**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.

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**

- Trade bill (Genuine bill)
- Accommodation Bill
- 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. B | Accepted Signed B | |||

Gokulpeth | Stamp | |||

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 2006 | Signed 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 | |||

Sitabardy | Stamp | ||

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 2006 | Signed 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 Transaction | In the Books of Drawer | In 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. | xx | Purchase a/c Dr. | xx | ||

To Sales a/c | xx | To ‘A’ a/c | xx | |||

(b) When the bills is drawn by ‘A’ on | B. R. a/c Dr. | xx | ‘A’ a/c Dr. | xx | ||

‘B’ or P. N. is made by ‘B’ | To B a/c | xx | To B. P. a/c | xx |

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

a. Bill is retained or | No transaction | No transaction | ||

b. Bill is discounted or | Bank a/c Dr. | xx | — do — | |

Discount a/c Dr. | xx | |||

To B.R. a/c | xx | |||

c. Bill is endorsed to ‘C or | ‘C’ a/c Dr. | xx | — do — | |

To B R a/c | xx | |||

d Bill is sent for collection | Bill for collection a/c. Dr. | xx | — do — | |

To B R a/c | xx |

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

a. If bill was retained | Cash or Bank a/c Dr. | xx | B. P. a/c Dr. | xx | ||||

To B R a/c | xx | To Cash or Bank a/c | xx | |||||

b. If a bill was discounted | No 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 collection | Bank a/c Dr. | xx | — do — | |||||

Bank charges a/c Dr. | xx | |||||||

To Bill for collection a/c | xx | |||||||

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

a. If bill was retained | ‘B’ a/c Dr. | xx | B.P. a/c. Dr. | xx | ||||

To B.R. a/c xx | Noting charges a/c Dr. | xx | ||||||

To Cash or Bank a/c | xx | To ‘A’ a/c | xx | |||||

(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 ’C | B’ a/c Dr. | xx | — do — | |||||

To ‘C’ a/c | xx | |||||||

(including noting charges) | ||||||||

d If a bill was sent for collection | ‘B’ a/c Dr. | xx | — do — | |||||

To Bills for collection a/c | xx | |||||||

To Cash or Bank a/c | ||||||||

(noting charges) | xx | |||||||

**Special Notes:**

- 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.
- 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.
- 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.
- 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

- 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

Transaction | Books of A | Books of B | ||||||

1.1.06 Trade takes place and Bills/Promissory Notes made | ||||||||

Sales goods to B | B’s A/c Dr. | ,800 | Purchase A/c Dr. | 1.800 | ||||

To Sales A/c. | ,800 | To A’s A/c | 1,800 | |||||

B gives 4 Promissory Notes to A | B.R.A/c Dr. | ,800 | A’s A/c Dr. | 1,800 | ||||

To B’s A/c | ,800 | To B.P. A/c | 1,800 | |||||

1 st Bill retained | No transaction | No transaction | ||||||

2nd Bill endorsed to ‘C | C’s A/c Dr. | 500 | No transaction | |||||

To B.R. A/c | 500 | |||||||

4.1.06 | Bank A/c Dr. | 590 | No transaction | |||||

3rd Bill Discounted | Discount A/c Dr. | 10 | ||||||

To B.R. A/c | 600 | |||||||

4th Bill sent for collection | Bill for Collection A/c Dr. | 400 | No transaction | |||||

To B.R. A/c | 400 | |||||||

Due Date 4.4.06 Assuming that bills are honoured | ||||||||

1st Bill which was retained | Cash/Bank A/c Dr. | 300 | B.P. A/c Dr. | 300 | ||||

To B.R. A/c | 300 | To Cash/Bank A/c | 300 | |||||

2nd Bill which was endorsed to “C | No Entry | B.P. A/c Dr. | 500 | |||||

To Cash/Bank A/c | 500 | |||||||

3rd Bill which was discounted. | No Entry | – | B.P. A/c Dr. | 600 | ||||

– | To Cash/Bank A/c | 600 | ||||||

4th Bill which was sent for | Cash/Bank A/c Dr. | 400 | B.P. A/c Dr. | 400 | ||||

