CA FOUNDATION MARATHON | BILLS OF EXCHANGE 7.

7. BILLS OF EXCHANGE

1. FEATURES OF PROMISSORY NOTE / BILL OF EXCHANGE

Particulars Promissory Note Bill of Exchange
Nature Unconditional Undertaking to pay Unconditional Order to pay
Parties Maker and Payee Drawer, Drawee and Payee
Authorisation It is signed by the maker It is signed by the drawer
Example Rupee Note Bills drawn during normal business
Liability Liability is on the Maker (a) Primary liability on the drawee.
(b) Secondary liability on the
drawer
Act According to RBI Act a promissory Negotiable Instruments Act, 1981
note cannot be made payable to governs the provisions for bills of
bearer. exchange.
It should be properly stamped.

2. CALCULATION OF DUE DATES

Related Term • Sight – Means Acceptance
• Grace days – 3

Specified days after Count specified days from the date immediately after the date
sight of acceptance and also include 3 grace days.

Specified days / The Starting date shall be date of drawal

Months after date

When Due date is public The Due dates shall be the immediate preceding Business
holiday and known (Working) day
before

When Due date is public The Due date shall be the immediate succeeding Business
holiday & declared (Working) day
suddenly

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CA FOUNDATION MARATHON | BILLS OF EXCHANGE 7.2

3. NO OF DAYS IN EACH MONTH

January – 31 Days April – 30 Days July – 31 Days October – 31 Days

February – 28 May – 31 Days August – 31 Days November – 30

Days (29 Days if Days
Leap Yr.)
March – 31 Days June – 30 Days September – 30 Days December – 31
Days

4. SIGNIFICANT PUBLIC HOLIDAYS

01.01. – New Year 26.01. – Republic Day 01.05 – May day
02.10. – Gandhi Jayanthi 15.08. – Independence Day 25.12.2010 – Christmas

5. SPECIAL SITUATIONS
• When bills are paid before the due date.
• Calculate Rebate (called discount / Interest) = Amount paid  Int.
Rate  No. of days or Months between date of payment & due date
 365 or 12
Retirement
• ‘Rebate’ is generally equal to the amount of interest for the
remaining period of the bill. Rebate is an expense for the party
receiving the payment and gain to the acceptor of the bill making
the payment.

• When bills are not paid on due date and are renewed for further
period.
• Calculate Interest = Amount Unpaid  Int. Rate  No. of days or
Months between date of renewal & fresh due date  365 or 12
Renewal • Steps for renewal of Bill
o Cancellation of original bill
o Part payment by drawee to drawer
o Interest charged by drawer to drawee
o Fresh bill drawn by drawer on drawee

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CA FOUNDATION MARATHON | BILLS OF EXCHANGE 7.3

RENEWAL

Cancel Original Bill Renew Bill

• The bills are discounted with the banker by the drawer and Money
is received from the bank.
• Discount will be deducted by the bank. Discount = Amount of Bill
 Int. Rate  No. of days or Months between date of discounting &
Discounting due date  365 or 12
• If the drawee does not pay, then the bank can recover the money
from the drawer.
• Discount is an expense for the holder receiving the payment and
gain to the bank.

• Acceptor refuses to honour his commitment on due date

• Recording the fact of dishonour on the bill by the ‘Notary public’
Dishonour is called “Noting” and the amount charged by him for his services
are called ‘Noting Charges’.
• Dishonour of bill recorded in Bills receivable Book.

DISHONOUR

Bill Date - 20 June 1920 20 Sept 1920

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CA FOUNDATION MARATHON | BILLS OF EXCHANGE 7.4

• When the bills receivable is transferred in favour of any other

person by the drawer.
• Transferor – Endorser;
Endorsement • Transferee – Endorsee
• There is no limit on number of endorsements that can be made.
On due date, the last endorsee holding the bill presents the bill to
the acceptor for payment.

