchange ‘A’ is drawer as well as a payee and ‘B’ is the drawee

10.2 MEANING OF PROMISSORY NOTE

A promissory note is:

♦     an instrument in writing,

♦     not being a banknote or currency note,

♦     containing an unconditional undertaking (promise)

♦     signed by the maker ( promissor )

♦     to pay a certain sum of money only to or to the order of a certain person.

Under section 31(2) of the Reserve Bank of India Act, a promissory note cannot be made payable to bearer except by RBI &/or Central Government.

Draft of a Promissory Note

To,
Mr A
SitabardyStamp
Nagpur
I hereby promise (undertake) to pay you or your order a sum of Rs. 5000 (Rupees five thousand only) one month after the date of this note, for value received.
20th April 2006Signed by ‘B’
Nagpur

In the above promissory note ‘B’ is promissory ( same as drawee) ‘A’ is promisee (payee)

10.3 PARTIES TO A BILL OF EXCHANGE

There are three parties to a bill of exchange:

(i)    Drawer: a Drawer is a person, who draws the bill. He is the creditor who has the right to receive the money;

(ii)   Drawee.-Drawee (acceptor), is the person to whom the bill is addressed or on whom it is drawn and who accepts the bill. He is the debtor; who is liable to pay and

(iii) Payee. The payee is the person who is to receive payment under the bill. The drawer in many cases is also the payee.

10.4 PARTIES TO A PROMISSORY NOTE

There are two parties to the promissory note.

(i)    Maker/promissor: He is the person, a debtor who makes the promissory note i.e. promises to pay.

(ii)   Promisee: He is (he person, a creditor in whose favour a promissory note is made. He is entitled to receive the money.

10.5 DISTINCTION BETWEEN A BILL OF EXCHANGE & A PROMISSORY NOTE

Important points of comparison are:

♦     A promissory note needs no acceptance as required for a bill of exchange, as the debtor himself writes the document promising to pay the stated amount.

♦     In the case of a bill of exchange, the drawer and the payee may be the same person but in case of a promissory note, the maker and the payee cannot be the same person.

♦     In the case of a bill of exchange, the drawee and payee cannot be same. But if such a situation arises, due to subsequent endorsements then bill will gel cancelled. Similarly, a promissory note will get cancelled if due to endorsement maker/promisor and promisee becomes the same.

because a person liable to pay and a person entitled to receive both are same.

♦     Both are negotiable instruments and can be transferred by endorsement.

♦     For accounting purposes, both will be treated alike & both will be classified as bills payable & bills receivable.

10.6 DEMAND BILL

♦     Bill which is payable as and when demanded by the payee is known as demand bill,

♦     that means no specific period is specified.

10.7 USANCE BILL OR TIME BILL

♦     Usance bill or time bill is a bill payable after a certain period specified in the bill.

♦     Say after 30 days or after 2 months etc.

♦     Such a period is counted from (i) the date of bill/date of drawing the bill or (ii) date of acceptance/date of presentation, as may be mentioned in the bill.

♦     While calculating the due date, 3 days of grace are added.

Illustration 10.1: Calculation of Due date: (Also called as a maturity date)

(i)    Term of the bill is 3 months from the date of the bill. Bill is drawn on 10.3.2006 and accepted on 14.3.2006. Calculate the due date.

Solution : due date = 10.3.2006 + 3 month + 3 days = 13.6.2006

(ii)   Term of the bill is 3 months from the date of acceptance. Bill is drawn on 10.3.2006 and accepted on 14.3.2006. Calculate the due date.

Solution : due date = 14.3.2006 + 3 month + 3 days = 17.6.2006

(iii) Term of the bill is 90 days from the date of the bill. Bill is drawn on 10.3.2006 and accepted on 14.3.2006. Calculate the due date.

Solution : due date = 10.3.2006 + 90 days + 3 days = 11.6.2006

(iv) Term of the bill is 90 days from the date of acceptance. Bill is drawn on 10.3.2006 and accepted on 14.3.2006. Calculate the due date.

Solution : due date = 14.3.2006 + 90 days + 3 days = 15.6.2006

10.8     EFFECT OF HOLIDAYS WHILE ASCERTAINING DUE DATE

♦     In case of Bills of Exchange & Promissory Notes if the due date falls on a Public Holiday (As per Negotiable Instruments Act) then the due date will be the preceding working day. Sunday is a public holiday.

♦     In case of other Emergency Holidays, the subsequent working day will be taken as the due date

10.9     ACCOUNTING FOR TRANSACTIONS OF BILLS/PROMISSORY NOTES WITH SUITABLE MODEL ENTRIES

♦     For the purport: of accounting, it makes no difference whether it is a bill of exchange or promissory note.

♦     It should be classified as Bills Receivable (BR) or Bills Payable (BP) for the party in whose books of account entry is being made.

♦     For the purpose of accounting, a bill is Bills Receivable for the seller of goods and it is Bills payable for the purchase of goods.

After receiving the bill, the seller (drawer) can deal with the bill in either of the following ways:

(i) Retain it and present on the due date for payment or

(ii) Can discount the bill with the bank & get the amount immediately, then the Bank will present the bill for payment on the due date or

(iii) Can transfer/Endorse the bill in favour of some other party to whom he may be liable to pay, who will present the bill for payment on the due date or

(iv) Can send it for collection through bank & will get the payment through Bank on the due date. The purchaser after accepting the hill is not concerned with the above treatments of bill i.e. it will not require any accounting entry in his books. On the due date, whosoever will present the bill to him, the purchaser will either pay (i.e. honoured) or will not pay (i.e. dishonoured) the bill

MODEL ENTRY

Nature of TransactionIn the Books of DrawerIn the Books of Drawee
(Mr A)(Mr B)

(1) When a trade transaction takes place and the bill is drawn:

(a) When ‘A’ sales goods to ‘B’‘B’ a/c Dr.xxPurchase a/c Dr.xx
To Sales a/cxxTo ‘A’ a/cxx
(b) When the bills is drawn by ‘A’ onB. R. a/c Dr.xx‘A’ a/c Dr.xx
‘B’ or P. N. is made by ‘B’To B a/cxxTo B. P. a/cxx

(2) Action which can be taken by the drawer after the receipt of the accepted bill.

a. Bill is retained orNo transactionNo transaction
b. Bill is discounted orBank a/c Dr.xx— do —
Discount a/c Dr.xx
To B.R. a/cxx
c. Bill is endorsed to ‘C or‘C’ a/c Dr.xx— do —
To B R a/cxx
d Bill is sent for collectionBill for collection a/c. Dr.xx— do —
To B R a/cxx

