Accounting Treatment of Bills of Exchange

What is a Bill of Exchange?

A bill of exchange is a written order that one party receives from another requiring them to pay the other a specific amount of money, either immediately or at a later date. It is important that such an order of payment should be unconditional and be accepted by both parties concerned, i.e., the creditor as well as the debtor. Since bills of exchange are official legal papers, the drawer has legal recourse if the drawee fails to pay the agreed-upon amount within the allotted time.

Definition:

As per the Negotiable Instruments Act, 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.”

Accounting Treatment (in the Books of Drawer):

1. When the bill is retained until the maturity period:

2. When the bill is discounted from the bank:

3. When the drawer endorses a bill in favour of his creditor:

Accounting Treatment (in the Books of Acceptor):

Only the following journal entries are to be recorded in the books of the acceptor in all cases- retaining the bill under maturity/ endorsement/ discounting from bank or dishonour:

Illustration:

Richard sold goods to Madden for ₹69,000 and immediately drew upon him a bill on 01 January 2023, payable 3 months later. On maturity, the bill got dishonoured, ₹200 being the noting charges paid by the holder. Record the necessary journal entries in the books of Richard and Madden, in the following cases:

1. If Richard holds the bill till maturity.

2. If Richard immediately discounts the bill with his bank at 15% p.a.

3. If Richard endorses the bill in favour of his creditor Kim.

Solution:

1. If Richard holds the bill till maturity:

2. If Richard immediately discounts the bill with his bank at 15% p.a.

3. If Richard endorses the bill in favour of his creditor Kim:

The following entries would appear in Madden’s books in all three cases:

Other Articles from the Chapter: Bills of Exchange

• Bills of Exchange: Meaning, Features, Parties, and Advantages
• Important Terms in Bills of Exchange
• Difference between Bills of Exchange and Promissory Note