Bill sent for • These agencies realise the bills on behalf of the drawer and charge
collection: a nominal commission or collection charges for it.

BILL SENT FOR COLLECTION

Bank Officer
Date - 20 June 1920 30 Sept 1920

6. ACCOMMODATION BILLS (‘FICTITIOUS BILLS’)

• Meaning: Bills drawn by one trade on another, when they are in need of funds.
• Feature: There is no sale / purchase by one party on the other.

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CA FOUNDATION MARATHON | BILLS OF EXCHANGE 7.5

• Discounting: The drawer of the above bill will discount the bill with the bank and
share the proceeds.
• Discounting Charges : are shared by both the parties in the ratio in which they share
the amount of bill.
Situations arising in case of Accommodation Bill
• Both the parties, drawer and drawee, honour their commitments on due date i.e.
drawer remits his share in accommodation and drawee honours the bill on due date.
• In spite of non-remittance from drawer, drawee honours the bill.
• Drawer remits his share in accommodation, but drawee dishonours the bill.
• Drawer does not remit his share in accommodation and drawee dishonours the bill.

7. JOURNAL ENTRIES
No Books of Drawer Books of Drawee

1 Biil drawn duly accepted

Bills receivable A/c Dr. Drawer's A/c Dr.

To Drawee' A/c To Bills payable A/c

2. i. Bill retained

No entry No entry

( not being a transaction ) ( not being a transaction )

ii. Bill sent to Bank for collection

Bill for collection A/c Dr. No entry

To Bills Receivable A/c

iii. Bill Discounted with bank

Bank A/c.. Dr. No entry

Discount A/c Dr.

To Bills Receivable A/c

iv. Endorsement of bill

Endorsee's A/c.. Dr. No entry

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CA FOUNDATION MARATHON | BILLS OF EXCHANGE 7.6

To Bills receivable A/c

3. Renewal of bill

i. Cancellation of old bill

Drawee's A/c... Dr. Bills payable A/c ... Dr.

To Bill Receivable A/c To Drawer's A/c

ii. Part payment by drawee

Cash/Bank A/c ... Dr. Drawer's A/c ... Dr.

To Drawee's A/c To Cash / Bank A/c

iii. Drawl of new bill

Bill Receivable A/c. Drawer's A/c .. Dr.

To Drawee's A/c. Interest A/c Dr.

To interest A/c. To Bills Payable A/c.

4 Retirement of bill

Bill retirement by drawee

Bank A/c. Dr. Bill Payable A/c. Dr.

Rebate / Discount A/c. . Dr. To Bank A/c.

To Bills Receivable A/c. To Rebate / Discount A/c.

5. Honored on maturity

i. Bill retained

Bank A/c ... Dr. Bills payable A/c .. Dr.

To Bill Receivable A/c Dr. To Bank A/c

ii. Bill sent to bank for collection

Bank A/c Dr. Bills payable A/c .. Dr.

To Bill for collection A/c To Bank A/c

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CA FOUNDATION MARATHON | BILLS OF EXCHANGE 7.7

iii. Bill Discounted with Bank

No entry, as payment will be Bills payable A/c ... Dr.

received by the bank,

(holder in due course) To Bank A/c

iv. Endorsement of bill

No entry, as payment will be Bills payable A/c ... Dr.

received by the endorsee

(holder in due course) To Bank A/c

6. Dishonored on maturity

i. Noting charges / Bank charges paid Dr. No Entry

Noting / Bank charges A/c ...

To Cash / Bank A/c

ii. Bill retained

Drawee's A/c ... Dr. Bills payable A/c ... Dr.

To Bills receivable A/c Noting charges A\c ... Dr.

To Noting / Bank charges A/c To Drawer's A/c

iii. Bill sent to Bank for collection

Drawee's A/c .. Dr. Bills Payable A/c Dr. Dr.

To Bill for collection A/c Noting / Bank Charges A/c... Dr.