Collection | To Bill for Collection a/c | 400 | To Cash/Bank a/c | 400 | ||||

On Due dale Entry If hill la Dlahonnured | ||||||||

1st Bill which was retained | B’s A/c Dr. | 300 | BP A/c Dr. | 300 | ||||

To B.R. A/c | 300 | To A’s A/c | 300 | |||||

2nd Bill which was endorsed to ‘C’ | B’s A/c | 500 | B.P. A/c Dr. | 500 | ||||

To C’s A/c | 500 | To A’s A/c | 500 | |||||

3rd Bill which was discounted | B’s A/c Dr. | 600 | B.P. A/c Dr. | 600 | ||||

(Bank will recover amt. from A) | To Bank A/c | 600 | To A’s A/c | 600 | ||||

4th Bill which was sent for | B’s A/c Dr. | 400 | B.P. A/c Dr. | 400 | ||||

Collection | To Bills for Collection A/c | 400 | To A’s A/c | 400 | ||||

**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

Transaction | In the books of Drawer (Mr A) | In the books of Acceptor (Mr B) | ||||

(a) Cancel the old bill | B’s a/c Dr. | … | B.P. a/c Dr. | … | ||

To B.R. a/c | … | To A’s a/c | … | |||

(b) Interest due to A from B | B’s a/c Dr. | … | Interest a/c Dr. | … | ||

To Interest a/c | … | To A’s a/c | … | |||

(c) Settlement of the dues | B.R. a/c Dr. (Amt. of the new bill) | … | A’s a/c Dr. (total dues) | … | ||

partly cash and partly | Cash a/c Dr. (Cash received) | … | To B.P. a/c (Amt. of the new bill) | … | ||

bill or full amount in the bill | To 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

Transaction | Books of Nit in | Books of Suresh | ||||

(a) Old Bill cancelled | Suresh a/c Dr. | 2,000 | B. P. A/c Dr | 2,000 | ||

To B. R. a/c | 2,000 | To Nitin a/c | 2,000 | |||

(b) Interest due | Suresh a/c Dr. | 50 | Interest a/c Dr | 50 | ||

2000 × 1006 × 3/12 = 50 | To Interest a/c | 50 | To Nitin a/c | 50 | ||

(c) Settlement by | B. R. a/c Dr. | 2050 | Nitin a/c Dr. | 2050 | ||

drawing a new bill | To Suresh a/c | 2050 | To B. P. a/c | 2050 |

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

Transaction | Books of A | Books of B | ||||

A draws bill on B’ | B.R.A/c Dr. | 1,000 | ‘A’ A/c Dr. | 1,000 | ||

To ‘B’ A/c | 1,000 | To B.P. A/c | 1,000 | |||

An endorsed bill to ‘C | C’s A/c Dr. | 1,000 | No Entry | – | ||

To B.R. A/c | 1,000 | – | ||||

Old bill cancelled | ‘B’ A/c Dr. | 1,000 | B.P. A/c Dr. | 1,000 | ||

To ‘C A/c | 1,000 | To ‘A’ A/c | 1,000 | |||

Int. Due | ‘B’ A/c Dr. | 15 | Intt. A/c Dr. | 15 | ||

1,000 ×6%×3/12=15 | To Int. A/c | 15 | To ‘A’ A/c | 15 | ||

Settlement by new’ bill | B.R.A/c Dr. | 1,015 | ‘A’A/c Dr. | 1,015 | ||

(2nd bill) | To ‘B’ A/c | 1,015 | To B. P. A/c | 1,015 | ||

A paid to C | C’s A/c Dr. | 1,000 | No Entry | • | ||

To Cash/Bank A/c | 1,000 | – | ||||

2nd Bill Honoured by B | Cash/Bank A/c | 1,015 | B.P. A/c Dr. | 1,015 | ||

To B.R. A/c | 1,015 | To Cash/Bank | 1,015 |

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)