(3) On the due date if the bill is honoured/paid

a. If bill was retainedCash or Bank a/c Dr.xxB. P. a/c Dr.xx
To B R a/cxxTo Cash or Bank a/cxx
b. If a bill was discountedNo transaction (because the bank will get the money from B)— do —
c. If a bill was endorsed to ‘C— do —(because ‘C’ will get the money from B)— do —
d If a bill was sent for collectionBank a/c Dr.xx— do —
Bank charges a/c Dr.xx
To Bill for collection a/cxx

(4) On the due date if a bill is dishonoured i.e. not paid

a. If bill was retained‘B’ a/c Dr.xxB.P. a/c. Dr.xx
To B.R. a/c xxNoting charges a/c Dr.xx
To Cash or Bank a/cxxTo ‘A’ a/cxx
(noting charges)
b. If a bill was discounted (Bank will recover the money from A’)‘B’ a/c Dr.xx– do –
To Cash or Bank a/c.xx
(including noting charges)
c. If a bill was endorsed to ’CB’ a/c Dr.xx— do —
To ‘C’ a/cxx
(including noting charges)
d If a bill was sent for collection‘B’ a/c Dr.xx— do —
To Bills for collection a/cxx
To Cash or Bank a/c
(noting charges)xx

Special Notes:

  1. Noting charges will be applicable if bill is notarized after dishonour. Noting is done to create evidence of dishonour which will be useful in case of litigation.
  2. Entries on due date will be dependent on what was done to the bill by the drawer after receipt i.e. retained, discounted, endorsed, etc.
  3. BR a/c. (i.e. bill receivable a/c.) is an asset (debit balance) hence when in a transaction it increases, its account should be debited and when it decreases its account should be credited.
  4. Similarly B.P. a/c. (bills payable a/c.) is a liability (credit balance) hence when it increases, its account should be credited and when it decreases its account should be debited.

Because Dr. Dr. gets added, Cr. Cr. gets added but Dr. Cr. gets subtracted

  1. No transaction for a party means it has no financial effect on that party hence no accounting entry.

Illustration 10.2 : ‘A’ sales goods worth Rs. 1800 to ‘B’, A receives four promissory notes from B, dated 1st January, 2006 for 3 months. 1 st bill is for Rs. 300, the second is for Rs. 500, the third is for Rs. 600 and the fourth is for Rs. 400. The second bill is endorsed to C. The third bills is discounted with the Bank for Rs. 590 on 4th January, and the fourth bill is sent for collection. Pass the entries in the journal of A & B assuming (1) the bill are met on maturity and (2) Bills are dishonoured on maturity.

Solution :

Entry for all normal transactions of bills

TransactionBooks of ABooks of B
1.1.06 Trade takes place and Bills/Promissory Notes made
Sales goods to BB’s A/c Dr.,800Purchase A/c Dr.1.800
To Sales A/c.,800To A’s A/c1,800
B gives 4 Promissory Notes to AB.R.A/c Dr.,800A’s A/c Dr.1,800
To B’s A/c,800To B.P. A/c1,800
1 st Bill retainedNo transactionNo transaction
2nd Bill endorsed to ‘CC’s A/c Dr.500No transaction
To B.R. A/c500
4.1.06Bank A/c Dr.590No transaction
3rd Bill DiscountedDiscount A/c Dr.10
To B.R. A/c600
4th Bill sent for collectionBill for Collection A/c Dr.400No transaction
To B.R. A/c400
Due Date 4.4.06 Assuming that bills are honoured
1st Bill which was retainedCash/Bank A/c Dr.300B.P. A/c Dr.300
To B.R. A/c300To Cash/Bank A/c300
2nd Bill which was endorsed to “CNo EntryB.P. A/c Dr.500
To Cash/Bank A/c500
3rd Bill which was discounted.No EntryB.P. A/c Dr.600
To Cash/Bank A/c600
4th Bill which was sent forCash/Bank A/c Dr.400B.P. A/c Dr.400
CollectionTo Bill for Collection a/c400To Cash/Bank a/c400
On Due dale Entry If hill la Dlahonnured
1st Bill which was retainedB’s A/c Dr.300BP A/c Dr.300
To B.R. A/c300To A’s A/c300
2nd Bill which was endorsed to ‘C’B’s A/c500B.P. A/c Dr.500
To C’s A/c500To A’s A/c500
3rd Bill which was discountedB’s A/c Dr.600B.P. A/c Dr.600
(Bank will recover amt. from A)To Bank A/c600To A’s A/c600
4th Bill which was sent forB’s A/c Dr.400B.P. A/c Dr.400
CollectionTo Bills for Collection A/c400To A’s A/c400

10.10   RENEWAL OF A BILL

♦     On the due date, if acceptor is unable to pay the amount of bill, then he can approach the Drawer, for renewal of the bill.

♦     Renewal means giving further time for the payment of the bill.

♦     For this delay the Drawer will/may collect Interest from acceptor on the delayed amount [total amount (-) amount if any paid at the time of renewal] for delayed/extended period.

♦     Renewal will involve the cancellation of the old bill, accruing the interest and preparing a new bill for balance amount with interest. (Some part amount may be paid immediately)

Model Entry for renewal which can be passed in three parts

TransactionIn the books of Drawer (Mr A)In the books of Acceptor (Mr B)
(a) Cancel the old billB’s a/c Dr.B.P. a/c Dr.
To B.R. a/cTo A’s a/c
(b) Interest due to A from BB’s a/c Dr.Interest a/c Dr.
To Interest a/cTo A’s a/c
(c) Settlement of the duesB.R. a/c Dr. (Amt. of the new bill)A’s a/c Dr. (total dues)
partly cash and partlyCash a/c Dr. (Cash received)To B.P. a/c (Amt. of the new bill)
bill or full amount in the billTo B’s a/c (total amt. due)To Cash a/c (cash paid)

♦ Entry for cancellation of the old bill given above is assuming bill was retained, if it was discounted or endorsed etc. then the entry will be as explained earlier in model entry 5.

♦     Entry for renewal can be passed in any other combination giving the same net effect as in the above three entries.

10.11   NOTING OF BILL AND NOTING CHARGES

♦     When a bill has dishonoured the holder of the bill (the holder can be drawer, endorsee or Bank) may present it to notary public (A Government-appointed Authority).

♦     Notary public will present the bill to the acceptor of the bill and if he doesn’t pay, the notary public will note the fact of dishonour on the bill.

♦     This (Noting) becomes final evidence for court cases.

♦     The charges charged by a notary for this service is called noting charges.

♦     Noting charges will be paid by the holder of the bill but ultimately it will be recovered from the drawee/acceptor (Party which dishonours the bill).

♦     Hence, noting charges will be an expense for the drawee (acceptor) of the bill & income for the Notary Public.

Illustration 10.3: Nitin holds a bill receivable for Rs. 2,000 accepted by Suresh for goods sold to him by Nitin. On the due date, Suresh requests Nitin for the renewal of the bill for a further period of three months agreeing to the addition of interest @ 10% per annum in the new bill. Nitin agrees. Give the necessary journal entries in the books of Nitin for the renewal of the bill.