To Bank charge A/c To Drawer's A/c

iv. Bill Discounted with bank

Drawee's A/c ... Dr. Bills Payable A/c ... Dr.

To Bank A/c Bank charges A/c Dr.

(Bill amount + Bank Charges) To Drawer's A/c

v. Endorsement of bill

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CA FOUNDATION MARATHON | BILLS OF EXCHANGE 7.8

a. Noting charge paid by drawer

Drawee's A/c ... Dr. Bills payable A/c .... Dr.

To Endorsee's A/c Noting charges A/c . Dr.

To Noting / Bank charges A/c To Drawer's A/c

b. Noting charges paid by endorsee

Drawee's A/c Dr. Bill Payable A/c . Dr.

To Endorsee A/c. Noting Charges A/c. . Dr.

To Drawer's A/c.

7. Insolvency of drawee :

i. Bill retained

Drawee's A/c... Dr. Bills payable A/c ... Dr.

To Bill Receivable A/c To Drawer's A/c

ii. Bill sent to bank for collection

Drawee's A/c... Dr. Bills payable A/c ... Dr.

To Bill Receivable A/c To Drawer's A/c

iii. Bill discounted with bank

Drawee's A/c... Dr. Bills payable A/c ... Dr.

To Bank A/c To Drawer's A/c

iv. Endorsement of Bill

Drawee's A/c... Dr. Bills payable A/c ... Dr.

To Endorsee's A/c To Drawer's A/c

v. Dividend received from insolvent's

estate

Bank A/c ... Dr. Drawer's A/c ... Dr.

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CA FOUNDATION MARATHON | BILLS OF EXCHANGE 7.9

Bad Debts A/c. ... Dr. To Bank A/c.

To Drawee's A/c To Deficiency A/c

8. INSOLVENCY OF ACCEPTOR (DRAWEE)

when some amount is realised from the property or estate of the insolvent acceptor, entry
for cash received is passed and the balance of amount due from the insolvent acceptor
is treated as bad debts.

Class Work

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CA FOUNDATION MARATHON | BILLS OF EXCHANGE 7.10

1. Prepare Journal entries for the following transactions in K. Katrak’s books.

(i) Katrak’s acceptance to Basu for ` 2,500 discharged by a cash payment of `
1,000 and a new bill for the balance plus ` 50 for interest.
(ii) G. Gupta’s acceptance for ` 4,000 which was endorsed by Katrak to M. Mehta
was dishonoured. Mehta paid ` 20 noting charges. Bill withdrawn against
cheque.
(iii) D. Dalal retires a bill for ` 2,000 drawn on him by Katrak for ` 10 discount.
(iv) Katrak’s acceptance to Patel for ` 5,000 discharged by Patel Mody’s
acceptance to Katrak for a similar amount. (RTP
Nov 18)
Solution:
Books of K. Katrak
Journal Entries

Particulars Dr. Cr.

` `
(i) Bills Payable Account Dr. 2,500
Interest Account Dr. 50
To Cash A/c 1,000
To Bills Payable Account 1,550
(Bills Payable to Basu discharged by cash payment of
` 1,000 and a new bill for `1,550 including ` 50 as
interest)
(ii) (a) G. Gupta Dr. 4,020
To M. Mehta 4,020

(G. Gupta’s acceptance for ` 4,000 endorsed to M. Mehta

dishonoured, ` 20 paid by M. Mehta as noting charges)
(b) M. Mehta Dr. 4,020
To Bank Account 4,020
(Payment to M. Mehta on withdrawal of bill earlier
received from Mr. G. Gupta)

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CA FOUNDATION MARATHON | BILLS OF EXCHANGE 7.11