Date | Transaction | Journal of C | Dr. | Cr. | Journal of B | Dr. | Cr. |

1.4 | Promissory note | B.R. A/c Dr. | 600 | C A/c Dr. | 600 | ||

given by B to C | To B A/c | 600 | To B.P. A/c | 600 | |||

Bill discounted with the bank | Bank/cash a/c Dr | 590 | No entry | ||||

Discount a/c Dr. | 10 | ||||||

To B.R. A/c | 600 | ||||||

4.7 | Bill dishonoured, bank | B A/c Dr. | 605 | B.P. A/c Dr. | 600 | ||

recovers from ‘C bill amount + noting charges | To Bank A/c | 605 | Noting charges Dr To C A/c | 5 | 605 | ||

Interest due | B A/c Dr. | 10 | Interest A/c Dr. | 10 | |||

To Int. A/c | 10 | To C A/c | 10 | ||||

Settlement partly in Cash & | Cash/Bank a/c Dr. | 200 | C A/c Dr. | 615 | |||

balance by the new bill. | B.R. A/c Dr. | 415 | To B A/c | 415 | |||

To B.P. A/c | 615 | To Cash A/c | 200 | ||||

7.9 | The second bill dishonoured & | B A/c Dr. | 420 | B. P. A/c Dr. | 415 | ||

noting charges paid by ‘C | To B.R. A/c | 415 | Noting charges Dr. | 5 | |||

To cash A/c | 5 | To C A/c | 420 |

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)

Date | Transaction | Journal of C | Dr. | Cr. | Journal of B | Dr. | Cr. | ||

1.5 | Promissory note | B.R. A/c | Dr. | 600 | C A/c | Dr. | 600 | ||

given by B to C | To B A/c | 600 | To B. P. A/c | 600 | |||||

Discounted with Bank | Bank A/c | Dr. | 591 | No entry | |||||

Discount A/c | Dr. | 9 | |||||||

To B.R. A/c | 600 | ||||||||

4.8 | Dishonour and Renewal | ||||||||

Bill gets dishonoured | |||||||||

(Bank recovers from | B A/c | Dr. | 610 | B. P. A/c | Dr. | 600 | |||

‘C’ including noting | To Bank A/c | 610 | Noting charges a/c Dr. | 10 | |||||

charges) Interest due | To C A/c | 610 | |||||||

(out of 25, 10 is | |||||||||

noting charges & ball. | B A/c | Dr. | 15 | Interest A/c | Dr. | 15 | |||

is interest) | To Int. A/c (25-10 | =15) | 15 | To C A/c | 15 | ||||

Settlement by interest | B.R. A/c | Dr. | 400 | C A/c | Dr. | 625 | |||

amt. in cash & balance | Cash A/c | Dr. | 225 | To B. P. A/c | 400 | ||||

by bill. | To B A/c | 625 | To Cash A/c | 225 | |||||

Renewal of Bill | |||||||||

7.10 | (i) Cancellation of Bill | ||||||||

B A/c | Dr. | 400 | B. P. A/c | Dr. | 400 | ||||

To B.R. A/c | 400 | To C A/c | 400 | ||||||

(ii) Interest due | |||||||||

B A/c | Dr. | 20 | Interest A/c Dr. | 20 | |||||

To interest A/c | 20 | To C A/c | 20 | ||||||

(iii) Settlement | |||||||||

B.R. A/c | Dr. | 400 | C A/c | Dr. | 420 | ||||

Cash A/c | Dr. | 20 | To B. P. A/c | 400 | |||||

To B A/c | 420 | To cash A/c | 20 | ||||||

On due date Bill | |||||||||

10.1. | Honoured | Cash A/c | Dr. | 400 | B. P. A/c | Dr. | 400 | ||

To B.R. A/c | 400 | To cash A/c | 400 |

**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

Transaction | In the books of Drawer (Mr A) | In the books of Acceptor (Mr B) | ||||||