Solution :       Entry for Renewal of the Bill on due date

TransactionBooks of Nit inBooks of Suresh
(a) Old Bill cancelledSuresh a/c Dr.2,000B. P. A/c Dr2,000
To B. R. a/c2,000To Nitin a/c2,000
(b) Interest dueSuresh a/c Dr.50Interest a/c Dr50
2000 × 1006 × 3/12 = 50To Interest a/c50To Nitin a/c50
(c) Settlement byB. R. a/c Dr.2050Nitin a/c Dr.2050
drawing a new billTo Suresh a/c2050To B. P. a/c2050

Illustration 10.4: A draws on B a bill of exchange for 3 months for Rs. 1000/- which B accepts on 1 st January 2006. A endorses the bill in favour of C. Before maturity B approaches A with the request that the bill is renewed for a further period of 3 months at six per cent per annum interest. A pays the sum to C on that due date and agrees to the proposal of B. Pass journal entries in the books of A, assuming that the second bill is duly met.

Solution:       Entry for Renewal of endorsed bill

TransactionBooks of ABooks of B
A draws bill on B’B.R.A/c Dr.1,000‘A’ A/c Dr.1,000
To ‘B’ A/c1,000To B.P. A/c1,000
An endorsed bill to ‘CC’s A/c Dr.1,000No Entry
To B.R. A/c1,000
Old bill cancelled‘B’ A/c Dr.1,000B.P. A/c Dr.1,000
To ‘C A/c1,000To ‘A’ A/c1,000
Int. Due‘B’ A/c Dr.15Intt. A/c Dr.15
1,000 ×6%×3/12=15To Int. A/c15To ‘A’ A/c15
Settlement by new’ billB.R.A/c Dr.1,015‘A’A/c Dr.1,015
(2nd bill)To ‘B’ A/c1,015To B. P. A/c1,015
A paid to CC’s A/c Dr.1,000No Entry
To Cash/Bank A/c1,000
2nd Bill Honoured by BCash/Bank A/c1,015B.P. A/c Dr.1,015
To B.R. A/c1,015To Cash/Bank1,015

Illustration 10.5: B owes C a sum of Rs. 600/-. On 1st April 2006 he gives a promissory note for the amount for 3 months to C who gets it discounted with his bankers for Rs. 590/-. On the due date, the bill is dishonoured the bank paying Rs. 5/- as noting charges. B then pays Rs. 200/- in cash and accepts a bill of exchange drawn on him for the balance together with Rs. 10/- as interest. This bill of exchanges is for 2 months and on the due date, the bill is again dishonoured, C paying Rs. 5/- for noting charges. Draft the journal entries to be passed in C’s books. Prepare

Solution :       (Renewal of discounted bill)

DateTransactionJournal of CDr.Cr.Journal of BDr.Cr.
1.4Promissory noteB.R. A/c Dr.600C A/c Dr.600
given by B to CTo B A/c600To B.P. A/c600
Bill discounted with the bankBank/cash a/c Dr590No entry
Discount a/c Dr.10
To B.R. A/c600
4.7Bill dishonoured, bankB A/c Dr.605B.P. A/c Dr.600
recovers from ‘C bill amount + noting chargesTo Bank A/c605Noting charges Dr To C A/c5605
Interest dueB A/c Dr.10Interest A/c Dr.10
To Int. A/c10To C A/c10
Settlement partly in Cash &Cash/Bank a/c Dr.200C A/c Dr.615
balance by the new bill.B.R. A/c Dr.415To B A/c415
To B.P. A/c615To Cash A/c200
7.9The second bill dishonoured &B A/c Dr.420B. P. A/c Dr.415
noting charges paid by ‘CTo B.R. A/c415Noting charges Dr.5
To cash A/c5To C A/c420

Illustration 10.6: B sends his promissory note for 3 months to C for Rs. 600 on May 1, 2006. C gets it discounted with his bankers at 6 per cent per annum. On the due date, the bill is dishonoured, the bank paying Rs. 10 as noting charges. C agrees to accept Rs. 225 in cash (Rs. 25 for noting charges and interest) and another promissory note for Rs. 400 for 2 months. On the due date, B approaches C again and asks for a renewal of the bill for a further period of 3 months. C agrees to the request, provided B pays Rs. 20 as interest in cash. This last bill is paid on maturity. Draft journal entries in the books of B and C.

Solution :       (Renewal of discounted bill & 2nd-time renewal)

DateTransactionJournal of CDr.Cr.Journal of BDr.Cr.
1.5Promissory noteB.R. A/cDr.600C A/cDr.600
given by B to CTo B A/c600To B. P. A/c600
Discounted with BankBank A/cDr.591No entry
Discount A/cDr.9
To B.R. A/c600
4.8Dishonour and Renewal
Bill gets dishonoured
(Bank recovers fromB A/cDr.610B. P. A/cDr.600
‘C’ including notingTo Bank A/c610Noting charges a/c Dr.10
charges) Interest dueTo C A/c610
(out of 25, 10 is
noting charges & ball.B A/cDr.15Interest A/cDr.15
is interest)To Int. A/c (25-10=15)15To C A/c15
Settlement by interestB.R. A/cDr.400C A/cDr.625
amt. in cash & balanceCash A/cDr.225To B. P. A/c400
by bill.To B A/c625To Cash A/c225
Renewal of Bill
7.10(i) Cancellation of Bill
B A/cDr.400B. P. A/cDr.400
To B.R. A/c400To C A/c400
(ii) Interest due
B A/cDr.20Interest A/c Dr.20
To interest A/c20To C A/c20
(iii) Settlement
B.R. A/cDr.400C A/cDr.420
Cash A/cDr.20To B. P. A/c400
To B A/c420To cash A/c20
On due date Bill
10.1.HonouredCash A/cDr.400B. P. A/cDr.400
To B.R. A/c400To cash A/c400

10.12   RETIREMENT OF THE BILL

♦     Retirement of the bill means that payment is made before the due date.

♦     Therefore, normally the receiver will allow some rebate/discount to the payer.

♦     Entry for payment/receipt will be recorded net of rebate.

♦     Thus retirement is the opposite of renewal. In retirement, payment is made early whereas in renewal payment is delayed.

Model entry for the retirement of the bill

TransactionIn the books of Drawer (Mr A)In the books of Acceptor (Mr B)
Bill retiredCash/Bank a/cDr.950B. P. A/cDr.1000
Rebate a/c.Dr.50To Cash/Bank a/c950
To B.R. a/c1000To Rebate a/c50

Illustration 10.7: On 1st January 2006, A sells goods for Rs. 10,000 to B and draws a bill at three months for the amount. B accepts it and returns it to A. On 1st March 2006. B retires his acceptance under rebate of 12% per annum. Record these transactions in the journals of A and B.

