Bill of Exchange: Earning Bjectives

Bill of Exchange 8
G oods can be sold or bought for cash or on

credit. When goods are sold or bought for
cash, payment is received immediately. On the
other hand, when goods are sold/bought on credit
the payment is deferred to a future date. In such a
LEARNING OBJECTIVES
situation, normally the firm relies on the party to
make payment on the due date. But in some cases,
After studying this chapter, to avoid any possibility of delay or default, an
you will be able to :
instrument of credit is used through which the
• state the meaning of buyer assures the seller that the payment shall be
bill of exchange and a
made according to the agreed conditions. In India,
promissory note;
instruments of credit have been in use since time
• distinguish between a
bill of exchange and a
immemorial and are popularly known as Hundies.
promissory note; The hundies are written in Indian languages and
• state the advantages have a large variety (refer box1).
of bill of exchange;
• explain the meaning of Box 1
different terms involved
Hundies and its Types
in the bill transaction,
There are a variety of hundies used in our country.
• record bill of exchange
Let us discuss some of the most common ones.
transactions in
Shahjog Hundi: This is drawn by one merchant on
journal;
another, asking the latter to pay the amount to a
• record transactions Shah. Shah is a respectable and responsible person,
relating to dishonour, a man of worth and known in the bazaar. A shah-jog
retirement and renewal hundi passes from one hand to another till it reaches
of bill; a shah, who, after reasonable enquiries, presents it
• describe the uses of to the drawee for acceptance of the payment.
bill receivable and bill Darshani Hundi: This is hundi payable at sight. It
payable book; must be presented for payment within a reasonable
• state the meaning and time after its receipt by the holder. It is similar to a
use of accommodation demand bill.
bill.
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Muddati Hundi: A muddati or miadi hundi is payable after a specified period of time.
This is similar to a time bill.
There are few other varieties of hundies like Nam-jog hundi, Dhani-jog hundi, Jawabee
hundi, Hokhami hundi, Firman-jog hundi, and so on.
Now a days these instruments of credit are called bills of exchange or

promissory notes. The bill of exchange contains an unconditional order to pay
a certain amount on an agreed date while the promissory note contains an
unconditional promise to pay a certain sum of money on a certain date. In
India these instruments are governed by the Indian Negotiable Instruments
Act 1881.
8.1 Meaning of Bill of Exchange

According to the Negotiable Instruments Act 1881, a bill of exchange is defined
as 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. The following
features of a bill of exchange emerge out of this definition.
• A bill of exchange must be in writing.
• It is an order to make payment.
• The order to make payment is unconditional.
• The maker of the bill of exchange must sign it.
• The payment to be made must be certain.
• The date on which payment is made must also be certain.
• The bill of exchange must be payable to a certain person.
• The amount mentioned in the bill of exchange is payable either on
demand or on the expiry of a fixed period of time.
• It must be stamped as per the requirement of law.
A bill of exchange is generally drawn by the creditor upon his debtor. It has to
be accepted by the drawee (debtor) or someone on his behalf. It is just a draft
till its acceptance is made.
For example, Amit sold goods to Rohit on credit for ` 10,000 for three months. To
ensure payment on due date Amit draws a bill of exchange upon Rohit for
` 10,000 payable after three months. Before it is accepted by Rohit it will be called
a draft. It will become a bill of exchange only when Rohit writes the word “accepted”
on it and append his signature thereto communicate his acceptance.
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8.1.1 Parties to a Bill of Exchange

There are three parties to a bill of exchange:
(1) Drawer is the maker of the bill of exchange. A seller/creditor who is entitled
to receive money from the debtor can draw a bill of exchange upon the
buyer/debtor. The drawer after writing the bill of exchange has to sign it
as maker of the bill of exchange.
(2) Drawee is the person upon whom the bill of exchange is drawn. Drawee is
the purchaser or debtor of the goods upon whom the bill of exchange is
drawn.
(3) Payee is the person to whom the payment is to be made. The drawer of
the bill himself will be the payee if he keeps the bill with him till the date
of its payment. The payee may change in the following situations:
(a) In case the drawer has got the bill discounted, the person who has
discounted the bill will become the payee;
(b) In case the bill is endorsed in favour of a creditor of the drawer, the
creditor will become the payee.
Normally, the drawer and the payee is the same person. Similarly, the drawee
and the acceptor is normally the person. For example, Mamta sold goods worth
`10,000 to Jyoti and drew a bill of exchange upon her for the same amount payable
after three months. Here, Mamta is the drawer of the bill and Jyoti is the drawee. If
the bill is retained by Mamta for three months and the amount of ` 10,000 is
received by her on the due date then Mamta will be the payee. If Mamtagives away
this bill to her creditor Ruchi, then Ruchi will be the payee. If Mamta gets this bill
discounted from the bank then the bankers will become the payee.
In the above mentioned bill of exchange, Mamta is the drawer and Jyoti is
the drawee. Since Jyoti has accepted the bill, she is the acceptor. Suppose in
place of Jyoti the bill is accepted by Ashok then Ashok will become the acceptor.
Test Your Understanding - I

Write ‘True’ or ‘False’ against each statement regarding a bill of exchange:
(i) A bill of exchange must be accepted by the payee.
(ii) A bill of exchange is drawn by the creditor.
(iii) A bill of exchange is drawn for all cash transaction.
(iv) A bill payable on demand is called Time bill;
(v) The person to whom payment is to be made in a bill or exchange is called
payee.
(vi) A negotiable instrument does not require the signature of its maker.
(vii) The hundi Payable at sight is called Darshani hundi.
(viii) A negotiable instrument is not freely transferable.
(ix) Stamping of promissory note is not mandatory.
(x) The time of payment of a negotiable instrument need not be certain.
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8.2 Promissory Note

According to the Negotiable Instruments Act 1881, a promissory note is defined
as an instrument in writing (not being a bank note or a currency note), containing
an unconditional undertaking signed by the maker, to pay a certain sum of
money only to or to the order of a certain person, or to the bearer of the
instrument. However, according to the Reserve Bank of India Act, a promissory
note payable to bearer is illegal. Therefore, a promissory note cannot be made
payable to the bearer.
This definition suggests that when a person gives a promise in writing to
pay a certain sum of money unconditionally to a certain person or according to
his order the document is called is a promissory note.
Following features of a promissory note emerge out of the above definition:
• It must be in writing
• It must contain an unconditional promise to pay.
• The sum payable must be certain.
• It must be signed by the maker.
• The maker must sign it.
• It must be payable to a certain person.
• It should be properly stamped.
A promissory note does not require any acceptance because the maker of the
promissory note himself promises to make the payment.
8.2.1 Parties to a Promissory Note

There are two parties to a promissory note.
• Maker or Drawer is the person who makes or draws the promissory note
to pay a certain amount as specified in the promissory note. He is also
called the promisor.
• Drawee or Payee is the person in whose favour the promissory note is
drawn. He is called the promisee.
Generally, the drawee is also the payee, unless, it is otherwise mentioned in the
promissory note. In the specimen of promissory note(refer figure 8.2), Ashok
Kumar is the drawer or maker who promises to pay `30,000 and Harish Chander
is the drawee or payee to whom payment is to made. If Harish Chander endorses
this promissory note in favour of Rohit then Rohit will become the payee. Similarly,
if Harish Chander gets this promissory note discounted from the bank then the
bank will become the payee.
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Box 2
Distinction between a Bill of Exchange and Promissory Note
Both a bill of exchange and a promissory note are instruments of credit and are similar
in many ways. However, there are certain basic differences between the two.
S.No. Basis Bill of Exchange Promissory Note
1. Drawer It is drawn by the creditor It is drawn by the debtor
2. Order or Promise It contains an order to make It contains a promise to make
and Parties payment. There can be three payment. There are only two
parties to it, viz. the drawer, parties to it, viz. the drawer
the drawee and the payee. and the payee.
3. Acceptance It requires acceptance by the It does not require any
drawee or someone else on his acceptance.
behalf.
4. Payee Drawer and payee can be the Drawer cannot be the payee
same party. of it.
5. Notice In case of its dishonour due No notice needs to be givenin
notice of dishonour is to be case of its dishonour.
given by the holder to the drawer
Fig. 8.3 Distinction between bills of exchange and promissory note
8.3 Advantages of Bill of Exchange