Bill retired | Cash/Bank a/c | Dr. | 950 | B. P. A/c | Dr. | 1000 | ||

Rebate a/c. | Dr. | 50 | To Cash/Bank a/c | 950 | ||||

To B.R. a/c | 1000 | To Rebate a/c | 50 |

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**

Transaction | Books of A | Books of B | ||||

1.1.06 | ||||||

A Selling to B | B’s A/c Dr. | 10,000 | Purchases A/c | 10,000 | ||

To Sales A/c | 10,000 | To A’s A/c | 10,000 | |||

Bill Drawn by A on | B.R. A/c Dr. | 10,000 | A’s A/c Dr. | 10,000 | ||

B | To B’s A/c | 10,000 | To B.P. A/c | 10,000 | ||

1.3.06 | ||||||

B retires his acceptance | Cash A/c Dr. | 9,900 | B. R. A/c Dr. | 10,000 | ||

12% × 10,000 × 1/12 = 100 | Rebate A/c Dr. | 100 | To Rebate A/c | 100 | ||

To B.R. a/c | 10,000 | To Cash/Bank a/c | 9,900 |

**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)

Transaction | Books of David | Books of Thomas | ||||

1.1.06 | ||||||

Bills Drawn | B.R. A/c Dr. | 6,000 | David A/c Dr. | 16,000 | ||

B.R. A/c Dr. | 10,000 | To B.P. A/c | 6.000 | |||

To Thomas A/c | 16,000 | To B.P. A/c | 10,000 | |||

Renewal of 1st bill, | Thomas A/c Dr. | 6,000 | B.P. A/c Dr. | 6,000 | ||

old bill cancelled | To B.R. A/c | 6,000 | To David’s A/c | 6,000 | ||

Interest due | Thomas A/c Dr. | 180 | Int. A/c Dr. | 180 | ||

To Int. A/c | 180 | To David a/c | 180 | |||

Settlement by net | B.R. A/c Dr. | 6180 | David A/c Dr. | 6,180 | ||

bill (3rd bill) | To Thomas A/c | 6,180 | To B.P. A/c | 6,180 | ||

20.3.06 | ||||||

Retirement of 2nd | Cash/Bank A/c Dr. | 9,900 | B.P. A/c Dr. | 10,000 | ||

bill | Rebate A/c Dr. | 100 | To Cash/Bank A/c | 9.900 | ||

To B.R. A/c | 10,000 | To Rebate A/c | 100 | |||

Thomas declared | Thomas A/c Dr. | 6,180 | B.P. A/c Dr. | 6,180 | ||

insolvent hence | To B.R. A/c | 6,180 | To David A/c | 6,180 | ||

3rd bill dishonoured | ||||||

Full and final | Cash/Bank A/c Dr. | 3,090 | David A/c Dr. | 6,180 | ||

the settlement at 50% | Bad Debts A/c Dr. | 3,090 | To Cash/Bank A/c | 3,090 | ||