Solution :

Retirement of bill

TransactionBooks of ABooks of B
1.1.06
A Selling to BB’s A/c Dr.10,000Purchases A/c10,000
To Sales A/c10,000To A’s A/c10,000
Bill Drawn by A onB.R. A/c Dr.10,000A’s A/c Dr.10,000
BTo B’s A/c10,000To B.P. A/c10,000
1.3.06
B retires his acceptanceCash A/c Dr.9,900B. R. A/c Dr.10,000
12% × 10,000 × 1/12 = 100Rebate A/c Dr.100To Rebate A/c100
To B.R. a/c10,000To Cash/Bank a/c9,900

10.13   IN WHICH BOOK OF ENTRY THE TRANSACTIONS OF BILLS WILL BE ENTERED

♦     By observing the above entries, some may be inclined to give an answer that it will be recorded in Journal.

♦     But it is not necessarily true.

♦     As studied in the 1st Chapter on the basis of accounting, it depends on the fact that which books of entry are being maintained by the entity.

♦     If a concern is maintaining only Journal then all will be entered in Journal.

♦     If it is maintaining Cashbook & Journal & then all Cash & Bank transactions shall be recorded in Cash Book & others in Journal.

♦     If it is also preparing B.R. book & B.P. Book, then Cash-Bank transactions in cash book, B.R. received (1st step of the bill only) in B.R. book similarly bills issued in B.P. book & remaining transactions like endorsement, dishonour etc. will be recorded in Journal.

♦     Concern can also maintain more books as per need like Bill receivable endorsed book.

Note: For more on such books of entry please refer 1st Chapter.

ILLUSTRATIONS

Illustration 10.8: Mr David draws two bills of exchange on 1 -1 -2006 for Rs.6,000 and Rs. 10,000. The bills of exchange for Rs.6,000 is for two months while the bill of exchange for Rs. 10,000 is for three months. These bills are accepted by Mr Thomas. On 4-3-2006 Mr Thomas requests Mr David to renew the first bill with interest at 18% p.a. for a period of two months. Mr David agrees to this proposal. On 20-3-2006 Mr Thomas retires the acceptance for Rs. 10,000, the interest rebate i.e. discount being Rs. 100. Before the due date of the renewed bill, Mr Thomas becomes insolvent and only 50 paise in a rupee could be recovered from his estate. You are to give the journal entries in the books of Mr David.

Solution :       (Renewal & Retirement)

TransactionBooks of DavidBooks of Thomas
1.1.06
Bills DrawnB.R. A/c Dr.6,000David A/c Dr.16,000
B.R. A/c Dr.10,000To B.P. A/c6.000
To Thomas A/c16,000To B.P. A/c10,000
Renewal of 1st bill,Thomas A/c Dr.6,000B.P. A/c Dr.6,000
old bill cancelledTo B.R. A/c6,000To David’s A/c6,000
Interest dueThomas A/c Dr.180Int. A/c Dr.180
To Int. A/c180To David a/c180
Settlement by netB.R. A/c Dr.6180David A/c Dr.6,180
bill (3rd bill)To Thomas A/c6,180To B.P. A/c6,180
20.3.06
Retirement of 2ndCash/Bank A/c Dr.9,900B.P. A/c Dr.10,000
billRebate A/c Dr.100To Cash/Bank A/c9.900
To B.R. A/c10,000To Rebate A/c100
Thomas declaredThomas A/c Dr.6,180B.P. A/c Dr.6,180
insolvent henceTo B.R. A/c6,180To David A/c6,180
3rd bill dishonoured
Full and finalCash/Bank A/c Dr.3,090David A/c Dr.6,180
the settlement at 50%Bad Debts A/c Dr.3,090To Cash/Bank A/c3,090
To Thomas A/c6,180To Deficiency A/c3,090

Illustration 10.9 : Journalise the following transactions in the books of J. Jaggi:

(a)   Our acceptance to M. Madan for Rs.5000/- retired before due date, rebate allowed Rs. 10/-.

(b)   K. Kaku’s acceptance for Rs.400/- renewed for a further period of 3 months, interest charged at 15 per cent

(c)   Our acceptance to P. Swamy for Rs. 800/- renewed for 3 months on the condition that Rs. 200/-is paid in cash immediately and the remaining balance to carry interest at 12 per cent.

(d)   D. Dutt’s promissory note for Rs. 700/- which we had endorsed in favour of P. Mukherjee dishonoured. P. Mukherjee paid Rs.10/- as noting charges. We pay P. Mukherjee by cheque and accept from D. Dutt another bill for the amount due plus interest Rs. 15/-.

(e)   Our promissory note for Rs. 500/- in favour of A. Alam returned unpaid due to lack of instructions to the bank. A. Alam claims Rs. 510/- which we pay by cheque.

(f) Our promissory note for Rs. 500/- in favour of Patel settled by sending him Tanna’s acceptance of Rs.500/-.

Solution :

Books of J. Jaggi

TransactionDr.Cr.
(a) Our B.P. retiredB. P. A/cDr.5,000
To Rebate10
To Cash/Bank A/c4990
(b) Renewal of our B.R.K. Kaku’s A/cDr.400
Old bill (cancelled)To B.R. A/c400
Interest dueK. Kaku’s A/cDr.15
To Intt. A/c15
Settlement by new billB.R. A/cDr.415
To K. Kaku’s A/c415
(c) Renewal of our B.P.B.P. A/cDr.800
Old bill cancelledTo P. Swamy. A/c800
Part cash paymentP. Swamy A/cDr.200
To Cash/Bank A/c200
Interest duelull. A/cDr.18
To P. Swamy. A/c18
2nd bill accepted for the balance amountP. Swamy A/cDr.618
To B.P. A/c618
(d) B.R. which was endorsed renewedD. Dutt’s A/cDr.710
Old bill cancelledTo Mukherjee’s A/c710
We pay MukherjeeMukherjee’s A/cDr.710
To Bank A/c710
Interest dueD. Dull’s A/cDr.15
To Intl. A/c15
2nd bill drawn on DuttaB.R. A/cDr.725
To D. Dutt’s A/c725
(e) B. P. dishonouredB.P. A/cDr.500
To A. Alam A/c500
Bank charges dueBank charges A/cDr.10
To A. Alam A/c10
PaidA’ Alam A/cDr.510
To Bank A/c510
(f) B. P. settled by giving B.R.B.P. A/cDr.500
To Bill Receivable A/c500

Illustration 10.10: Pass journal entries for the following bill in each parties book

Drafts of a Bill of Exchange

To,Accepted
Mr BSigned BStamp
Pay Rs. 5000 after 3 months to ‘C or his order for value received
Signed by ‘A’
Nagpur 2/4/06

Solution :

DateBooks of ABooks of BBooks of C
2.4.06When a bill is drawn by ‘A’ on
‘B’ but favouring ‘C’
C a/c. Dr.5000A  a/c Dr.5,000B.R. a/c. Dr.5000
To B. a/c5000To B.P. a/c5000To A a/c5000
5.7.06If the bill is honoured on the due date
No EntryB.P. a/c. Dr.5000Bank a/c. Dr.5000
To Bank a/c5000To B.R. a/c5000
5.7.06If Bill is dishonoured on the due date
B a/c Dr.5000B.P. a/c. Dr.5000A a/c. Dr.5000
To C a/c5000To A a/c5000To B.R. a/c5000

Illustration 10.11 : Calculate interest/discount/rebate @ 12% in following cases

(a)   A bill of Rs. 10,000 for 3 months discount after one month.