The bills of exchange as instruments of credit are used frequently in business
because of the following advantages:
• Framework for relationships: A bill of exchange represents a device, which
provides a framework for enabling the credit transaction between the seller/
creditor and buyer/debtor on an agreed basis.
• Certainty of terms and conditions: The creditor knows the time when he
would receive the money so also debtor is fully aware of the date by which
he has to pay the money. This is due to the fact that terms and conditions
of the relationships between debtor and creditor such as amount required
to be paid; date of payment; interest to be paid, if any, place of payment are
clearly mentioned in the bill of exchange.
• Convenient means of credit: A bill of exchange enables the buyer to buy the
goods on credit and pay after the period of credit. However, the seller of
goods even after extension of credit can get payment immediately either by
discounting the bill with the bank or by endorsing it in favour of a
third party.
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• Conclusive proof: The bill of exchange is a legal evidence of a credit

transaction implying thereby that during the course of trade buyer has
obtained credit from the seller of the goods, therefore, he is liable to pay to
the seller. In the event of refusal of making the payment, the law requires the
creditor to obtain a certificate from the Notary to make it a conclusive evidence
of the happening.
• Easy transferability: A debt can be settled by transferring a bill of
exchange through endorsement and delivery.
8.4 Maturity of Bill
The term maturity refers the date on which a bill of exchange or a promissory
note becomes due for payment. In arriving at the maturity date three days,
known as days of grace, must be added to the date on which the period of credit
expires instrument is payable. Thus, if a bill dated March 05 is payable 30
days after date it, falls due on April 07, i.e., 33 days after March 05 If it were
payable one month after date, the due date would be April 08, i.e., one month
and 3 days after March 05. However, where the date of maturity is a public
holiday, the instrument will become due on the preceding business day. In this
case if April 08, falls on a public holiday then the April 07 will be the maturity
date. But when an emergent holiday is declared under the Negotiable
Instruments Act 1881, by the Government of India which may happen to be the
date of maturity of a bill of exchange, then the date of maturity will be the next
working day immediately after the holiday. For example, the Government declared
a holiday on April 08 which happened to be the day on which a bill of exchange
drawn by Gupta upon Verma for `20,000 became due for payment, Since April
08, has been declared a holiday under the Negotiable Instruments Act, therefore,
April 09, will be the date of maturity for this bill.
8.5 Discounting of Bill

If the holder of the bill needs funds, he can approach the bank for encashment
of the bill before the due date. The bank shall makes the payment of the bill
after deducting some interest (called discount in this case). This process of
encashing the bill with the bank is called discounting the bill. The bank gets
the amount from the drawee on the due date.
8.6 Endorsement of Bill

Any holder may transfer a bill unless its transfer is restricted, i.e., the bill has
been negotiated containing words prohibiting its transfer. The bill can be initially
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endorsed by the drawer by putting his signatures at the back of the bill along
with the name of the party to whom it is being transferred. The act of signing
and transferring the bill is called endorsement.
8.7 Accounting Treatment

For the person who draws the bill of exchange and gets it back after its due
acceptance, it is a bill receivable. For the person who accepts the bill, it is a bills
payable. In case of a promissory note for the maker it is a bills payable and for
the person in whose favour the promissory note is drawn it is a bills receivable.
Bills receivables are assets and Bills payable are liabilities. Bills and Notes are
used interchangeably.
8.7.1 In the Books of Drawer/Promissor

A bill receivable can be treated in the following four ways by its receiver.
1. He can retain it till the date of maturity, and
(a) get it collected on date of maturity directly, or
(b) get it collected through the banker.
2. He can get the bill discounted from the bank.
3. He can endorse the bill in favour of his Creditor.
The accounting treatment in the books of receiver under all the four
alternatives is given below under the assumption that the bill is duly honoured
on maturity by the acceptor.
(1) When the bill of exchange is retained by the receiver with him till date of its
maturity:
On receiving the bill
Bills Receivable A/c Dr.
To Debtors A/c
On maturity of the bill

Cash/Bank A/c Dr.
To Bills Receivable A/c
However, when the bill of exchange is retained by the receiver with him and
sent to bank for collection a few days before maturity, the following two
entries are recorded:
On sending the bill for collection
Bills Sent for Collection A/c Dr.
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On receiving the advice from the bank that the bill has been collected
Bank A/c Dr.
To Bills Sent for Collection A/c
(2) When the receiver gets the bill discounted from the bank:
To Debtors A/c
On discounting the bill
Bank A/c Dr.
Discount A/c Dr.
On Maturity
No entry is recorded because the bill becomes the property of the bank,
therefore, the bank collects the amount of the bill from the acceptor and
no journal entry is recorded in the books of the drawer.
(3) When the bill is endorsed by the receiver in favour of his creditor:
To Debtor’s A/c
On endorsing the bill
Creditor’s A/c Dr.
On Maturity
No entry is recorded because the bill has been transferred in favour of the
creditor, therefore the creditor becomes its owner and will receive the
payment on maturity. Hence, no entry is recorded in the books of drawer or
endorser.
8.7.2 In the Books of Acceptor/Promissor

The following journal entries are recorded in the books of the acceptor or
promisesor under all the four alternatives. It makes no difference whether the
bill is retained discounted, endorsed or pledged.
On accepting the bill
Creditor’s A/c Dr.
To Bills Payable A/c
On Maturity of the bill
Bills Payable A/c Dr.
To Bank A/c
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1. When the drawer retains the bill with him till the date of its maturity and
gets the same collected directly
Transaction Books of Creditor/Drawer Books of Debtor/
Acceptor
Sale/Purchase of goods Debtor’s A/c Dr. Purchases A/c Dr.
To Sales A/c To Creditor’s A/c
Receiving/Accepting the bill Bills Receivable A/c Dr. Creditor’s A/c Dr.
To Debtor’s A/c To Bills Payable A/c
Collection of the bill Cash/Bank A/c Dr. Bills Payable A/c Dr.
To Bills Receivable A/c To Cash/Bank A/c
2. When the bill is retained by the drawer with him and sent to bank for collection
a few days before maturity
Acceptor
Receiving /Accepting the bill Bills Receivable A/c Dr. Creditor’s A/c Dr.
To Debtor’s A/c To Bills Payable A/c
Sending the bill for collection Bills sent for
collection A/c Dr. No entry
To Bill Receivable A/c
On Receiving from the bank Bank A/c Dr. Bills Payable A/c Dr.
advice that the bill has been To Bill Sent for To Bank A/c
collected Collection A/c
3. When the drawer gets the bill discounted from the bank
Acceptor
To Debtor’s A/c To Bills payable A/c
Discounting the bill Bank A/c Dr. No entry
Discount A/c Dr.
On maturity of the bill No entry Bills payable A/c Dr.
To Bank A/c
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4. When the bill is endorsed by the drawer in favour of his creditor

Acceptor
Sale/Purchase of goods Debtor’s A/c Dr. Purchase A/c Dr.
To Debtor’s A/c To Bills payable A/c
Endorsing the bill Creditor’s A/c Dr. No entry
On maturity of the bill No entry Bills payable A/c Dr.
To Bank A/c
The journal entries to be recoded in the books of the drawer and the acceptor
under all the four cases have been summarised below.
Illustration 1
Amit sold goods for `20,000 to Sumit on credit on Jan 01, 2017. Amit drew a bill of
exchange upon Sumit for the same amount for three months. Sumit accepted the bill and
returned it to Amit. Sumit met his acceptance on maturity. Record the necessary journal
entries under the following circumstances:
(i) Amit retained the bill till the date of its maturity and collected directly
(ii) Amit discounted the bill @ 12% p.a from his bank
(iii) Amit endorsed the bill to his creditor Ankit
(iv) Amit retained the bill and on March 31, 2017 Amit sent the bill for collection to
its bank. On April 05, 2017 bank advice was received.
Solution
Books of Amit
Journal
(i) When the bill was retained till its maturity.
Date Particulars L.F. Debit Credit

Amount Amount
` `
2017
Jan 01 Sumit’s A/c Dr. 20,000
To Sales A/c 20,000
(Sold goods to Sumit’s on credit)
Jan 01 Bills Receivable A/c Dr. 20,000
To Sumit’s A/c 20,000
(Received Sumit’s acceptance payable
after three months)
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Apr.05 Bank A/c Dr. 20,000

To Bills Receivable A/c 20,000
(Sumit met his acceptance on maturity)
(ii) When the bill was discounted from the book.