To Thomas A/c | 6,180 | To Deficiency A/c | 3,090 |

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**

Transaction | Dr. | Cr. | ||

(a) Our B.P. retired | B. P. A/c | Dr. | 5,000 | |

To Rebate | 10 | |||

To Cash/Bank A/c | 4990 | |||

(b) Renewal of our B.R. | K. Kaku’s A/c | Dr. | 400 | |

Old bill (cancelled) | To B.R. A/c | 400 | ||

Interest due | K. Kaku’s A/c | Dr. | 15 | |

To Intt. A/c | 15 | |||

Settlement by new bill | B.R. A/c | Dr. | 415 | |

To K. Kaku’s A/c | 415 | |||

(c) Renewal of our B.P. | B.P. A/c | Dr. | 800 | |

Old bill cancelled | To P. Swamy. A/c | 800 | ||

Part cash payment | P. Swamy A/c | Dr. | 200 | |

To Cash/Bank A/c | 200 | |||

Interest due | lull. A/c | Dr. | 18 | |

To P. Swamy. A/c | 18 | |||

2nd bill accepted for the balance amount | P. Swamy A/c | Dr. | 618 | |

To B.P. A/c | 618 | |||

(d) B.R. which was endorsed renewed | D. Dutt’s A/c | Dr. | 710 | |

Old bill cancelled | To Mukherjee’s A/c | 710 | ||

We pay Mukherjee | Mukherjee’s A/c | Dr. | 710 | |

To Bank A/c | 710 | |||

Interest due | D. Dull’s A/c | Dr. | 15 | |

To Intl. A/c | 15 | |||

2nd bill drawn on Dutta | B.R. A/c | Dr. | 725 | |

To D. Dutt’s A/c | 725 | |||

(e) B. P. dishonoured | B.P. A/c | Dr. | 500 | |

To A. Alam A/c | 500 | |||

Bank charges due | Bank charges A/c | Dr. | 10 | |

To A. Alam A/c | 10 | |||

Paid | A’ Alam A/c | Dr. | 510 | |

To Bank A/c | 510 | |||

(f) B. P. settled by giving B.R. | B.P. A/c | Dr. | 500 | |

To Bill Receivable A/c | 500 |

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

**Drafts of a Bill of Exchange**

To, | Accepted | |||

Mr B | Signed B | Stamp | ||

Pay Rs. 5000 after 3 months to ‘C or his order for value received | ||||

Signed by ‘A’ | ||||

Nagpur 2/4/06 |

**Solution :**

Date | Books of A | Books of B | Books of C | ||||||

2.4.06 | When a bill is drawn by ‘A’ on | ||||||||

‘B’ but favouring ‘C’ | |||||||||

C a/c. Dr. | 5000 | A a/c Dr. | 5,000 | B.R. a/c. Dr. | 5000 | ||||

To B. a/c | 5000 | To B.P. a/c | 5000 | To A a/c | 5000 | ||||

5.7.06 | If the bill is honoured on the due date | ||||||||

No Entry | B.P. a/c. Dr. | 5000 | Bank a/c. Dr. | 5000 | |||||

To Bank a/c | 5000 | To B.R. a/c | 5000 | ||||||

5.7.06 | If Bill is dishonoured on the due date | ||||||||

B a/c Dr. | 5000 | B.P. a/c. Dr. | 5000 | A a/c. Dr. | 5000 | ||||

To C a/c | 5000 | To A a/c | 5000 | To B.R. a/c | 5000 |

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**

Date | Party (Drawer/Creditor/Supplier) | L.F. | Amount |

5.1.04 | X | 5000 | |

10.1.04 | L | 6000 | |

16.1.04 | M | 4000 | |

25.1.04 | Z | 10000 | |

Total | 25,000 |

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.

- 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**

Date | Party (Drawee/Debtor/Customer) | L.F. | Amount |

6.3.04 | P | 6000 | |

12.3.04 | Q | 8000 | |

18.3.04 | R | 4000 | |

26.3.04 | S | 12000 | |

Total | 30,000 |

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**

Date | Party (Endorsee/Creditor/Supplier) | L.F. | Amount |

8.3.04 | L | 6000 | |

14.3.04 | M | 8000 | |

28.3.04 | Z | 12000 | |

Total | 26,000 |

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.

**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**

Transaction | Books of ‘A’ | Books of ‘B’ | ||||||

(1) If ‘A’ draws a bill & uses the money | ||||||||

a. Bill is drawn by A on B | B R a/c Dr. | xx | ‘A’ a/c Dr. | xx | ||||

To ‘B’ a/c | xx | To B P a/c | xx | |||||

b. ‘A’ discounts the bill with his | Bank a/c Dr. | xx | No transaction | |||||

bank. | Discount a/c Dr. | xx | ||||||

To B R a/c | xx | |||||||

c. On due date, ‘A’ remits the | ‘B’ a/c Dr. | xx | Cash or Bank a/c Dr. | xx | ||||

money to ‘B’ (full amount) | To Cash or Bank a/c | xx | To ‘A’ a/c | xx | ||||

d. Bill is honoured by ‘B’ | No transaction | B P a/c Dr. To Cash or Bank a/c | xx | xx | ||||