(iii) Bank Account Dr. 1,990

Discount Account Dr. 10
To Bills Receivable Account 2,000
(Payment received from D. Dalal against his
acceptance for ` 2,000. Allowed him a discount of ` 10)
(iv) Bills Payable Account Dr. 5,000
To Bills Receivable Account 5,000
(Bills Receivable from Mody endorsed to Patel in
settlement of bills payable issued to him earlier)

2. Mr. B accepted a bill for ` 10,000 drawn on him by Mr. A on 1st August, 2017 for
3 months. T his was for the amount which B owed to A. On the same date
Mr. A got the bill discounted at his bank for ` 9,800.
On the due date, B approached A for renewal of the bill. Mr. A agreed on con dition
that` 2,000 be paid immediately along with interest on the remaining amount
at 12% p.a. for 3 months and that for the remaining balance B should accept
a new bill for 3 months. These arrangements were carried through. On 31st
December, 2017, B became insolvent and his estate paid 40%.
You are required to prepare Journal Entries in the books of Mr. A (RTP Nov 19)
Solution:
Journal Entries in the Books of Mr. A
Date Particulars LF Dr. Cr.
Amount Amount
` `
2017
August 1 Bills Receivable A/c Dr. 10,000
ToB 10,000
(Being the acceptance received from B to
settle his account)
August 1 Bank A/c Dr. 9,800
Discount A/c Dr. 200
T o Bills Receivable 10,000

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CA FOUNDATION MARATHON | BILLS OF EXCHANGE 7.12

(Being the bill discounted for ` 9,800 from

bank)
November 4 B Dr. 10,000
T o Bank Account 10,000
(Being the B’s acceptance is to be renewed)
November 4 B Dr. 240
T o Interest Account 240
(Being the interest due from B for 3
months i.e., 8000x3/12 12%=240)
November 4 Cash A/c Dr. 2,240
Bills Receivable A/c Dr. 8,000
ToB 10,240
(Being amount and acceptance of new bill
received from B)
December 31 B A/c Dr. 8,000
T o Bills Receivable A/c 8,000
(Being B became insolvent)
December 31 Cash A/c Dr. 3,200
Bad debts A/c Dr. 4,800
ToB 8,000
(Being the amount received and written off
on B’s insolvency)

3. Mr. B accepted a bill for ` 10,000 drawn on him by Mr. A on 1st August, 2017 for 3
months. This was for the amount which B owed to A. On the same date Mr. A
got the bill discounted at his bank for ` 9,800.
On the due date, B approached A for renewal of the bill. Mr. A agreed on condition
that 2,000 be paid immediately along with interest on the remaining amount at
12% p.a. for 3 months and that for the remaining balance B should accept a
new bill for 3 months. These arrangements were carried through. On 31st
December, 2017, B became insolvent and his estate paid 40%.
Prepare Journal Entries in the books of Mr. A (RTP May 2018)
Solution:
Journal Entries in the Books of Mr. A

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CA FOUNDATION MARATHON | BILLS OF EXCHANGE 7.13

Date Particulars Dr. Cr.

2017
August 1 Bills Receivable A/c Dr. 10,000
To B 10,000
(Being the acceptance received from B to settle his
account)
August 1 Bank A/c Dr. 9,800
Discount A/c Dr. 200
To Bills Receivable 10,000
(Being the bill discounted for ` 9,800 from bank)
Nov 4 B Dr. 10,000
To Bank Account 10,000
(Being the B’s acceptance is to be renewed)
Nov 4 B Dr. 240
To Interest Account 240
(Being the interest due from B for 3 months i.e.,
8000x3/1 x 12%=240)
Nov 4 Cash A/c Dr. 2,240
Bills Receivable A/c Dr. 8,000
To B 10,240
(Being amount and acceptance of new bill received
from B)
Dec 31 B A/c Dr. 8,000
To Bills Receivable A/c 8,000
(Being B became insolvent)
Dec 31 Cash A/c Dr. 3,200
Bad debts A/c Dr. 4,800
To B 8,000
(Being the amount received and written off on
B’s insolvency)

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