Journal

Amount Amount
` `
2017
Jan 01 Sumit’s A/c Dr. 20,000
To Sales A/c 20,000
(Sold goods to Sumit’s)
Jan 01 Bills Receivable A/c Dr. 20,000
(Received Sumit’s acceptance three months)
Jan 01 Bank A/c Dr. 19,400
Discount A/c Dr. 600
(Sumit’s acceptance discounted with the bank)
(iii) When Amit endorsed the bill in favour of his creditor Ankit.
Journal
Amount Amount
` `
2017
Jan. 01 Sumit’s A/c Dr. 20,000
To Sales A/c 20,000
Jan. 01 Bills Receivable A/c Dr. 20,000
(Received Sumit’s acceptance for
three months)
Jan. 01 Ankit’s A/c Dr. 20,000
(Sumit acceptance endorsed in favour of Ankit)
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(iv) When the bill was sent for collection by Amit to the bank.
Journal
Amount Amount
` `
2017
Jan. 01 Sumit’s A/c Dr. 20,000
To Sales A/c 20,000
(Received Sumit’s acceptance payable
after three months)
Mar. 31 Bills Sent for Collection A/c Dr. 20,000
(Bills sent for collection)
Apr. 05 Bank A/c Dr. 20,000
To Bills sent for collection A/c 20,000
(Bills sent for collection collected by the bank)
The following journal entries will be made in the books of Sumit under all the four
circumstances:
In the books of Sumit

Journal

Amount Amount
` `
2017
Jan. 01 Purchases A/c Dr. 20,000
To Amit’s A/c 20,000
(Purchases goods from Amit on credit)
Jan. 01 Amit’s A/c Dr. 20,000
To Bill’s Payable A/c 20,000
(Accepted bill drawn by Amit payable after
three months)
Apr. 04 Bills payable A/c Dr. 20,000
To Bank A/c 20,000
(Met acceptance maturity)
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Illustration 2
On March 15, 2017 Ramesh sold goods for ` 8,000 to Deepak on credit. Deepak accepted a
bill of exchange drawn upon him by Ramesh payable after three months. On April, 15
Ramesh endorsed the bill in favour of his creditor Poonam in full settlement of her debt of
` 8,250. On May 15, Poonam discounted the bill with her bank @ 12% p.a. On the due date
Deepak met the bill. Record the necessary journal entries in the books of Ramesh, Deepak,
Poonam.
Books of Ramesh
Journal

Amount Amount
` `
2017
Mar.15 Deepak A/c Dr. 8,000
To Sales A/c 8,000
(Sold goods to Deepak on credit)
Mar.15 Bills Receivable A/c Dr. 8,000
To Deepak A/c 8,000
(Received Deepak’s acceptance for three months)
Apr.15 Poonam’s A/c Dr. 8,250
To Discount Received A/c 250
(Bill endorsed in favour of Poonam in full
settlement of her debt of ` 8,250)
Book of Deepak
Journal

Amount Amount
` `
2017
Mar.05 Purchases A/c Dr. 8,000
To Ramesh A/c 8,000
(Sold goods to Deepak on credit)
Mar.05 Ramesh’s A/c Dr. 8,000
To Bills Payable A/c 8,000
(Accepted Ramesh’s draft payable
after three months)
Jun.18 Bills Payable A/c Dr. 8,000
To Bank A/c 8,000
(Met the acceptance in favour of Ramesh
on maturity)
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Books of Poonam
Journal

Amount Amount
` `
2017
Mar.15 Bills Receivable A/c Dr. 8,000
Discount Allowed A/c Dr. 250
To Ramesh’s A/c 8,250
(Ramesh endorsed Deepak’s acceptance in
our favour for discharge his dept of
` 8,250 in full settlement)
Mar.15 Bank A/c Dr. 7,920
Discount Allowed A/c Dr. 80
(Biils receivable encashed on maturity)
8.8 Dishonour of a Bill

A bill is said to have been dishonoured when the drawee fails to make the
payment on the date of maturity. In this situation, liability of the acceptor is
restored. Therefore, the entries made on the receipt of the bill should be
reversed. For example, Anju received bill of exchange duly accepted by Manju,
which was dishonoured. The entries of dishonour will be as follows in the
books of Anju (receiver):
When the bill was kept by Anju with her till maturity
Manju’s A/c Dr.
To Bill Receivables A/c
When the bill had been endorsed by Anju in favour of Sandhya
Manju’s A/c Dr.
To Sandhaya’s A/c
When the bill was discounted by Anju with his bank
Manju’s A/c Dr.
To Bank A/c
When the bill was sent for collection by Anju
Manju’s A/c Dr.
To Bill Sent for Collection A/c
Illustration 3
On Jan 01, 2017 Shieba sold goods to Vishal for ` 10,000 and drew upon him a bill of
exchange for 2 months. Vishal accepted the bill and returned it to Shieba. On the date of
maturity the bill was dishonoured by Vishal. Record the necessary entries in all the cases
listed below in the books of Shieba and Vishal:
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(i) When the bill kept by Shieba till its maturity;

(ii) When the bill is discounted by Shieba for ` 200;
(iii) When the bill is endorsed to Lal Chand by Shieba.
Solution
(i) When the bill was kept by Shieba till its maturity.
Books of Shieba
Journal
Amount Amount
` `
2017
Jan.01 Vishal’s A/c Dr. 10,000
To Sales A/c 10,000
(Sold goods to Vishal)
To Vishal’s A/c 10,000
(Received Vishal’s acceptance)
Mar. 04 Vishal’s A/c Dr. 10,000
(Vishal dishonoured his acceptance)
(ii) When the bill was discounted by shieba
Journal

Amount Amount
` `
2017
To Sales A/c 10,000
Jan. 01 Bank A/c Dr. 9,800
(Vishal’s Bill dishonoured his acceptance)
Mar.04 Vishal’s A/c Dr. 10,000
To Bank A/c 10,000
(Discounted bill dishonoured by Vishal)
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(iii) When the bill was endorsed by Shieba to Lal Chand

Journal

Amount Amount
` `
2017
To Sales A/c 10,000
Jan. 01 Lal Chand A/c Dr. 10,000
(Vishal’s acceptance endorsed
in favour of Lal Chand)
Mar.04 Vishal’s A/c Dr. 10,000
To Lal Chand A/c 10,000
(Endorsed bill dishonoured by Vishal)
Whereas, in the book of Vishal, the following entries will be recorded
Books of Vishal
Journal

Amount Amount
` `
2017
Jan.01 Purchases A/c Dr. 10,000
To Shieba’s A/c 10,000
(Purchased good from shieba)
Jan. 01 Shieba’s A/c Dr. 10,000
(Accepted Shieba’s draft)
Mar. 04 Bills Payable A/c Dr. 10,000
To Shieba’s A/c 10,000
(Acceptance in favour of shieba dishonoured)
8.8.1 Noting Charges

A bill of exchange should be duly presented for payment on the date of its
maturity. The drawee is absolved of his liability if the bill is not duly presented.
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Proper presentation of the bill means that it should be presented on the date of
maturity to the acceptor during business working hours. To establish beyond
doubt that the bill was dishonoured, despite its due presentation, it may
preferably to be got noted by Notary Public. Noting authenticates the fact of
dishonour. For providing this service, a fees is charged by the Notary Public
which is called Noting Charges.
The following facts are generally noted by the Notary:
• Date, fact and reasons of dishonour;
• If the bill is not expressly dishonoured, the reasons why he treats it
as dishonoured and;
• The amount of noting charges.
The entries recorded for noting charges in the drawers book are as follows:
When Drawer himself pays
Drawee’s A/c Dr.
To Cash A/c
Where endorsee pays
Drawee’s A/c Dr.
To Endorsee A/c
When the bank pays on discounted bill
Drawee’s A/c Dr.
To Bank A/c
When the bank pays in the event of sending the bill for collection to the bank
Drawee’s A/c Dr.
To Bank A/c
It may be noticed that whosoever pays the noting charges, ultimately these
have to be borne by the drawee. That is why the drawee is invariably debited in
the drawer’s books. This is because he is responsible for the dishonour of the
bill and, hence, he has to bear these expenses. For recording the noting charges
in his book the drawee opens Noting Charges Acccount. He debits the Noting
Charges Account and credits the Drawer’s Account. For example, Azad sold
goods for ` 15,000 to Bunty and immediately drew a bill upon him on Jan. 01,
2017 payable after 3 months. On maturity the bill was dishonoured and ` 50
were paid by the holder of the bill as noting charges. The journal entries will be
recorded in the books of Azad and Bunty as given below under the following
circumstances:
(a) When the bill was kept by Azad till maturity.
(b) When the bill was discounted by Azad with his bank immediately
@ 12% p.a.
(c) When the bill was endorsed by Azad in favour of his creditor Chitra.
In the books of Azad, entries will be recorded as:
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(i) When the bill was retained till its maturity
Books of Azad
Journal