(2) If ‘A’ draw a bill and proceeds after discounting are shared | ||||||||

a. Bill is drawn by A on B | B R a/c Dr. | xx | ‘A’ a/c Dr. | xx | ||||

To ‘B’ a/c | xx | To B P a/c | xx | |||||

b. ‘A’ discounts the bill | Bank a/c Dr, | xx | No transaction | |||||

Discount a/c Dr. | xx | |||||||

To B R a/c | xx , | |||||||

c. ‘K remits part amount and | B’ a/c Dr. | xx | Bank a/c. Dr. | xx | ||||

proportionate discount to ‘B’ | To Bunk a/c | xx | Discount a/c Dr. | xx | ||||

immediately | To Discount a/c | xx | To ‘A’ a/c | xx | ||||

d. On due date ‘K remits balance | B a/c Dr. | xx | Bank a/c Dr. | xx | ||||

amount to ‘B’ | To Bank a/c | xx | To ‘A’ a/c | xx | ||||

c. Bill is honoured by ‘B’ | No transaction | B P a/c Dr | xx | |||||

To Bank a/c | xx | |||||||

(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/c | xx | To BP a/c | xx | |||||

b. ‘A’ discounts the hill | Bank a/c Dr. | xx | No transaction | |||||

Discount a/c. Dr. | xx | |||||||

To B R a/c | xx | |||||||

c. ‘B’ draws on ‘A’ (2nd bill) | ‘B’ a/c Dr. | xx | B R a/c Dr. | xx | ||||

To B P a/c | xx | To ‘A’ a/c | xx | |||||

d. ‘B’ discounts the bill | No transaction | Bank a/c Dr. | xx | |||||

Discount a/c Dr. | xx | |||||||

To B R a/c | xx | |||||||

e. Honours his acceptance on | B P. a/c Dr. | xx | No transaction | |||||

due date (2nd bill) | To Bank a/c | xx | ||||||

f. ‘B’ honours his acceptance on | No transaction | B P a/c Dr. | xx | |||||

due date (1st bill) | To Bank a/c | xx | ||||||

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. | 1000 | Bank a/c. Dr. | 1000 | ||

remitted by A to B | To Bank a/c. | 1000 | To ‘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