(b)   A bill of Rs. 5,000 for 3 months retired one month before the due date.

(c) A 3-month bill of Rs. 10,000 renewed for 2 months on the condition that 30% is paid immediately.

(d) A 3-month bill of Rs. 5,000 was dishonoured, noting charges were Rs. 100 & bill is being renewed for 4 months.

Solution :

(a)   Discount for 2 months only because remaining period at the time of discounting is only 2 months. Discount = 10,000 × 12% × 2/12 = Rs. 200

(b)   Rebate = 5,000 ×12% × 1/12 = Rs. 50

(c)   Interest = 7,000 ×12% × 2/12 = Rs. 140

Interest is applicable on the amount being renewed Rs. 7000(10000-3000 puid)& for the period of extension i.e. 2 months

(d)   Interest = 5100 × 12% × 4/12 = Rs. 204/-

Illustration 10.12 : From the following details of M/s ΛBC prepare Bills payable book & explain the posting from it.

1.1.04              Bill drawn by X for Rs. 5,000 for 2 months

10.1.04            Bill drawn by L for Rs. 6,000 for 3 months

16.1.04            Bill drawn by M for Rs. 4,000 for 60 days

25.1.04            Bill drawn by Z for Rs. 10,000 for 90 days.

Solution :

Bills Payable Book of M/s ΛBC for January 2004

DateParty (Drawer/Creditor/Supplier)L.F.Amount
5.1.04X5000
10.1.04L6000
16.1.04M4000
25.1.04Z10000
Total25,000

Posting: Date-wise individual party a/cs will be debited with the corresponding bill amount & at the end of month total Rs. 25,000 will be credited to bills payable a/c.

Note: 1. Posting is similar to as seen for sales book, Purchase book etc.

  1. Any number of further columns can be added for further details like due date, honoured/dishonoured etc.

Illustration 10.13: From the following details of M/s ABC prepares Bills Receivable book for March 2004 & explain posting from it.

6.3.04              Bill drawn on P for Rs. 6000 for 3 months

12.3.04            Bill drawn on Q for Rs. 8000 for 2 months

18.3.04            Bill drawn on R for Rs. 4000 for 90 days

26.3.04            Bill drawn on S for Rs. 12000 for 60 days.

Solution :

Bills Receivable Book of M/s ABC for March 2004

DateParty (Drawee/Debtor/Customer)L.F.Amount
6.3.04P6000
12.3.04Q8000
18.3.04R4000
26.3.04S12000
Total30,000

Posting: On the respective dates the above parties a/c will be credited with the amount of bill & at the end of the month Bills Receivable a/c will be debited with total amount i.e. Rs. 30,000.

Note: 1. Further column to record additional information like a due date. Further treatment like endorsed, discounted etc.

Illustration 10.14: Suppose each of the above bills except 3rd bill is endorsed after 2 days to L, M, Z respectively. Prepare Bills Receivable endorsed register & suggest posting from it.

Solution :

Bills Receivable Endorsed book of M/s ABC for March 2004

DateParty (Endorsee/Creditor/Supplier)L.F.Amount
8.3.04L6000
14.3.04M8000
28.3.04Z12000
Total26,000

Posting: Individual party a/c will be debited on a respective date with the corresponding bill amount & at the end of month Bills Receivable a/c will be credited with Rs. 26,000.

  1. ACCOMMODATION BILL

Introduction: Accommodation bill is the bill drawn for financial accommodation (help) of one or both the parties. Thus it is not backed by any trade transactions. Parties involved will be related to each other. Either one bill may be drawn or both may draw a bill on each other. Such bills are discounted, proceeds are used & on the maturity, the amount is returned to Bank.

Alternatively, both parties may draw bill on each other & get them discounted respectively.

10.14   MEANING & PURPOSE OF ACCOMMODATION BILL

♦     Bills of exchange are usually drawn to facilitate trade transactions, that is, bills are meant to finance actual purchase and sale of goods.

♦     But the mechanism of the bill can be utilized to raise finance also.

♦     Therefore, an accommodation bill is one which is drawn, accepted or endorsed for the purpose of arranging financial accommodation for one or more interested parties.

♦     It is not a genuine trade bill.

♦     Suppose A needs finance for three months. In that case he may persuade his friend B to accept his bill. The bill of exchange may then be taken by A to his bank and discounted there. Thus, A will be able to make use of funds. When the three months period draws to a close A will send the requisite amount to B and B will meet the bill. Thus, A is able to raise money for his use.

♦     If both A and B need money, the same device can be used. Either A accepts a bill of exchange or B does. In either case, the bill will be discounted with the bank and the proceeds divided between the two parties according to their needs. The proportionate discount will also be transferred. On the due date, the acceptor will receive from the other party of his share. The Bills of Exchange will then be met.

♦     When bills are used for such a purpose, these are known as accommodation bills. If the bill is dishonoured the first party (i.e. drawer) will have to pay to the Bank.

♦     Entries are passed in the books of two parties exactly in the same way as for ordinary bills. The only additional entry to be passed is for sending the remittance to the other party and also for debiting the other party with the requisite amount of discount.

10.15   MODEL ENTRIES FOR ACCOMMODATION BILLS UNDER VARIOUS ALTERNATIVES

♦     The entries will be the same as in case of genuine or trade bill except that to start with, here there is no opening balance due by either party.

♦     And additionally, there will be entries for remittances.

♦     The expense of discount will be borne by the party who uses the proceeds after discounting. If both shares the proceeds, discount will also be shared among them.

Model Entries for Accommodation Bill

TransactionBooks of ‘A’Books of ‘B’
(1) If ‘A’ draws a bill & uses the money
a. Bill is drawn by A on BB R a/c Dr.xx‘A’ a/c Dr.xx
To ‘B’ a/cxxTo B P a/cxx
b. ‘A’ discounts the bill with hisBank a/c Dr.xxNo transaction
bank.Discount a/c Dr.xx
To B R a/cxx
c. On due date, ‘A’ remits the‘B’ a/c Dr.xxCash or Bank a/c Dr.xx
money to ‘B’ (full amount)To Cash or Bank a/cxxTo ‘A’ a/cxx
d. Bill is honoured by ‘B’No transactionB P a/c Dr.