Amount Amount
` `
2017
Jan.01 Bunty’s A/c Dr. 15,000
To Sales A/c 15,000
(Sold goods to Bunty)
To Bunty’s A/c 15,000
(Received Bunty’s acceptance)
Apr. 04 Bunty’s A/c Dr. 15,050
To Bills Receivable A/c Dr. 15,000
To Cash A/c 50
(Bunty dishonoured his acceptance and
paid ` 50 as noting charges)
(ii) When the bill was discounted with the bank.
Journal

Amount Amount
` `
2017
Jan.01 Bunty’s A/c Dr. 15,000
To Sales A/c 15,000
(Received Bunty’s acceptance payable
after three months)
(Bunty’s acceptance discounted)
To Bank A/c 15,050
(Bunty dishonoured his acceptance on maturity
and bank paid noting charges)
2019-2020
(iii) When the bill was endorsed to Chitra

Journal

Amount Amount
` `
2017
Jan. 01 Bunty’s A/c Dr. 15,000
To Sales A/c 15,000
Jan.01 Bill’s Receivable A/c Dr. 15,000
Jan. 01 Chitra’s A/c Dr. 15,000
(Bunty’s acceptance endorsed in favour
of Chitra)
To Chitra’s A/c 15,050
(Bunty dishonoured his acceptance on
maturity and chitra paid ` 50 as
noting charges)
The following journal entries will be made in the books of Bunty in all the three cases.
Book of Bunty
Journal

Amount Amount
` `
2017
Jan.01 Purchases A/c Dr. 15,000
To Azad’s A/c 15,000
(Purchase goods from Azad)
Jan. 01 Azad’s A/c Dr. 15,000
(Accepted Azad’s draft)
Apr. 04 Bills Payable A/c Dr. 15,000
Noting charges A/c Dr. 50
To Azad’s A/c 15,050
(Acceptance in favour of Azed dishonoured)
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296 Accountancy
8.9 Renewal of the Bill

Sometimes, the acceptor of the bill foresees that it may be difficult to meet the
obligation of the bill on maturity and may, therefore, approach the drawer with
the request for extension of time for payment. If it is so, the old bill is cancelled
and the fresh bill with new terms of payment is drawn and duly accepted and
delivered. This is called renewal of the bill. Since the cancellation of bill is mutually
agreed upon noting of the bill is not required.
The dreawee may have to pay interest to the drawer for the extended period
of credit. The interest is paid in cash or may be included in the amount of the
new bill. Sometimes, a part of the amount due may be paid and the new bill may
be drawn only for the balance. For example, a bill of ` 10,000 is cancelled on a
cash payment of ` 3,000 and acceptance of a new bill for the balance of ` 7,000
plus interest as agreed between the parties. The journal entries in the books of
the drawer and the drawee will be the same as that of dishonour of bill. As for
the interest invalued, if it is not paid in cash, the drawer debits the drawee’s
account and credits the interest account, and the drawee debits the interest
and credits the drawer’s account in his books.
The journal entries recorded in case of renewal for the cancellation of the
old bill, for interest and for the acceptance of the new bill in the books of the
drawer and drawee are given below:
Transaction Books of Drawer Books of Drawee
Cancellation of old bill Drawee’s A/c Dr. Bills Payable A/c Dr.
To Bills Receivable A/c To Drawer’s A/c
Interest Drawee’s A/c Dr. Interest A/c Dr.
To Interest A/c To Drawer’s A/c
New bill Bill Receivable A/c Dr. Drawer’s A/c Dr.
To Drawee’s A/c To Bills Payable A/c
For example on February 01, 2017 Ravi sold goods to Mohan for `18,000;
` 3,000 were paid by Mohan immediately and for the balance he accepted three
months bill drawn upon him by Ravi. On the date of maturity of the bill Mohan
requested Ravi to cancel the old bill and a new bill upon him for a period of 2
months. He further agreed to pay interest in cash to Ravi @ 12% p.a. Ravi
agreed to Mohan’s request and cancelled the old bill and drew a new bill. The
new bill was met on maturity by Mohan. In this case, the following entries will
be recorded in the books of Ravi and Mohan.
2019-2020
Books of Ravi
Journal
Amount Amount
` `
2017
Feb. 01 Mohan’s A/c Dr. 18,000
To Sales A/c 18,000
(Sold goods to Mohan)
Feb. 01 Cash A/c Dr. 3,000
Bills Receivable A/c Dr. 15,000
To Mohan’s A/c 18,000
(Received ` 3,000 in cash from Ravi and
an acceptance for the balance)
May 01 Mohan’s Account Dr. 15,300
To Interest A/c 300
(Cancelled old bill on renewal
` 300 as interest)
May 04 Bill’s Receivable A/c Dr. 15,000
Cash A/c Dr. 300
To Mohan’s A/c 15,300
(Received new acceptance from Mohan)
Jul. 07 Bank A/c Dr. 15,000
(Mohan met his new acceptance)
Book of Mohan
Journal
Amount Amount
` `
2017
Feb. 01 Purchases A/c Dr. 18,000
To Ravi A/c 18,000
(Purchased goods from Ravi)
Feb.01 Ravi’s A/c Dr. 18,000
To Cash’s A/c 3,000
Bills Payable A/c 15,000
(Received cash from Ravi and his acceptance)
May 04 Bill Payable A/c Dr. 15,000
Interest A/c Dr. 300
To Ravi A/c 15,300
(Old bill cancelled on renewal,
` 300 charged as interest)
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298 Accountancy
May 04 Ravi’s A/c Dr. 15,300

To Cash A/c 300
(Accepted new bill and paid cash for interest)
Jul. 07 Bill Payable A/c Dr. 15,000
Bank A/c 15,000
(Met acceptance of the new bill on maturity)
8.10 Retiring of the Bill

There are instances when a bill of exchange is arranged to be retired before
the due date by mutual understanding between the drawer and the drawee.
This happens when the drawee of the bill has funds at his disposal and
makes a request to the drawer or holder to accept the payment of the bill
before its maturity. If the holder agrees to do so, the bill is said to have
been retired.
The retiring of a bill draws a curtain on the bill transactions before
the expiry of its normal term. To encourage the retirement of the bill, the
holder allows some discount called Rebate on bills for the period between
date of retirement and maturity. The rebate is calculated at a certain rate
of interest.
The accounting treatment on the retirement of a bill is similar to the
accounting treatment when a bill is honoured by the acceptor on the due date
in the ordinary course. The only difference between the two relates to the
granting of rebate. The following journal entries are recorded:
In the books of the holder
On retiring the acceptance and rebate allowed
Cash A/c Dr.
Rebate on bills A/c Dr.
To Bills Receivables A/c
In the books of the drawee
Bills Payable A/c Dr.
Cash A/c Dr.
To Rebate on Bills A/c
Amit sold goods ` 10,000 to Babli on Jan. 01, 2015 and immediately drew a bill
on Babli for three month for the same amount, Babli accepted the bill and
returned it to Amit. On March 04, 2017 Babli retired her acceptance under
rebate of 6% per annum.
2019-2020
In the books of Amit

Journal
Amount Amount
` `
2017
Jan. 01 Babli’s A/c Dr. 10,000
To Sales A/c 10,000
(Sold goods to Babli)
To Babli’s A/c 10,000
(Received Babli’s acceptance for three months)
Mar. 04 Bank A/c Dr. 9,950
Rebate on bills A/c Dr. 50
(Babli retired her acceptance and rebate
allowed to him)
The recorded entries will be posted to the following ledger acounts

Babli’s Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
` `
2017 2017
Jan. 01 Sales 10,000 Jan 06 Bills Receivable 10,000
10,000 10,000
Bill Receivable Account

Dr. Cr.
` `
2017 2017
Jan. 01 Babli 10,000 Mar 04 Cash 9,950
Rebate on bill 50
10,000 10,000
Book of Babli
Journal

Amount Amount
` `
2017
To Amit A/c 10,000
(Purchased goods from Amit)
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300 Accountancy
Jan.01 Amit’s A/c Dr. 10,000

(Accepted Amit’s draft payable after
three months)
Mar. 04 Bill Payable A/c Dr. 10,000
To Cash A/c 9,950
To Rebate on bills A/c 50
(Acceptance in favour of Amit retired
and rebate received)
Amit’s Account
Dr. Cr.
` `
2017 2017
Jan. 01 Bills Payable 10,000 Jan. 04 Purchases 10,000
10,000 10,000
Bills Payable Account