Transaction | Books of DGS | Books of YOU | ||||

DGS draw’s on | B.R. A/c Dr. | 100000 | DGS A/c Dr. | 100000 | ||

YOU | To YOU A/c | 100000 | To B.P. A/c | 100000 | ||

Bill Discounted by | Bank A/c Dr. | 95000 | No Entry | . | ||

DGS | Discount Dr. | 5000 | – | |||

To B.R. A/c | 100000 | |||||

On due date DGS | YOU A/c Dr. | 100000 | Bank A/c Dr. | 100000 | ||

remits the amt. | To Bank. A/c | 100000 | To DGS A/c | 100000 | ||

Bill honoured by | No Entry | – | B.P. A/c Dr. | 100000 | ||

YOU | To Bank A/c | 100000 |

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

Transaction | Books of DGS | Books of YOU | ||||

DGS draws on YOU | B.R. A/c Dr. | 100000 | DGS A/c Dr. | 100000 | ||

To YOU A/c | 100000 | To B.P. A/c | 100000 | |||

Bill Discounted by DGS | Bunk A/c Dr. | 9S000 | No Entry | – | ||

Discount Dr. | 5000 | – | ||||

To B.R. A/c | 100000 | |||||

On due date YOU draws | YOU A/c Dr. | 105000 | B.R. A/c Dr | 105000 | ||

New hill on DGS | To B. P. A/c | 105000 | To DGS A/c | 105000 | ||

Bill Discounted by | Discount Dr. | 5000 | Bank A/c Dr. | 100000 | ||

YOU. Discount debited | To YOU a/c | 5000 | DGS A/c Dr. | 5000 | ||

to DGS | To B.R. A/c | 105000 | ||||

1st Bill Honoured | No Entry | B.P. A/c Dr. | 100000 | |||

To Bank A/c | 100000 |

**DGS A/c In YOU’s Books**

To Bills Payable A/c | 1,00,000 | By Bills Receivable A/c | 1,05,000 |

To Discount of 2nd bill | 5,000 | ||

1,05,000 | 1,05,000 |

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)**

Date | Transaction | Journal of X | Dr. | Cr. | Journal of Y | Dr. | Cr. |

1.4 | X draws on Y a bill of | B.R. A/c Dr. | 1500 | X A/c Dr. | 1500 | ||

exchange | To Y A/c | 1500 | To B.P. A/c | 1500 | |||

Bill was discounted with | Bank/cash A/c Dr. | 1470 | No entry | ||||

bank | Discount A/c Dr. | 30 | |||||

To B.R A/c | 1500 | ||||||

Remittance by X to Y | Y A/c Dr. | 500 | Cash A/c Dr. | 490 | |||

With proportionate discount | To Cash A/c | 490 | Discount A/c Dr. | 10 | |||

To Discount A/c | 10 | To X A/c | 500 | ||||

4.7. | X remits balance to Y | Y A/c Dr. | 1000 | Bank A/c Dr. | 1000 | ||

To Bank A/c | 1000 | To X A/c | 1000 | ||||

Bill honoured by Y | No entry | B.P. A/c Dr. | 1500 | ||||

To Bank A/c | 1500 |

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)**

Dale | Transaction | Journal of X | Dr. | Cr. | Journal of Y | Dr. | Cr. | ||

1.4 | X draws on Y a bill of | B.R. A/c | Dr. | 1500 | X A/c Dr | 1500 | |||

exchange | To Y A/c | 1500 | To B.P. A/c | 1500 | |||||

Bill was discounted with | Bank/cash A/c | Dr. | 1470 | No entry | |||||

bank | Discount A/c | Dr. | 30 | ||||||

To B.R A/c | 1500 | ||||||||

Remittance by X to Y | Y A/c | Dr. | 500 | Cush A/c Dr. | 490 | ||||

With proportionate discount | To Cash A/c | 490 | Discount A/c Dr. | 10 | |||||

To Discount A/c | 10 | To X A/c | 500 | ||||||

4.7. | 2nd bill drawn by Y on X | Y A/c | Dr. | 2100 | B.R. A/c Dr. | 2100 | |||

To B.P. A/c | 2100 | To X A/c | 2100 | ||||||

Second bill discounted | No entry | Bank/cash A/c | Dr. | 2055 | |||||

Discount A/c | Dr. | 45 | |||||||

To B.R. A/c | 2100 | ||||||||

1st bill is honoured from the | No entry | B.P. A/c | Dr. | 1500 | |||||

proceeds of 2nd bill | To Cash A/c | 1500 | |||||||

Remittance to X by Y | Cash A/c | Dr. | 370 | X A/c | Dr. | 400 | |||

•Dis = 45/2055 X1370 | Discount A/c | Dr. | 30 | To Cash A/c | 370 | ||||

=30 | To Y A/c | 400 | To discount A/c | 30 | |||||

7.10 | Second bill dishonoured & Y | B.P. A/c | Dr. | 2100 | X A/c | Dr. | 2100 | ||

pays the bank | To Y A/c | 2100 | To cash/bank A/c | 2100 | |||||

Final | Y A/c | Dr. | 1400 | Cash/Bank A/c | Dr. | 700 | |||

Settlement | To cash/bank A/c | 700 | Bad debts A/c | Dr. | 700 | ||||

To deficiency A/c | 700 | To X A/c | 1400 |

“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)**

Date | Transaction | Journal of Mohan | Dr. | Cr. | Journal of Ram | Dr. | Cr. | |