To Cash or Bank a/c

xxxx
(2) If ‘A’ draw a bill and proceeds after discounting are shared
a. Bill is drawn by A on BB R a/c Dr.xx‘A’ a/c Dr.xx
To ‘B’ a/cxxTo B P a/cxx
b. ‘A’ discounts the billBank a/c Dr,xxNo transaction
Discount a/c Dr.xx
To B R a/cxx ,
c. ‘K remits part amount andB’ a/c Dr.xxBank a/c. Dr.xx
proportionate discount to ‘B’To Bunk a/cxxDiscount a/c Dr.xx
immediatelyTo Discount a/cxxTo ‘A’ a/cxx
d. On due date ‘K remits balanceB a/c Dr.xxBank a/c Dr.xx
amount to ‘B’To Bank a/cxxTo ‘A’ a/cxx
c. Bill is honoured by ‘B’No transactionB P a/c Drxx
To Bank a/cxx
(3) If both draw hill on each other for an equal amount
a. ‘A’ draws on ‘B’ (1st bill)B R a/c Dr.xx‘A’ a/c Dr.xx
To ‘B’ a/cxxTo BP a/cxx
b. ‘A’ discounts the hillBank a/c Dr.xxNo transaction
Discount a/c. Dr.xx
To B R a/cxx
c. ‘B’ draws on ‘A’ (2nd bill)‘B’ a/c Dr.xxB R a/c Dr.xx
To B P a/cxxTo ‘A’ a/cxx
d. ‘B’ discounts the billNo transactionBank a/c Dr.xx
Discount a/c Dr.xx
To B R a/cxx
e. Honours his acceptance onB P. a/c Dr.xxNo transaction
due date (2nd bill)To Bank a/cxx
f. ‘B’ honours his acceptance onNo transactionB P a/c Dr.xx
due date (1st bill)To Bank a/cxx

Note – In the above case if bills are for unequal amount say 1st bill is for Rs. 5000 and 2nd bill is for Rs. 4000. Then on the due date in addition to all above entries one more entry for remittance of Rs. 1000 by ‘A’ to ‘B’ will also be passed as follows –

The net difference between the two bills‘B’ a/c. Dr.1000Bank a/c. Dr.1000
remitted by A to BTo Bank a/c.1000To ‘A’ a/c.1000

Note: In case of accommodation bills also, if the bill is dishonoured on the due date the entry will be the same as seen in case of normal (trade) bills.

Illustration 10.15: DGS draws a bill on YOU for Rs. 1,00,000 for his accommodation YOU accept it. DGS discounts it for Rs. 95,000. On the due date, DGS remits the amount and bill is honoured. Account the above transaction in books of both the parties.

Solution:       Bill discounted and proceeds used by the drawer

TransactionBooks of DGSBooks of YOU
DGS draw’s onB.R. A/c Dr.100000DGS A/c Dr.100000
YOUTo YOU A/c100000To B.P. A/c100000
Bill Discounted byBank A/c Dr.95000No Entry.
DGSDiscount Dr.5000
To B.R. A/c100000
On due date DGSYOU A/c Dr.100000Bank A/c Dr.100000
remits the amt.To Bank. A/c100000To DGS A/c100000
Bill honoured byNo EntryB.P. A/c Dr.100000
YOUTo Bank A/c100000

Illustration 10.16: DGS draws a bill on YOU for Rs. 1,00,000 for his accommodation YOU accept it. DGS discounts it for Rs. 95,000/-. On due dale, DGS being unable to remit the amount accepts a bill for Rs. 1,05,000 drawn by YOU. YOU discount it for Rs. 1,00,000 and honoured the 1st bill.

How much is due to YOU or by YOU on the due date of the 2nd bill and how the matter will be settled. Account the above transaction in books of both the parties.

Solution:       Bill discounted and proceeds used by the drawer 2nd bill made to honour 1st bill

TransactionBooks of DGSBooks of YOU
DGS draws on YOUB.R. A/c Dr.100000DGS A/c Dr.100000
To YOU A/c100000To B.P. A/c100000
Bill Discounted by DGSBunk A/c Dr.9S000No Entry
Discount Dr.5000
To B.R. A/c100000
On due date YOU drawsYOU A/c Dr.105000B.R. A/c Dr105000
New hill on DGSTo B. P. A/c105000To DGS A/c105000
Bill Discounted byDiscount Dr.5000Bank A/c Dr.100000
YOU. Discount debitedTo YOU a/c5000DGS A/c Dr.5000
to DGSTo B.R. A/c105000
1st Bill HonouredNo EntryB.P. A/c Dr.100000
To Bank A/c100000

DGS A/c In YOU’s Books

To Bills Payable A/c1,00,000By Bills Receivable A/c1,05,000
To Discount of 2nd bill5,000
1,05,0001,05,000

Thus on the due dale of 2nd bill, no amount is due to YOU or by YOU. DGS should meet the 2nd bill on the due date.

Illustration 10.17: X draws on Y a bill of exchange for Rs. 1500 on 1st April 2006 for 3 months. Y accepts the bill and send it to X who gets it discounted for Rs. 1470. X immediately remits Rs.490 to Y. On the due date, X remits the amount due, and Y honours the bill. Give the journal entries in the books of X and Y.

Solution :

(Bill discounted and Proceeds Shared)

DateTransactionJournal of XDr.Cr.Journal of YDr.Cr.
1.4X draws on Y a bill ofB.R. A/c Dr.1500X A/c Dr.1500
exchangeTo Y A/c1500To B.P. A/c1500
Bill was discounted withBank/cash A/c Dr.1470No entry
bankDiscount A/c Dr.30
To B.R A/c1500
Remittance by X to YY A/c Dr.500Cash A/c Dr.490
With proportionate discountTo Cash A/c490Discount A/c Dr.10
To Discount A/c10To X A/c500
4.7.X remits balance to YY A/c Dr.1000Bank A/c Dr.1000
To Bank A/c1000To X A/c1000
Bill honoured by YNo entryB.P. A/c Dr.1500
To Bank A/c1500

Illustration 10.18: X draws on Y a bill of exchange for Rs. 1500 on 1st April 2005 for 3 months. Y accepts the bill and send it to X who gets it discounted for Rs. 1470. X immediately remits Rs. 490 to Y. On the due date, X, being unable to remit the amount due, accepts a bill for Rs. 2100 for three months which is discounted by Y for Rs. 2055. Y sends Rs. 370 to X. Before the maturity of the bill X becomes bankrupt his estate paying fifty paise in the rupee. Give the journal entries in the books of X and Y Also show X’s account in Y’s books.