Dr. Cr.
` `
2017 2017
Jan. 01 Cash 9950 Jan. 01 Amit 10,000
Rebate on bills 50
10,000 10,000
Illustration 4
On Jan. 15, 2017 Sachin sold goods `30,000 to Narain and drew upon the later a bill for
the same amount payable after 3 months. The bill was accepted by Narain. The bill was
discounted by Sachin from his bank for `29,250 on Jan. 31, 2017 on maturity the bill was
dishonoured. He further agreed to pay `10,500 in cash including ` 500 interest and accept
a new bill for two months for the remaining `20,000.
The new bill was endorsed by sachin in favour of his creditor Kapil for settling a debt of `
20,800. The new bill was duly met by Narain on maturity.
Record the necessary journal entries in the books of Sachin and Narain.
Solution
Books of Sachin
Journal
Amount Amount
` `
2017
Jan. 15 Narain A/c Dr. 30,000
To Sales A/c 30,000
(Sold goods to Narain)
2019-2020
Jan.15 Bill’s Receivable A/c Dr. 30,000

To Narain’s A/c 30,000
Discount A/c 750
To Bill receivable A/c 30,000
(Narains’ acceptance discounted with bank)
Apr. 19 Narain’s A/c Dr. 30,500
To Bank A/c 30,000
To Interest A/c 500
(Narain’s acceptance cancelled)
Apr.19 Bank A/c Dr. 10,500
Bills Receivavble A/c Dr. 20,000
To Narain A/c 30,500
(Received cash from Narain and a new
acceptance for the balace)
Apr.19 Kapil A/c Dr. 20,800
To Bill Receivable A/c 20,000
To Discount Received A/c 800
(Narain’s acceptance endorsed in favour of
kapil and he allowed discount)
Books of Narain
Journal
Amount Amount
` `
2017
To Sachin A/c 30,000
(Purchased goods from sachin)
Jan.15 Sachin A/c Dr. 30,000
(Accepted Sachin’s draft)
Jan.19 Bill Payable A/c Dr. 30,000
Interest A/c 500
To Sachin A/c 30,500
(Cancelled old bill & Sachin charged interest)
Apr. 19 Sachin’s A/c Dr. 30,500
To Bank A/c 10,500
To Bill Payable A/c 20,000
(Paid Sachin and accepted a new draft
for the balance)
Apr.22 Bills Receivavble A/c Dr. 20,000
To Bank A/c 20,000
(Met new acceptance on Maturity)
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302 Accountancy
Illustration 5.
Ashok sold goods `14,000 to Bishan on October 30, 2016 and drew three bills for `2,000,
`4,000 & `8,000 payable after two, three, and four months respectively. The first bill was
kept by Ashok with him till maturity. He endorsed the second bill in favour of his creditor
Chetan. The third bill was discounted on December 03, 2016 at 12% p.a. The first and
second bills were duly met on maturity but the third bill was dishonoured and the bank
paid `50 as noting charges. On March 03, 2017 Bishan paid `4,000 and noting charges in
cash and accepted a new bill at two months after date for the balance plus interest `100.
The new bill was met on maturity by Bishan.
You are required to give the journal entries in the books of both Ashok ans Bishan and
prepare Bishan’s account in Ashok’s books and Ashok’s account in Bishan’s books.
Solution
Books of Ashok
Journal
Amount Amount
` `
2016
Oct. 30 Bishan’s A/c Dr. 14,000
To Sales A/c 14,000
(Sold goods to Bishan on credit)
Oct. 30 Bills Receivable A/c Dr. 14,000
To Bishan’s A/c 14,000
(Received three acceptances from Bishan.
First for ` 2,000 payable after two months,
second for ` 4,000 payable after three months
and the third for ` 8,000 payable after
four months)
Oct. 30 Chetan’s A/c Dr. 4,000
To Bills receivable A/c 4,000
(Endorsed second bills in favour of
creditor Chetan)
Dec. 03 Bank A/c Dr. 7,760
Discount A/c 240
To Bill receivable A/c 8,000
(Third bill discounted at 12% p.a.)
2016
Jan.02 Bank A/c Dr. 2,000
Bills receivable A/c 2,000
(Bishan met his first acceptance on due date)
Mar. 03 Bishan A/c Dr. 8,050
To Bank A/c 8,050
(Bishan dishonoured his third acceptance
and bank paid `50 as noting charges)
2019-2020
Mar. 03 Cash A/c Dr. 4,050

(Cash received from Bishan)
Mar. 03 Bishan’s A/c Dr. 100
To Interest A/c 100
(Interest charged from Bishan for the
extended period)
Mar. 03 Bills Receivable A/c Dr. 4,100
(Received new acceptance from Bishan for
two months)
May 06 Bank A/c Dr. 4,100
To bills Receivable A/c 4,100
(Bishan met his new acceptance on maturity)
Bishan’s Account
Dr. Cr.
` `
2016 2016
Oct. 30 Sales 14,000 Oct. 30 Bills Receivable 14,000
2017 2017
Mar. 03 Bank 8,050 Mar. 03 Cash 4,050
Mar. 09 Interest 100 Mar. 03 Bills Receivable 4,100
22,150 22,150
Books of Bishan
Journal

Amount Amount
` `
2016
Oct. 30 Purchases A/c Dr. 14,000
To Ashok’s A/c 14,000
(Purchases goods on credit from Ashok)
Oct. 30 Ashok’s A/c Dr. 14,000

(Accepted three drafts of Ashok, the first for
` 2,000 payable after 2 months, second for
` 4,000 Payable after 3 months and the third
for ` 8,000 Payable after 4 months)
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304 Accountancy
2017
Jan. 02 Bills Payable A/c Dr. 2,000
To Bank A/c 2,000
(Met first acceptance for ` 2,000 in
favour of Ashok.)
Mar. 03 Bill Payable A/c Dr. 8,050

To Ashok A/c 8,050
(Third acceptance in favour of Ashok
dishonoured and noting charges ` 50)
Mar. 03 Ashok’s A/c Dr. 4,050

To Cash A/c 4,050
(Paid to Ashok ` 4,000 plus noting charges)
Mar. 03 Interest A/c Dr. 100

To Ashok’s A/c 100
(Interest allowed to Ashok)
Mar. 03 Ashok’s A/c Dr. 4,100

(New draft of Ashok for two months accepted)
May 03 Bills Payable A/c Dr. 4,100

To Bank A/c 4,100
(Met new acceptance for ` 4,100 in favour
of Ashok on maturity)
Ashok’s Account
Dr. Cr.
` `
2016 2016
Oct. 30 Bills payable 14,000 Oct. 30 Purchases 14,000
2017 2017
Mar. 03 Cash 4,050 Mar. 03 Bills Payable 8,000
Noting charges 50
Mar. 09 Bills Payable 4,100 Mar. 09 Interest 100
22,150 22,150
Illustration 6.
Aashirwad draws on Aakarshak a Bill of exchange for 3 months for `10,000 which Aakarshak
accepts on January 01, 2016. Aashirwad endorses the bill in favour of Aakarti. Before
maturity Aakarshak approaches Aashirwad with the request that the bill be renewed for a
further period of 3 months at 18 per cent per annum interest. Aashirwad pays the
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sum to Aakriti on the due date and agrees to the proposal of Aakarshak. Record journal
entries in the books of Aashirwad, assuming that the second bill is duly met.
Solution
Book of Ashirwad
Journal

