Bills Of Exchange
A Written Unconditional Order

According to the Negotiable Instruments Act, 1881, "Bill of Exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument".

An analysis of the above definition chalks the following important features or essentials of a bill of exchange.

  1. It is a written document.
  2. It is an unconditional order.
  3. It is an order to pay a certain sum of money.
  4. It is signed by the drawer.
  5. It bears stamp or it is drafted on a stamp paper.
  6. It is accepted by the acceptor.
  7. The amount is paid to drawer or endorsee.
Parties Of Bill of Exchange:
  1. Drawer or Maker or Creditor
  2. Drawee or Debtor or Acceptor
  3. Payee or who have right to get payment
Bill Of Exchange Advantages:
  1. The bills of exchange grant the debtors his credit full period. Debtors cannot be asked to pay the amount before the date of due.
  2. The bills of exchange facilitate credit sales and credit purchases.
  3. The bill of exchange fixes the payment date and this enables the creditor to know when he can expect his money

    (cash). Debtor also knows when he is required to make the payment or settlement.

  4. The bill of exchange offers an easy way of sending money from one to another place.
  5. The bills of exchange are a negotiable document. And so, bill of exchange can be transferred from one person to another person in debts settlement.
Maturity Date:

Due date of bill is also called maturity date and we can get three day of grace period for paying debt through bill.

Discounting Of Bill:

Discounting of bill is the process of procurement of money against the bill from a bank before its maturity.   The drawer can discount the bill with his banker and get the money before its due date and the banker after deducting a certain amount as discount will pay the remaining amount of the bill money to the drawer.

The drawer or holder remains liable to the banker for the value of the bill money until the bill is honoured on due date

(maturity).

Endorsement Of Bill:

Endorsement of Bill is the process of negotiating or transferring the bill receivable from one person to another so as to constitute the endorsee the holder of a bill.

Some times the drawer of the bill does not retain the bill til the date of the maturity. He endorses it to some other party in discharge of a debt due from him.

If drawer signs on the back side of bill for giving the right to other for getting money from debtor, it will be termed "Endorsement".

Accommodation Bill:

Normally bills are drawn and accepted to facilitate trade. But sometime bills are drawn and accepted for the purpose of helping on or both the parties involved without any genuine business transaction between them. These bills are known as accommodation bills or fictitious bills. The main purpose of accommodation bill is to raise funds for a short period by discounting the bill with then bank. The discounting charges are shared by both the parties in the ratio if funds they received

Dishonour Of Bill Of Exchange:

If drawee or debtor does not pay the money of bill of exchange on maturity, then bill will be dishonour. After this, debtor will be responsible to his unpaid dues.

Definition and Explanation of Retiring a Bill:

Sometimes the acceptor of a bill of exchange desires to meet the bill before its maturity if he has sufficient funds at his disposal. He may ask the holder of the bill to accept the payment before the due date. If the holder agrees to his proposal

(obviously he welcomes it), he will withdrew the bill. Such a withdrawal is called "retirement of a bill of exchange". The holder generally allows the acceptor a rebate or discount for the unexpired period of the bill. This rebate is discount is an expense for the holder and a revenue for the acceptor of the bill. The accounting treatment is similar to cash discount.

Journal Entries For Retiring A Bill:

When a bill of exchange is retired by an acceptor, the following entry is made in books of the holder: 

Cash A/C...................Dr.(with actual amount of cash received)

Rebate A/C................Dr.(amount of rebate allowed)

     To Bill receivable A/C(full amount of bill) 

In the books of acceptor, the following entry is passed: 

Bill payable A/C...........Dr.(with full amount)

     To Cash A/C

(amount actually paid)

    To Rebate A/C(rebate earned)

Bills Of Exchange Accounting Treatment: Journal Entry In The Books Of Drawer: 1. When The Bill Is Accepted By Drawee:

Bill Receivable A/c-------------------------Dr.

    To Drawee A/c

(Being the bill accepted by the drawee)

Note:
  1. Bills Receivable is an asset (current asset) and falls under Real A/c - (Debit- What Comes In and Credit-What goes Out)
  2. The drawee's A/c is credited as because the amount of the bill is to be paid the drawee on whom the bill is drawn and is also accepted by him.
2. Drawee Pays The Bill On Due Date:

Cash A/c-------------------------Dr.

    To Bill Receivable A/c

(Being the bill paid on due date)

Note:
  1. Here it is to be noted that both Cash and bills receivable are assets (current asset) falls under Real A/c - (Debit- What Comes In and Credit-What goes Out.
  2. The Bill Receivable A/c, which was debited earlier on being accepted by the drawee; is now credited as because the payment is made on due date.
3. When The Bill Is Dishonored On Due Date:

Drawee A/c-------------------------Dr.

    To Bill Receivable A/c

(Being the bill dishonored on due date)

Note:
  1. On dishonor of the bill, the drawer again becomes debtor for the drawee as such the drawee's account is debited.
  2. Bills receivable A/c is credited signifying auto cancellation of the bill due to dishonor.
Journal Entry In The Books Of The Drawee: 1. When The Bill Is Accepted By Drawee:

Drawer A/c-------------------------Dr.

    To Bill Payable A/c

(Being the bill accepted the drawee)

Note:
  1. After the bill is accepted by the drawee, the liability against the bill is raised and as such bills payable account is credited.
  2. Drawer's account is debited as because he is the receiver of the bill.

    ( Personal Account: Debit-The Receiver Credit-The Giver)

2. When The Drawee Pays The Bill Amount On Due Date:

Bills Payable A/c-------------------------Dr.

    To Cash A/c

(Being the bill met on due date)

Note:
  1. Bills Payable is now debited as because the liability raised earlier is now paid off.
  2. Cash account is credited as it falls under Real A/c

    (Debit- What Comes In and Credit-What goes out)

3. Drawee Dishonors The Bill On Due Date:

Bills Payable A/c -------------------------Dr.

    To Drawer A/c

(Being the bill dishonored on due date)

Note:
  1. On dishonor of the bill, the drawer again becomes a creditor for the drawee and as such, the drawer's account is credited.
  2. Bills payable account is debited as because due to dishonor of the bill, the old bill accepted earlier by the drawee stands cancelled.
Endorsement Of Bill: Journal Entries In The Books of Endorser

Endorsee's A/c -------------------------Dr.

    To Bill receivable A/c

(Being the bill endorsed)

Journal Entries in the Books of Endorsee

Bill receivable A/c -------------------------Dr.

    To Endorser's A/c

(Being the bill received on endorsement)

On The Due Date When Payment Is Being Made:

Cash/Bank A/c -------------------------Dr.

    To Bill receivable A/C.

(Being cash received on due date)

Note:

In the books of the endorser, no journal entry is required to be passed when the bill is paid on due date. This is because, on endorsement, the ownership of the bill is transferred to the endorsee

When The Bill Is Sent To The Bank for Collection:

Entries in the Books of Drawer:

Bank for collection Of Bills A/c -------------------------Dr.

    To Bill receivable A/c

(Being the bill sent to the bank for collection)

(2) When the bill is collected by the bank on the due date an intimation is received from the bank, following entry is made in drawer's books:

Bank A/c -------------------------Dr.

    To Bank for collection Of Bills A/c

(Being the bill money collected by the bank on due date)

(3)For Collection Charges Charged By The Bank:

Bank charges A/c -------------------------Dr.

    To Bank A/c

(Being the collection charges charged by the bank)

Note:

The collection charges charged by the bank is treated as expenses for the drawer and as such it is debited.