Solution :

(Bill discounted and Proceeds Shared. 2nd hill made to honour 1st bill)

DaleTransactionJournal of XDr.Cr.Journal of YDr.Cr.
1.4X draws on Y a bill ofB.R. A/cDr.1500X A/c Dr1500
exchangeTo Y A/c1500To B.P. A/c1500
Bill was discounted withBank/cash A/cDr.1470No entry
bankDiscount A/cDr.30
To B.R A/c1500
Remittance by X to YY A/cDr.500Cush A/c Dr.490
With proportionate discountTo Cash A/c490Discount A/c Dr.10
To Discount A/c10To X A/c500
4.7.2nd bill drawn by Y on XY A/cDr.2100B.R. A/c Dr.2100
To B.P. A/c2100To X A/c2100
Second bill discountedNo entryBank/cash A/cDr.2055
Discount A/cDr.45
To B.R. A/c2100
1st bill is honoured from theNo entryB.P. A/cDr.1500
proceeds of 2nd billTo Cash A/c1500
Remittance to X by YCash A/cDr.370X A/cDr.400
•Dis = 45/2055 X1370Discount A/cDr.30To Cash A/c370
=30To Y A/c400To discount A/c30
7.10Second bill dishonoured & YB.P. A/cDr.2100X A/cDr.2100
pays the bankTo Y A/c2100To cash/bank A/c2100
FinalY A/cDr.1400Cash/Bank A/cDr.700
SettlementTo cash/bank A/c700Bad debts A/cDr.700
To deficiency A/c700To X A/c1400

“Out of the proceeds of 2nd bill Rs. 370 is used for X (Rs. 1000 for honouring 1st bill which ‘X’ could not contribute & further Rs.370 remitted to him) hence proportionate discount debited to him.

Illustration 10.19: On 1 st January 2006 Mohan draws on Ram a bill for 3 months for Rs. 2000 which Ram duly accepts. Mohan discounts the bill for Rs. 1980. On the same date, Ram draws on Mohan a bill for Rs. 2000 which is accepted by Mohan. Ram gets the bill discounted with his bankers at 6 per cent. On the due date, Ram and Mohan meet the bill. Give journal entries in the books of Mohan & Ram.

Solution :

(Accommodation bill, Cross billing)

DateTransactionJournal of MohanDr.Cr.Journal of RamDr.Cr.
1.1Mohan draws a bill onB.R. AcDr.2000Mohan A/c Dr.2000
Ram (1st bill)To Ram Ac2000To B. P. A/c2000
Bill discounted withBank/cash A/cDr.1980No entry
BankDiscount A/cDr.20
To B.R. A/c2000
1.1Ram draws bill onRam A/cDr.2000B.R. A/c Dr.2000
Mohan (2nd bill)To B. P. A/c2000To Mohan A/c2000
Bill discounted withNo entryBank A/c Dr.1970
bankDiscount A/c Dr.30
To B.R. A/c2000
4.4Mohan honours his billB. P. A/cDr.2000No entry
(2nd bill)To cash/bank A/c2000
Ram honours his bill,No entryB.P. A/c Dr.2000
(1st bill)To Bank A/c2000

 

ILLUSTRATION

Illustration 10.20: On 1st July 2005 G drew a bill for Rs. 80,000 for 3 months on H for mutual accommodation. He accepted the bill of exchange.

G had purchased goods worth Rs. 81,000 from J on the same date. G endorsed H’s acceptance to J in full settlement.

On 1 st September 2005 J purchased goods worth Rs. 90,000 from 11. J endorsed the bill of exchange received from G to H and paid Rs. 9,000 in full settlement of the amount due to H.

On 1 st October, 2005 H purchased goods worth Rs. 1,00,000 from G. 1 le paid the amount due to G by cheque. Give the necessary Journal Entries in the books of H and prepare necessary accounts in the books of H, G & J.

Solution :

JOURNAL ENTRIES

DateBooks of H  Books of J Books of G  
1.7.2005G a/cDr.80000B.R. a/c Dr.80000
To B.P. a/c80000To H a/c80000
1.7.G a/c Dr.81000Purchase a/c Dr.81000
To Sale a/c81000To J a/c81000
1.7.B.R. a/c Dr.80000J a/c Dr.81000
Discount Dr.1000To B.R. a/c81000
To G a/c81000To Discount a/c1000
1.9.J. a/c.Dr.90000Purchase a/c Dr.90000
To Sale a/c90000To H a/c90000
1.9.B. P. A/cDr.80000H a/c Dr.90000
Bank a/cDr.9000To B.R. a/c80000
Discount a/c1000To Bank a/c9000
To J a/c90000To Discount a/c1000
(Our B.P. is endorsed in our favour hence cancelled)
1.10.Purchase a/cDr100000H a/c Dr.100000
To G a/c100000To Sale a/c100000
1.10.G. a/cDr.20000Bank a/c Dr.20000
To Bank a/c20000To H a/c20000

IN THE BOOKS OF ‘H’

G’s A/c

17. 05To B.P.80,0001.10.By Purchases1,00,000
9.10.To Cash/Bank20,000
1,00,0001,00,000

B.P A/c

1.9.05To J’s A/c80,0001.7.05By G A/c80,000
80,00080,000

J’s A/c

1.9.05To Sales A/c90,0001.9.05By BP A/c80,000
By Bank/Cash A/c9,000
By Discount1000
90,00090,000

IN THE BOOKS OF J

G’s A/c

1.7. 05To Sales A/c81,0001.7.05By BR A/c80,000
By Discount A/c1,000
81,00081,000

BR A/c

1.7. 05To G’s A/c80,0001.9.05By I Ps A/c80,000
80,00080,000

H’s A/c

1.9.05To B.R. A/c80,0001.9.05By Purchases A/c90,000
To Cash/Bank9.000
To Discount A/c1,000
90,00090,000

IN THE BOOKS OF G

H’s A/c

1.10.05To Sales A/c1,00,0001.7.05By B.R. A/c80,000
1.10.05By Cash/Bank A/c20,000
1,00,0001,00,000
B.R. A/c
1.7. 05To H’s A/c80,0001.7.05By J’s A/c80,000
80,00080,000
J A/c
1.7. 05To B.R A/c80,0001.7.05By Purchases A/c81,000
To Discount A/c1,000
81,00081,000

 

PRACTICE PROBLEMS

(Answers & Hints given at the end of the Chapter)

Trade Bill of Bills of Exchange

P.1 On 1.3.2013, A sells goods to B for Rs. 1,000. A bill for Rs. 1,000 is drawn for 4 months by A on B and accepted by the latter payable at Bank of India. Show what entries would be passed in the Books of both under each of the following cases (a) if the bill is honoured and (b) if the bill is dishonoured:

(i) If he retained the Bill till the due date.

(ii) If he discounted it with his Bankers for Rs. 950.