Amount Amount
` `
2016
To Aakarshak’s A/c 10,000
(The Bill of exchange received from Aakarshak)
Jan.01 Aakarati’s A/c Dr. 10,000
(The bill of exchange received from Aakarshak,
endorsed to Aakarati)
Apr. 04 Aakarshak’s A/c Dr. 10,000
To Aakarati’s A/c 10,000
(Cancellation of the bill of exchange received
from Aakarshak now with Aakarati)
Apr. 04 Aakarati’s A/c Dr. 10,000
To Bank A/c 10,000
(Payment of the amount due to Aakarati)
Apr. 04 Aakarshak’s A/c Dr. 450
To Interest A/c 450
(Interest due from Aakarshak on `10,000
for 3 months at 18% p.a.)
Apr. 04 Bills Receivable A/c Dr. 10,450
To Aakarshak’s A/c 10,450
(The new bill received from Aakarshak for
the amountdue for him)
July 07 Bank A/c Dr. 10,450
(The amount received from Aakarshak in
respect of the renewed bill)
Illustration 7.
Ankit owes Nikita a sum of `6,000. On April 01, 2016 Ankit gives a promissory note for the
amount for 3 months to Nikita who gets it discounted with her bankers for `5,760. on the
due date the bill is dishonoured, the bank paid `15 as noting charges. Ankit then pays
`2,000 in cash and accepts a bill of exchange drawn on him for the balance together with
`100 as interest. This bill of exchange is for 2 months and on the due date the bill is again
dishonoured, Nikita paid `15 as noting charges.
Draft the journal entries to be recorded in Nikita’s books.
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306 Accountancy
Solution
Books of Nikita
Journal
Amount Amount
` `
2016
Apr. 01 Bills Receivable A/c Dr. 6,000
To Ankit’s A/c 6,000
(Ankit’s promissory note received in
settlement of his account)
Apr. 01 Bank A/c Dr. 5,760
(Ankit’s Promissory note discounted for `5,760)
July 04 Ankit A/c Dr. 6,015
To Bank A/c 6,015
(The promissory note dishonoured by Ankit
the amount of the bill and the noting charges
recoverable from Ankit and payable to bank)
July 04 Cash A/c Dr. 2,000
(The amount received from Ankit)
July 04 Ankit’s A/c Dr. 100
To Interest A/c 100
(Interest due from Ankit for the second bill)
July 04 Bills Receivable A/c Dr. 4,115
(Ankit’s acceptance for 2 monthsin
settlement of amount due)
Sept.07 Ankit’s A/c Dr. 4,115
(The dishonour by Ankit of his acceptance)
Sept.07 Ankit’s A/c Dr. 15
To Cash A/c 15
(Payment of noting charges, recoverable
from Ankit)
Illustration 8.
On May 01, 2016 Mohit sends his promissory note of ` 6000 for 3 months to Rohit. Rohit
gets it discounted with his bankers at 18 percent per annum on May 04. On the due date
the bill is dishonoured, the bank paying `10 as noting charges. Rohit agrees to accept
`2,130 in cash (including `130 for noting charges and interest) and another promissory
note for `4,000 at 2 months. On the due date, Mohit approaches Rohit again
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and asks for renewal of the bill for a further period of 3 months. Rohit agrees to the
request, provided Mohit pays `200 as interest in cash. This last bill is paid on maturity.
Draft journal entries in the books of Mohit and Rohit.
Solution
Books of Mohit
Journal

Amount Amount
` `
2016
May 01 Rohit’s A/c Dr. 6,000
(The amount of the promissory note sent
to Rohit)
Aug.04 Bills Payable A/c Dr. 6,000
To Rohit’s A/c 6,010
(The dishonour of the promissory note and
`10 being payable as noting charges to Rohit)
Aug. 04 Interest A/c Dr. 120
Rohit’s A/c 120
(Interest due to Rohit from part renewal of
the promissory)
Aug.04 Rohit’s A/c Dr. 6,130
To Cash A/c 2,130
(Payment of ` 2,130 in cash and a new
promissory note for ` 4,000 sent to Rohit to
settle his account)
Oct.07 Bill Payable A/c Dr. 4,000
To Rohit’s A/c 4,000
(Cancellation of the bill due today)
Oct.07 Interest A/c Dr. 200
To Rohit’s A/c 200
(The amount due as interest ot Rohit on the
renewed bill)
Oct.07 Rohit’s A/c Dr. 4,200
To Cash A/c 200
(The new acceptance and cash sent to Rohit)
2017
Jan.10 Bills Payable A/c Dr. 4,000
To Cash A/c 4,000
(Payment made to meet the bill due this day)
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308 Accountancy
Book of Rohit
Journal
Amount Amount
` `
2016
May 01 Bills Receivable A/c Dr. 6,000
To Mohit’s A/c 6,000
(Mohit’s promissory note received this day)
May 04 Bank’s A/c Dr. 5,730
(The discounting of the promissory note by
Mohit at 18% on ` 6,000 for 3 months)
Aug.04 Mohit’s A/c Dr. 6,000
To Bank A/c 6,010
(The dishonour of the promissory not by Mohit
` 10 being charged by bank for noting charges)
Aug.04 Mohit’s A/c Dr. 120
Interest A/c 120
(The amount agreed to be paid as interest
by Mohit)
Aug.04 Cash A/c Dr. 2,130
Bills Receivable A/c 4,000
(Cash and promissory note received from
Mohit for the amount due from him)
Oct.07 Mohit’s A/c Dr. 4,000
(Cancellation of the bill due today)
Oct.07 Mohit’s A/c Dr. 200
To Interest A/c 200
(The amount due from Mohit as interest)
Oct.07 Cash A/c Dr. 200
Bills Receivable A/c Dr. 4,000
(Cash and promissory not received from Mohit)
2017
Jan. 10 Cash/Bank A/c Dr. 4,000
(Mohit met his acceptance on maturity)
2019-2020
Test Your Understanding - II

Fill in the blanks:
(i) A bill of exchange is a ___________________________________instrument.

(ii) A bill of exchange is drawn by the ________________upon his___________.
(iii) A promissory note is drawn by ______________in favour of his__________.
(iv) There are ____________________parties to a bill of exchange.
(v) There are ____________________parties to a promissory note.
(vi) Drawer and ______________can not be the same parties in case of a bill of
exchange.
(vii) Bill of exchange in India languages is called _____________
(viii) __________days of grace are added in terms of the bill to calculate the date
of its__________.
Key Terms Introduced in the Chapter
(a) Drawer
(b) Drawee
(c) Payee
(d) Bill Receivable
(e) Bill Payable
(f) Drawing of a Bill
(g) Acceptance of a Bill
(h) Payment of a bill
Summary with Reference to Learning Objectives

1. Bill of exchange as an Instrument : A bill of exchange is a device by
which the purchaser or debtor in a credit transaction is not required to
make immediate payment but satisfies the seller or creditor by accepting
in writing the liability to pay the amount due from him.
2. Meaning of bill of exchange and promissory note: A bill of exchange is
an acknowledgement of debt given by one person to another,
incorporating all the terms and conditions of payments. A promissory
note is an undertaking in writing given by the debtor to the creditor to
pay the latter a certain sum of money in accordance with the conditions
stated therein.
3. Difference between a bill and a note.
(a) A bill is prepared by the creditor and accepted by the debtor; a note
is prepared by the debtor.
(b) There are three parties to a bill; there are only two parties to a note.
(c) A bill requires acceptance to acquire financial status; a note in
itself has financial status.
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310 Accountancy
4. Featur and advantages of a bill : A bill is a written unconditional order;

it is signed by the creditor and accepted by the debtor; the amount of
the bill is payable either on demand or at a fixed period.
Questions for Practice
Short Answers
1. Name any two types of commonly used negotiable instruments.