1.1 | Mohan draws a bill on | B.R. Ac | Dr. | 2000 | Mohan A/c Dr. | 2000 | ||

Ram (1st bill) | To Ram Ac | 2000 | To B. P. A/c | 2000 | ||||

Bill discounted with | Bank/cash A/c | Dr. | 1980 | No entry | ||||

Bank | Discount A/c | Dr. | 20 | |||||

To B.R. A/c | 2000 | |||||||

1.1 | Ram draws bill on | Ram A/c | Dr. | 2000 | B.R. A/c Dr. | 2000 | ||

Mohan (2nd bill) | To B. P. A/c | 2000 | To Mohan A/c | 2000 | ||||

Bill discounted with | No entry | Bank A/c Dr. | 1970 | |||||

bank | Discount A/c Dr. | 30 | ||||||

To B.R. A/c | 2000 | |||||||

4.4 | Mohan honours his bill | B. P. A/c | Dr. | 2000 | No entry | |||

(2nd bill) | To cash/bank A/c | 2000 | ||||||

Ram honours his bill, | No entry | B.P. A/c Dr. | 2000 | |||||

(1st bill) | To Bank A/c | 2000 |

** **

**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**

Date | Books of H | | | Books of J | | Books of G | | | ||

1.7.2005 | G a/c | Dr. | 80000 | B.R. a/c Dr. | 80000 | |||||

To B.P. a/c | 80000 | – | To H a/c | 80000 | ||||||

1.7. | G a/c Dr. | 81000 | Purchase a/c Dr. | 81000 | ||||||

To Sale a/c | 81000 | To J a/c | 81000 | |||||||

1.7. | – | B.R. a/c Dr. | 80000 | J a/c Dr. | 81000 | |||||

Discount Dr. | 1000 | To B.R. a/c | 81000 | |||||||

To G a/c | 81000 | To Discount a/c | 1000 | |||||||

1.9. | J. a/c. | Dr. | 90000 | Purchase a/c Dr. | 90000 | — | ||||

To Sale a/c | 90000 | To H a/c | 90000 | |||||||

1.9. | B. P. A/c | Dr. | 80000 | H a/c Dr. | 90000 | — | ||||

Bank a/c | Dr. | 9000 | To B.R. a/c | 80000 | ||||||

Discount a/c | 1000 | To Bank a/c | 9000 | |||||||

To J a/c | 90000 | To Discount a/c | 1000 | |||||||

(Our B.P. is endorsed in our favour hence cancelled) | ||||||||||

1.10. | Purchase a/c | Dr | 100000 | — | H a/c Dr. | 100000 | ||||

To G a/c | 100000 | To Sale a/c | 100000 | |||||||

1.10. | G. a/c | Dr. | 20000 | — | Bank a/c Dr. | 20000 | ||||

To Bank a/c | 20000 | To H a/c | 20000 |

**IN THE BOOKS OF ‘H’**

**G’s A/c**

17. 05 | To B.P. | 80,000 | 1.10. | By Purchases | 1,00,000 |

9.10. | To Cash/Bank | 20,000 | |||

1,00,000 | 1,00,000 |

B.P A/c

1.9.05 | To J’s A/c | 80,000 | 1.7.05 | By G A/c | 80,000 |

80,000 | 80,000 |

**J’s A/c**

1.9.05 | To Sales A/c | 90,000 | 1.9.05 | By BP A/c | 80,000 |

By Bank/Cash A/c | 9,000 | ||||

By Discount | 1000 | ||||

90,000 | 90,000 |

**IN THE BOOKS OF J**

**G’s A/c**

1.7. 05 | To Sales A/c | 81,000 | 1.7.05 | By BR A/c | 80,000 |

By Discount A/c | 1,000 | ||||

81,000 | 81,000 |

**BR A/c**

1.7. 05 | To G’s A/c | 80,000 | 1.9.05 | By I Ps A/c | 80,000 |

80,000 | 80,000 |

**H’s A/c**

1.9.05 | To B.R. A/c | 80,000 | 1.9.05 | By Purchases A/c | 90,000 |

To Cash/Bank | 9.000 | ||||

To Discount A/c | 1,000 | ||||

90,000 | 90,000 |

**IN THE BOOKS OF G**

**H’s A/c**

1.10.05 | To Sales A/c | 1,00,000 | 1.7.05 | By B.R. A/c | 80,000 |

1.10.05 | By Cash/Bank A/c | 20,000 | |||

1,00,000 | 1,00,000 | ||||

B.R. A/c | |||||

1.7. 05 | To H’s A/c | 80,000 | 1.7.05 | By J’s A/c | 80,000 |

80,000 | 80,000 | ||||

J A/c | |||||

1.7. 05 | To B.R A/c | 80,000 | 1.7.05 | By Purchases A/c | 81,000 |

To Discount A/c | 1,000 | ||||

81,000 | 81,000 |

** **

**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. B | Accepted | |||

Signed B | Stamp | |||

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 ‘Y^{1}.

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