(iii) If he endorsed the Bill to his creditor C.

(iv) If he sent the same to their Bankers for collection. On collection, the bank charged Rs. 10.

P.2 Record the following transactions in the Journals of Ram and Hari:

Ram sells goods for Rs. 1,00,000 to Hari on 1st January 2013 and on the same day draws a bill on Hari at three months for the amount.

Hari accepts it and returns it to Ram, who discounts it on 4th January 2013 with his bank at 12% per annum.

The acceptance is dishonoured on the due date and the bank pays Rs. 250 as noting charges.

P.3 Neeraj sold goods to Dhiraj for Rs. 4,000 on 1st May 2013. On the same day, he drew on, Dhiraj, a bill for the amount for 3 months which Dhiraj duly accepted.

Neeraj endorsed the bill to Suraj.

Just before the due date, on 2nd August, 2013 Dhiraj became insolvent.

Later, his estate could pay only 40% of the amount due.

Pass the journal entries in the books of Neeraj & Dheeraj.

P.4 Anil draws a bill of exchange on Bindu for goods supplied, for Rs. 10,000, dated 1st January, at four months. Bindu accepts the bill, and thereafter on 4th February Anil discounts it with his Bankers at 8 per cent per annum (rounded off to the nearest month).

The Bill is dishonoured on presentation on the due date and the Bankers debit Anil with Rs.20 Noting Expenses, in addition to the value of the Bill.

Bindu pays Anil cash Rs. 5,000 on 5th May and simultaneously accepts a fresh Bill for the balance due by him, including Rs. 300 for Interest and Noting Expenses on the first bill.

The hill is paid in lime.

Journalise ihc above transactions in the journal of Λnil & Bindu.

P.5 Journalise the following transactions with narration in the books of Kamcsh:

(i) Ramesh’s promissory note for Rs. 12,000 in favour of Shankar settled by sending to Shankar, Nakul’s acceptance for a similar amount.

(ii) Ramesh retired his acceptance in favour of Rahim for Rs. 6,000 by paying Rs. 5,900.

P.6 Pass journal entries for the following bill in each parties book

Bill of Exchange

To,
Mr. BAccepted
Signed BStamp
Pay Rs. 10,000 after 3 months to ‘C or his order for value received
Signed by ‘A’
Nagpur 2/4/2013

P.7 Calculation of Due date of the bill in the following cases:

(i) Term of the bill is 3 months from the dale of the bill. Bill is drawn on 10.3.2013 and accepted on 14.3.2013. Calculate the due date.

(ii) Term of the bill is 3 months from the date of acceptance. Bill is drawn on 10.3.2013 and accepted on 14.3.2013. Calculate the due date.

(iii) Term of the bill is 90 days from the date of the bill. Bill is drawn on 10.3.2013 and accepted on 14.3.2013. Calculate the due date.

(iv) Term of the bill is 90 days from the date of acceptance. Bill is drawn on 10.3.2013 and accepted on 14.3.2013. Calculate the due date.

P.8 Calculate interest /discount/rebate @ 12% in following cases

(a)   A bill of Rs. 10,000 for 3 months discount after one month.

(b)   A bill of Rs. 5,000 for 3 months retired one month before the due date.

(c)   A 3-month bill of Rs. 10,000 renewed for 2 months on the condition that 30% is paid immediately.

(d)   A 3 months bill of Rs. 5,000 was dishonoured, noting charges were Rs. 100 & bill is being renewed for 4 months.

Accommodation Bill

P.9 M is in need of money and hence draws on his friend N a bill for Rs. 50,000 on 1st January 2013 for 2 months.

M gets it discounted at 18%.

On the due date, the bill is honoured.

Give journal entries in the books of M and N.

P.10 A draw’s on B a bill for mutual accommodation for Rs. 90,000 on 1st June 2013 for 3 months.

A gets it discounted for Rs. 87,000.

A immediately remits Rs. 29,000 to B.

On the due date, the bill is honoured.

Give journal entries in the books of A and B.

P.11 For financial accommodation ‘X’ draws on ‘Y’ on 1st April 2013, a bill for Rs. 15,000 and on the same date V draws on ‘X’, a bill for Rs. 10,000. Both the bills are for a four months period and are discounted at 12%.

On the due date, the matter is settled.

Record-Journal Entries in the books of ‘X’ and ‘Y1.

P.12 Shubham draws on Rajendra a bill for Rs. 45,000 on 1st April, 2013 for 3 months.

Rajendra accepts the bill and sends it to Shubham who gels it discounted for Rs. 44,100.

Shubham immediately remits Rs. 14,700 to Rajendra.

On the due date Shubham, being unable lo remit the amount due, accepts a bill for Rs. 63,000 for three months which is discounted by Rajendra for Rs. 61,650. 1st Bill is honoured with this proceeds and from the balance Rajendra sends Rs. 11,100 to Shubham.

On the due date, Shubham becomes insolvent, his estate paying forty paise in the rupee.

Give journal entries in the books of Shubham and Rajendra.

P.I3 DGS draws a hill on YOU for Rs. 1,00,000 for his accommodation YOU accept it. DOS discounts it for Rs. 95,000.

On the due date, IX JS being unable to remit the amount accepts a bill for Rs. 1,05,000/- drawn by YOU. YOU discount it for Rs. 1,00,000 and honoured the 1st bill.

Mow much is due to YOU or by YOU on the due date of the 2nd bill and how the matter will be settled.

Account the above transaction in books of both the parties.

ANSWERS AND HINTS FOR

Practice Problems

P. No.Answers & Hints
1.Refer solved illustrations given in the book.
2.Refer solved illustrations given in the book. Discount Rs. 3,000.
3.Refer solved illustrations given in the book. Bad debt Rs. 2,400.
4.Refer solved illustrations given in the book. Discount Rs.200, 2nd Bill of Rs. 5,300
5.(i) Bills Payable A/c Dr. To Bills Receivable A/c
6.A – Drawer, B – Drawee, C – Payee
7.(i) 13.6.2013, (ii) 17.6.2013, (iii) 11.6.2013, (iv) 15.6.2013
8.(a) Discount Rs. 200, (b) Rebate Rs. 50, (c) Interest Rs. 140, (d) Discount Rs. 204,
9.Discount Rs. 1,500
10.Discount Rs. 3,000
11.A discount of 1st bill Rs. 600, 2nd bill Rs. 400. On due date X to remits to YRs. 5,000
12.A discount of 1st bill Rs. 900, 2nd bill Rs. 1,350. 2nd bill discount Debited to Shubham Rs. 900. Bad debt Rs. 16,800.
13.A discount of 2nd bill Rs. 5,000 debited to DGS.

 

 

*This article contains all topics about the Bills of Exchange.

For notes on all CA foundation topics, you can visit this article CA foundation note

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