ASIAN INTERNATIONAL SCHOOL

SESSION 2020-2021
ACCOUNTANCY (XI)
BILLS OF EXCHNAGE
Meaning of the Bill
Negotiable Instruments are of three types, i.e., Bills of Exchange, Promissory Note and Cheques. Bill of exchange is a
financial instrument showing the money owed by the buyer towards the seller of goods. It is generally drawn by the
creditor on his debtor and it has to be accepted by the debtor. It is just a draft till it is accepted. A bill of exchange is a
binding agreement by one party to pay a fixed amount of cash to another party on a predetermined date or on
demand.
Definition of the Bill
According to Negotiable Instruments Act of 1881, “a 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
Parties in the Bill
Drawer is a person who draws the bill on the other party
Drawee is the person on whom the bill is drawn.
Payee is the person to whom the bill amount is paid.
Endorsee is the person to whom bill has been endorsed or transferred
Note
Grace days: 3 grace days will be added to ascertain the due date of the bill.
Accounting Treatment The accounting aspects of a bill of exchange includes
1. bill drawn and accepted 2. bill endorsed to a third party; 3. bill discounted with the banker;
4. bill sent to the banker for collection;
Note
1. Bill Can be Honored 2. Bill can be Dishonored
CASE 1 Journal Entries: Bill Honored
 ASIAN INTERNATIONAL SCHOOL
SESSION 2020-2021
ACCOUNTANCY (XI)
BILLS OF EXCHNAGE

Example 1
On 1st July 2015, ‘A’ purchased from ‘B’ goods worth ` 10,000 on credit. In settlement of the transaction, a bill for ` 10,000
was accepted by A on the same date payable after 3 months. The bill was duly honored on the due date. Pass
necessary entries in the books of A and B.
 ASIAN INTERNATIONAL SCHOOL
SESSION 2020-2021
ACCOUNTANCY (XI)
BILLS OF EXCHNAGE

Example 2
On 1st July 2015, Chandra & Co. drew a bill upon Shanti & Co. for ` 5,000 at 4 months date. This was duly accepted. After
acceptance, the bill was endorsed to Lakshmi & Co. On the due date, the bill was honored. Pass necessary entries in
the books of all the parties.
 ASIAN INTERNATIONAL SCHOOL
SESSION 2020-2021
ACCOUNTANCY (XI)
BILLS OF EXCHNAGE

Example 3
Srirama purchases goods worth ` 1,20,000 from Srikrishna on 1st October 2014. He pays ` 40,000 immediately in cash and
sends his acceptance for 3 months to Srikrishna for the balance. Srikrishna gets the bill discounted at 6% p.a. Pass
journal entries assuming that the bill was met on the due date.

Example 4
Harish purchases goods from Girish on credit for ` 20,000 on 31st December, 2014. On 1st January 2015, in settlement of
the above account, Harish accepted a bill for the amount payable 3 months after date. The bill was sent to the bank by
Girish on due date for collection. The bankers reported that the bill was duly honored by payment. Pass necessary
entries in the books of both the parties.
 ASIAN INTERNATIONAL SCHOOL
SESSION 2020-2021
ACCOUNTANCY (XI)
BILLS OF EXCHNAGE

CASE 2 Bill Dishonored

 ASIAN INTERNATIONAL SCHOOL
SESSION 2020-2021
ACCOUNTANCY (XI)
BILLS OF EXCHNAGE

Example 1
Shilpa draws a bill on Sruthi for ` 15,000 on 1st January 2015 for 2 months and retains the bill with him. The bill was
dishonored on the date of maturity, i.e., after 2 months. Pass necessary entries in the books of both the parties.

Example 2
Raju draws a bill on Rani for ` 25,000 on 1st January 2015 for 3 months and endorses the bill to Bhanu. The bill is
dishonored on the due date. The bill is met by Raju. Pass necessary entries in the books of all the parties.
 ASIAN INTERNATIONAL SCHOOL
SESSION 2020-2021
ACCOUNTANCY (XI)
BILLS OF EXCHNAGE

Example 3
Sreenu draws a bill on Prama on October 1, 2014 for ` 40,000 at 3 months and discounts it with his bankers at 5%. The bill
is dishonored on the due date. Pass journal entries in the books of both the parties.
 ASIAN INTERNATIONAL SCHOOL
SESSION 2020-2021
ACCOUNTANCY (XI)
BILLS OF EXCHNAGE

Example 4
Prasanna draws a bill on Praveena on October 1, 2014 for ` 30,000 at 2 months and sends it to her bankers for collection.
The bill is dishonored on the due date. Pass journal entries in the books of both the parties.