2. Write two points of distinction between bills of exchange and promissory
note.
3. State any four essential features of bill of exchange.
4. State the three parties involved in a bill of exchange.
5. What is meant by maturity of a bill of exchange?
6. What is meant by dishonour of a bill of exchange?
7. Name the parties to a promissory note
8. What is meant by acceptance of a bill of exchange?
9. What is Noting of a bill of exchange.
10. What is meant by renewal of a bill of exchange?
11. Give the performa of a Bills Receivable Book.
12. Give the performa of a Bills Payable Book.
13. What is retirement of a bill of exchange?
14. Give the meaning of rebate.
15. Give the performa of a Bill of Exchange.
Long Answers
1. A bill of exchange must contain “an unconditional promise to pay” Do
you agree with a statement?
2. Briefly explain the effects of dishonour and noting of a bill of exchange.
3. Explain briefly the procedure of calculating the date of maturity of a bill
of exchange? Give example.
4. Distinguish between bill of exchange and promissory note.
5. Briefly explain the purpose and benefits of retiring a bill of exchange to
the debtor and the creditor.
6. Explain briefly the purpose and advantages of maintaining of a Bills
Receivable Book.
7. Briefly explain the benefits of maintaining a Bills Payable Book and
state how is its posting is done in the ledger?
Numerical Questions
1. On Jan 01, 2016 Rao sold goods `10,000 to Reddy. Half of the payment
was made immediately and for the remaining half Rao drew a bill of
exchange upon Reddy payable after 30 days. Reddy accepted the bill and
returned it to Rao. On the due date Rao presented the bill to Reddy and
received the payment.
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Journalise the above transactions in the books Rao and prepare of Rao’s
account in the books of Reddy.
2. On Jan 01, 2016, Shankar purchased goods from Parvati for `8,000 and
immediately drew a promissory note in favour of Parvati payable after 3
months. On the date of maturity of the promissory note, the Government
of India declared holiday under the Negotiable Instrument Act 1881.
Since, Parvati was unaware about the provision of the law regarding the
date of maturity of the bill, she handed over the bill to her lawyer, who
duly presented the bill and received the payment. The amount of the bill
was handed over by the lawyer to Parvati immediately. Recore the
necessary Journal entries in the books of Parvati and Shankar.
3. Vishal sold goods for `7,000 to Manju on Jan 05, 2016 and drew upon
her a bill of exchange payable after 2 months. Manju accepted Vishal’s
draft and handed over the same to Vishal after acceptance. Vishal
immediately discounted the bill with his bank@12% p.a. On the due
date Manju met her acceptance.
Journalise the above transactions in the books of Vishal and Manju.
4. On Feb 01, 2016, John purchased goods for `15,000 from Jimmi. He
immediately made a payment of `5,000 by cheque and for the balance
accepted the bill of exchange drawn upon him by Jimmi. The bill of
exchange was payable after 40 days. Five days before the maturity of the
bill, Jimmi sent the same to his bank for collection. The bank duly
presented the bill to John on the due date who met the bill. The bank
informed the same to Jimmi.
Prepare John’s account in the books of Jimmi and Jimmi account in
the books of John.
5. On Jan 15, 2015, Kartar Sold goods for `30,000 to Bhagwan and drew
upon him three bills of exchanges of `10,000 each payable after one month,
two month, and three months respectively. The first bill was retained by
Kartar till its maturity. The second bill was endorsed by him in favour of
his creditor Ratna and the third bill was discounted by him immediately
@ 6% p.a. All the bills were met by Bhagwan. Journalise the above
transactions in the books of Kartar and Bhagwan. Also prepare ledger
accounts in books of Kartar and Bhagwan.
6. On Jan. 01, 2016 Arun sold goods for `30,000 to Sunil. 50% of the
payment was made immediately by Sunil on which Arun allowed a cash
discount of 2%. For the balance Sunil drew a promissory note in favour
of Arun payable after 20 days. Since, the date of maturity of bill was a
public holiday, Arun presented the bill on a day, as per the provisions of
Negotiable Instrument Act which was met by Sunil. State the date on
which the bill was presented by Arun for payment and Jounalise the
above transactions in the books of Arun and Sunil.
7. Darshan sold goods for ` 40,000 to Varun on 8.1.2016 and drew upon
him a bill of exchange payable after two months. Varun accepted the
bill and returned the same to Darshan. On the due date the bill was
met by Varun. Record the necessary Journal entries in the books of
Darshan and Varun in the following circumstances.
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312 Accountancy
• When the bill was retained by Darshan till the date of its maturity.
• When Darshan immediately discounted the bill @ 6% p.a. with
his bank.
• When the bill was endorsed immediately by Darshan in favour of
his creditor Suresh.
• When three days before its maturity, the bill was sent by Darshan
to his bank for collection.
8. Bansal Traders allow a trade discount of 10% on the list price of the
goods purchased from them. Mohan traders, who runs a retail shop
made the following purchases from Bansal Traders.
Date Amount
(`)
Dec. 21, 2016 1,000
Dec. 26, 2016 1,200
Dec. 18, 2016 2,000
Dec. 31, 2016 5,000
For all the purchases Mohan Traders drew promissory note in favour of
Bansal Traders payable after 30 days. The promissory note for the sale
of Dec. 21, 2016 was retained by Bansal Traders with them till the date
of its maturity. The promissory note drawn on 26.12.2016 was
discounted by Bansal Traders from their bank at 12% p.a. The promissory
note drawn on Dec. 28, 2016 was endorsed by Bansal Traders in favour
of their creditor Dream Soaps in full settlement of a purchase amounting
to ` 1,900. On 25.1.2017 Bansal Traders sent the promissory note drawn
on Dec. 31, 2016 to their bank for collection. All the promissory notes
were met by Mohan Traders. Record the necessary journal entries for
the above transactions in the books of Bansal Traders and Mohan
Traders and prepare Mohan Traders account in the books of Bansal
Traders and Bansal Traders account in the books of Mohan Traders.
9. Narayanan purchased goods for `25,000 from Ravinderan on Feb. 01,
2016. Ravinderan drew upon Narayanan a bill of exchange for the same
amount payable after 30 days. On the due date Narayanan dishonoured
his acceptance.
Record the necessary journal entries in the books of Ravinderan and
Narayanan in following cases:
• When the bill was retained by Ravinderan with him till the date of
its maturity.
• When the bill was discounted by Ravinderan immediately with his
bank @ 6% p.a.
• When the bill was endorsed to his creditor Ganeshan.
• When the bill was sent by Ravinderan to his bank for collection a
few days before it maturity.
10. Ravi sold goods for `40,000 to Sudershan on Feb 13, 2016. He drew four
bills of exchange upon Sudershan. The first bill was for `5,000
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payable after one month. The second bill was for `10,000 payable after 40
days; the third bill was for `12,000 payable after three months and fourth
bill was for the balance amount payable after 19 days. Sudershan accepted
all the bills and returned the same to Ravi. Ravi discounted the first bill
with his bank at 6% p.a. He endorsed the second bill to his creditor
Mustaq for the full settlement of a debt of `10,200. The third bill was kept
by Ravi with him till the date of maturity. Five days before the maturity
of the fourth bill, Ravi sent the bill to his bank for collection. All the four
bills were dishounoured by Sudarshan on maturity. Sudershan settled
Ravi’s claim in cash three days after the dishonour of each bill along with
interest @ 12% p.a. for the terms of the bills.
You are requested to record the necessary journal entries in the books to
Ravi, Sudershan, Mustaq and bank for the above transaction. Also prepare
Sudershan’s account and Mustaq’s account in the books of Ravi.
11. On Jan 01, 2016 Neha sold goods for `20,000 to Muskan and drew
upon her a bill of exchange payable after two months. One month before
the maturity of the bill Muskan approached Neha to accept the payment
against the bill at a rebate @ 12% p.a. Neha agreed to the request of
Muskan and Muskan retired the bill under the agreed rate of rebate.
Journalise the above transaction in the books of Neha and Muskan.
12. On Jan 15, 2016 Raghu sold goods worth ` 35,000 to Devendra and
drew upto the latter three bills of exchanges. The first bill was for `5,000
payable after one month, the second bill was for `20,000 payable after
three months and third bill for balance amount for 4 months. Raghu
endorsed the first bill in favour of his creditor Dewan in full settlement
of a debt of `5,200. The second bill was discounted by Raghu @ 6 % p.a.
and the third bill was retained by Raghu till the date of maturity.
Devendra dishonoured the bill on maturity and the bank paid ` 30 as
noting charges. Four days before the maturity of the third bill Raghu,
sent the same for collection to his bank. The third bill was also dishonored
by Devendra and the bank paid `200 as noting charges. Five days after
the dishonour of the bill Devendra paid the entire amount due to Raghu
along with interest `1,000 for this purpose Devendra obtained a short
term loan from his bank.
You are requested to record the necessary journal entries in the books
of Raghu Devendra and Dewan and also prepare Devendra’s account in
Raghu’s books and Raghu’s account in Devendra’s account.
13. Viaml purchased goods `25,000 from Kamal on Jan 15, 2016 and accepted
a bill of exchange drawn upon him by Kamal payable after two months.
On the date of the maturity the bill was duly presented for payment.
Vimal dishonoured the bill.
record the necessary journal entries in the books of Kamal and Vimal when.
• The bill was retained by Kamal till the date of its maturity.
• The bill was immediately discounted by Kamal with his bank @ 6% p.a.
• The bill was endorsed by Kamal in favour of his creditor Sharad.
• Five days before its maturity the bill was sent by Kamal to his bank
for collection.
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314 Accountancy
14. Abdulla sold goods to Tahir on Jan 17, 2017 for `18,000. He drew a bill
of exchange for the same amount on Tahir for 45 days. On the same
date Tahir accepted the bill and returned it to Abdulla. On the due date
Abdulla presented the bill to Tahir which was dishonoured. Abdulla
paid `40 as noting charges. Five days after the dishonour of his
acceptance Tahir settled his debt by making a payment of `18,700
including interest and noting charges.
Record the necessary journal entries in the books of Abdulla and Tahir.
Also prepare Tahir’s account in the books of Abdulla and Abdulla’s
account in the books of Tahir.
15. Asha sold goods worth `19,000 to Nisha on March 02, 2017. `4,000
were paid by Nisha immediately and for the balance she accepted a bill
of exchange drawn upon her by Asha payable after three months. Asha
discounted the bill immediately with her bank. On the due date Nisha
dishonoured the bill and the bank paid `30 as noting charges.
Record the necessary journal entries in the books of Asha and Nisha.
16. On Feb. 02, 2017, Verma purchased from Sharma goods for `17,500.
Verma paid `2,500 immediately and for the balance gave a promissory
note to Sharma payable after 60 days. Sharma immediately endorsed
the promissory note in favour of his creditor.
Gupta for the full settlement of a debt of `15,400. On the due date of the
bill Gupta presented the bill to Verma which the latter dishonoured and
Gupta paid `5,000 noting charges. On the same date Gupta informed
Sharma about the dishonour of the bill. Sharma settled his debt to Gupta
by cheque for `15,500 which includes noting charges and interest. Verma
settled Sharma’s claim by cheque for the same amount.
Record the necessary journal entries is the books of Sharma, Gupta and
Verma for the above transaction and prepare Verma’s and Gupta’s accounts
in the books of Sharma. Sharma’s account in the books of Verma. And
also Sharma’s account in the books of Gupta.
17. Lilly sold goods to Methew on 1.3.2017 for `12,000 and drew upon Methew
a bill of exchange for the same amount payable after two months. Lilly
immediately discounted the bill with her bank at 9% p.a. The maturity
date of the bill was a non business day (holiday), therefore, Lilly had to
present the bill as per the provisions of the Indian Instruments Act.1881.
The bill was dishonoured by Methew and Lilly paid `45 as noting charges.
Methew settled the claim of Lilly five days after the disonour of the bill
by a cheque, whch includes interest @ 12% for the term of the bill.
Journalise the above transactions in the books of Lilly and Methew and
prepare Mathew’s account in the books of Lilly and Lilly’s account in
the books of Mathew.
18. Kapil purchased goods for `21,000 from Gaurav on 1.2.2017 and accepted
a bill of exchange drawn by Gaurav for the same amount. The bill was
payable after one month. On 25.2.2017 Gaurav sent the bill to his bank
for collection. The bill was duly presented by the bank. Kapil dishonoured
the bill and the bank paid `100 as noting charges.
2019-2020
Record the necessary journal entries for the above transactions in the
books of Kapil and Gourav.
19. On Feb. 14, 2017 Rashmi sold good `7,500 to Alka. Alka paid `500 in
cash and for the bank balance accepted a bill of exchange drawn upon
her by Rashmi payable after two months. On Apr.10, 2017 Alka approached
Rashmi to cancel the bill since she was short of funds. She further
requested Rashmi to accept `2,000 in cash and draw a new bill for the
balance including interest `500. Rashmi accepted Alka’s request and drew
a new bill for the amount due payable after 2 months. The bill was accepted
by Alka. The new bill was duly met by Alka on maturity.
Record the necessary journal entries in the books of Rashmi and Alka
and prepared Alka’s account in the books of Rashmi’s and Rashmi’s
account in the books of Alka’s
20. Nikhil sold goods for `23,000 to Akhil on Dec. 01, 2017. He drew upon
Akhil a bill of exchange for the same amount payable after 2 months.
Akhil accepted the bill and sent it back to Nikhil. Nikhil discounted the
bill immediately with his bank @12 p.a. On the due date Akhil
dishonoured the bill of exchange and the bank paid `100 as noting
charges. Akhil requested Nikhil to draw a new bill upon him with interest
@10% p.a. which he agreed. The new bill was payable after two months.
A week before the maturity of the second bill Akhil requested Nikhil to
cancel the second bill. He further requested to accept `10,000 in cash
immediately and drew a third bill upon him including interest of `500.
Nikhil agreed to Akhil’s request. The third bill was payable after one month.
Akhil met the third bill on its maturity. record the necessary journal
entries in the books of Nikhil and Akhil and also prepare Akhil’s account
in the books of Nikhil and Nikhil’s account in the books of Akhil.
21. On Jan 01, 2017 Vibha sold goods worth `18,000 to Sudha and drew
upon the latter a bill of exchange for the same amount payable after
two months. Sudha accepted Vibha’s draft and returned the same to
Vibha after acceptance. Vibha endorsed the bill immediately in favour
of her creditor Geeta. Five days before the maturity of the bill Sudha
requested Vibha to cancel the bill since she was short of funds. She
further requested to draw a new bill upon her including interest of `200.
Vibha accepted Sudha’s request. Vibha took the bill from Geeta by
making the payment to her in cash and cancelled the same. Then she
drew a new bill upon Sudha as agreed. The new bill was payable after
one month. The new bill was duly met by Sudha on maturity. Record
the necessary journal entries in the books of Vibha.
22. Following was the position of debtor and creditor of Gautam as
on 1.1.2017.
Debtors Creditors
` `
Babu 5,000 -
Chanderkala 8,000 -
Kiran 13,500 -
Anita 14,000 -
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316 Accountancy
Anju - 5,000
Sheiba - 12,000
Manju - 6,000
The following transactions took place in the month of Jan 2017:
Jan 2
Drew on Babu at two months after date at full settlement for `4,800.
Babu accepted the bill and returned it on 5.1.2017 .
Jan. 04
Babu’s bill discounted for `4,750.
Jan. 08
Chanderkala sent a promissory note for `8,000 payable three months
after date.
Jan. 10
Promissory note received from Chanderkala discounted for `7,900.
Jan. 12
Accepted Sheiba draft for the amount due payable two months after
date.
Jan. 22
Anita sent his promissory note payable after two months.
Jan. 23
Anita’s promissory note endorsed in favour of Manju.
Jan. 25
Accepted Anju’s draft payable after three months.
Jan. 29
Kiran sent `2,000 in cash and a promissory note for the balance payable
after three months.
Record the above transactions in the proper subsidiary books.
23. On Jan. 01, 2017 Harsh accepted a months bill for ` 10,000 drawn on
him by tanu for latter’s benefit. Tanu discounted the bill on same
day @ 8% p.a On the due date tanu sent a cheque to Harsh for honour
the bill. Harsh duly honoured his acceptance.
Record the journal entries in the Books of Tanu and Harsh.
Checklist to test Your Understanding