NOTING CHARGES
The fact that the bill is dishonored should be given to the Notary Public for getting it noted. Noting is done by recording
the fact of dishonor, date of dishonor and reasons for dishonor. For the services rendered, the Notary Public charges
the holder of the bill an amount called as Noting Charges. Later, the holder of the bill collects the amount of noting
charges from the drawee
 ASIAN INTERNATIONAL SCHOOL
SESSION 2020-2021
ACCOUNTANCY (XI)
BILLS OF EXCHNAGE

Example
Suguna received a bill on January 1, 2015 for ` 10,000 duly accepted by Darshini. Suguna discounts this bill on the same
date for ` 9,600 with her bankers. On the due date April 4, the bill was dishonored and Suguna paid ` 10,100 including
noting charges to the bankers. Show entries in the books of both the parties.

Example
Sandhya owes on January 1, 2015 to Gayathri ` 15,000 on account of receiving cash from her and on the same date, she
has to receive ` 18,400 form Haritha. She receives from Haritha a cheque for ` 400; a bill for ` 15,000 due after 3
months and another bill for ` 3,000 due after one month. She endorsed to Gayathri the bill for ` 15,000 which was paid
on maturity but the second bill was dishonored and noting charges amounted to ` 200.
ASIAN INTERNATIONAL SCHOOL
SESSION 2020-2021
ACCOUNTANCY (XI)
BILLS OF EXCHNAGE
 ASIAN INTERNATIONAL SCHOOL
SESSION 2020-2021
ACCOUNTANCY (XI)
BILLS OF EXCHNAGE
CASE 3 Renewal of Bills
‘Renewal of the bill’ refers to drawing a new bill when the acceptor approaches the drawer to cancel the old bill and draw
a new bill. In order to renew the bill, the following steps would be followed:
a. Cancel the old bill (same entry as in the case of dishonor of the bill)
b. Charging of interest by the drawer
c. Accepting the new bill with a renewed date by the acceptor/drawee which may be for the whole amount of the old
bill or for a partial amount. The new bill will be for the amount of the original bill if interest is paid in cash, otherwise,
the new bill should include the amount of interest also along with the original amount.

Example 1
Sarita purchased goods from Geeta on credit for ` 12,000 on 1st April 2015. This debt was discharged by accepting a bill
dated 15th April 2015 for 3 months. On the due date, Sarita requested Geeta to accept ` 4,000 in cash and draw a bill
for the balance for a further period of 3 months for which Geeta agreed provided that interest for the balance amount
is paid in cash at 9% p.a. Sarita agreed to this agreement. On 21st October 2015, Sarita dishonored this second bill and
noting charges amounted to ` 200. Write up the journal entries in the books of both parties.
 ASIAN INTERNATIONAL SCHOOL
SESSION 2020-2021
ACCOUNTANCY (XI)
BILLS OF EXCHNAGE

CASE 4 Retiring of Bills under Rebate

The Acceptor of bills of exchange sometimes desires to meet the bill before its maturity if he has sufficient funds at his
disposal and approaches the holder of the bill to accept the payment before the due date. If the holder accepts the
proposal, he will withdraw the bill and such a withdrawal is called “retirement of a bill of exchange”.
 ASIAN INTERNATIONAL SCHOOL
SESSION 2020-2021
ACCOUNTANCY (XI)
BILLS OF EXCHNAGE

Example
Das accepted a bill for 3 months for ` 50,000 drawn on him by Seetha on July 1, 2016 for a debt he owed to Seetha. The bill
was discounted on the same date by Seetha at 5% p.a. A day prior to the due date of the bill, Das intimated Seetha of
his inability to honor the bill. Seetha agreed to renew the bill for 2 months provided Das would pay ` 32,000 in part
settlement including ` 2,000 by way of interest. On Das agreeing to the above conditions, Seetha drew a new bill for
the balance due for 2 months and this bill was accepted by Das. This new bill was retired one month before the due
date, rebate being ` 3,000. Pass necessary Journal Entries.
ASIAN INTERNATIONAL SCHOOL
SESSION 2020-2021
ACCOUNTANCY (XI)
BILLS OF EXCHNAGE