Test your understanding-I
(i) False (ii) True (iii) False (iv) False (v) True
(vi) False (vii) True (viii) False (ix) False (x) False
Test Your Understanding-II
(i)Promisee (ii) Endorsement (iii) Promissor (iv) Endorser
Test Your Understanding-III
(i) Negotiable, (ii) Drawer, Drawee (iii) Debtor, Creditor (iv) Three
(v) Two. (vi) Drawee (vii) Hundi (viii) 3, Maturity
2019-2020
NOTE
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318 Accountancy
NOTE
2019-2020

Bill of Exchange: Earning Bjectives

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Bill of Exchange 8

G oods can be sold or bought for cash or on

Now a days these instruments of credit are called bills of exchange or

8.1 Meaning of Bill of Exchange

8.1.1 Parties to a Bill of Exchange

Test Your Understanding - I

8.2 Promissory Note

8.2.1 Parties to a Promissory Note

Fig. 8.3 Distinction between bills of exchange and promissory note

8.3 Advantages of Bill of Exchange

• Conclusive proof: The bill of exchange is a legal evidence of a credit

8.4 Maturity of Bill

8.5 Discounting of Bill

8.6 Endorsement of Bill

8.7 Accounting Treatment

8.7.1 In the Books of Drawer/Promissor

On maturity of the bill

8.7.2 In the Books of Acceptor/Promissor

4. When the bill is endorsed by the drawer in favour of his creditor

Date Particulars L.F. Debit Credit

Apr.05 Bank A/c Dr. 20,000

(ii) When the bill was discounted from the book.

Date Particulars L.F. Debit Credit

In the books of Sumit

Date Particulars L.F. Debit Credit

Date Particulars L.F. Debit Credit

Date Particulars L.F. Debit Credit

Date Particulars L.F. Debit Credit

8.8 Dishonour of a Bill

(i) When the bill kept by Shieba till its maturity;

(ii) When the bill was discounted by shieba

Date Particulars L.F. Debit Credit

(iii) When the bill was endorsed by Shieba to Lal Chand

Date Particulars L.F. Debit Credit

Whereas, in the book of Vishal, the following entries will be recorded

Date Particulars L.F. Debit Credit

8.8.1 Noting Charges

(i) When the bill was retained till its maturity

Date Particulars L.F. Debit Credit

(ii) When the bill was discounted with the bank.

Date Particulars L.F. Debit Credit

(iii) When the bill was endorsed to Chitra

Date Particulars L.F. Debit Credit

Date Particulars L.F. Debit Credit

8.9 Renewal of the Bill

May 04 Ravi’s A/c Dr. 15,300

8.10 Retiring of the Bill

In the books of Amit

The recorded entries will be posted to the following ledger acounts

Bill Receivable Account

Date Particulars L.F. Debit Credit

Jan.01 Amit’s A/c Dr. 10,000

Bills Payable Account

Jan.15 Bill’s Receivable A/c Dr. 30,000

Mar. 03 Cash A/c Dr. 4,050

Date Particulars L.F. Debit Credit

Oct. 30 Ashok’s A/c Dr. 14,000

Mar. 03 Bill Payable A/c Dr. 8,050

Mar. 03 Ashok’s A/c Dr. 4,050