CBSE

Class 11 Accountancy
Revision Notes
Chapter-7 Accounting for Bills of Exchange

Learning Objectives
After studying this chapter, students shall be able to:

Explain the concept of Bill of Exchange and Promissory Note

Distinction between Bill of Exchange and Promissory Note.
Define Important terms of Bill Exchange and Promissory

Note. Record the Accounting Treatment of Bill of Exchange under different Circumstances

Suggested Methodology: - Illustration-cum-Explanation Method

Introduction
A bill of exchange is a binding agreement by one party to pay a fixed amount of cash to
another party as of a predetermined date or on demand. Bills of exchange are primarily used
in international trade. Their use has declined as other forms of payment have become more
popular. Bill of Exchange and Promissory Note both are legal Instruments which facilitate
the credit sale of goods by assuring the seller that the amount will be recovered after a
certain period of time. Both of these are legal instruments under the Negotiable Instruments
Act, 1881.
Bill of Exchange
“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 the order of, a
certain person or to the bearer of the instrument.” Section 5 of the Negotiable Instrument
Act, 1881

Features of a Bill Exchange are:

1. A bill of exchange must be in writing

2. It must contain an order (and note a request) to make payment.
3. The order of payment must be unconditional.
4. The amount of bill of exchange must be certain.
5. The date of payment should be certain.

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 6. It must be signed by the drawer of the bill.
7. It must be accepted by the drawee by signing on it.
8. The amount specified in the bill exchange in payable either on demand on the expiry of a
fixed period.
9. The amount specified in the bill is payable either to a certain person or to his order or to
the bearer of the bill.
10. It must be stamped as per legal requirements.

Parties to a bill of exchange

1. Drawer: Drawer is the person who makes or writes the bill of exchange. Drawer is a
person who has sold goods on credit or granted credit to the person on whom the bill of
exchange is drawn. The drawer is entitled to receive money from the drawee (acceptor).
2. Drawee: Drawee is the person on whom the bill of exchange is drawn for acceptance.
Drawee is the person who purchase goods on credit or to whom credit has been granted
by drawer. The drawee is liable to pay money to the creditor/drawer.
3. Payee: Payee is the person who receives the payment from the drawee. Usually the
Drawer and the payee is the same person. In the following cases, drawer and payee are
two different persons.
i. When the bill is discounted by the drawer from his bank-payee in the bank.
ii. When the bill is endorsed by the drawer to his creditors, payee is the endorsee.

Specimen of Bill of exchange

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Note:- Value received means the bill has been issued in exchange of some consideration.
These words are very important because law does not consider those agreements which
have been made without considerations.

PROMISSORY NOTE

A Promissory note is 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 or to the order of a certain person or to be the bearer of the instrument

Features of promissory note

1. There must be an unconditional promise to pay a certain sum of money on a certain date.
2. It must be signed by the maker.
3. The name of the payee must be mentioned on it.
4. It must be stamped according to its value.

PARTIES TO PROMISSORY NOTE

1. The maker: The maker is the person who makes the promise to pay the amount on a
certain date. Maker of a bill must sign the promissory note before giving it to the payee.
2. The Payee: The payee is the person who is entitled to get the payment from the maker of
promissory note. Payee is the person who has granted the credit.

Specimen of Promissory Note

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Distinction between Bills of Exchange and Promissory Note

S. Basis of
Bills of Exchange Promissory Note
No. difference

1. Drawer The Drawer is the creditor. The Drawer is the debtor

It has three parties namely

It has two parties namely:
No. of - The drawer
2. - The Maker
Parties - The drawee
- The Payee
- The Payee

Order or It contains an order to make the It contains a promise to make

3.
Promise payment. the payment

It is valid only when accepted by the It does not require any

4. Acceptance
drawee. acceptance from the drawee.

It case of bill of exchange, drawer can Drawer or maker cannot the

5. Payee
be the payee of the bill payee of Promissory note.

It case of dishonor of bill Noting Noting is not necessary in case

6. Noting
becomes important. of dishonor of promissory note.

The liability of the drawer arises only The liability of the drawer
7. Liability
if the drawee fails to make payment (maker) is primary

Important terms

1. Term of Bill: The period intervening between the date on which a bill is drawn and the
date on which it becomes due for payment is called “Term of Bill’.
2. Due Date: Due date is the date on which the payment of the bill is due.
i. In case of ‘Bill at Sight’:- Due date is the date on which a bill is presented for the
payment
ii. In case of ‘Bill after date’:- Due Date: - Date of Drawing + Term of Bill.
iii. In case of ‘Bill after sight’:-Due date: - Date of Acceptance +Term of Bill.
3. Days of Grace: Drawee is allowed three extra days after the due date of bill for making
payments. Such 3 days are known as ‘Days of Grace’. It is a custom to add the days of
grace.
4. Date of Maturity: The date which comes after adding three days of grace to the due

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 date of a bill is called “Date of maturity’.
5. Discounting of Bill: When the bill is encashed from the bank before its due date, it is
known as discounting of bill. Bank deducts its charges from the amount of bill and is
disburses the balance amount.
6. Endorsement of Bill: Endorsement of bill means the process by which drawer or holder
of bill transfer the title of bill in favour of his/her creditors. The person transferring the
title is called “Endorser” and the person to whom the bill is transferred called “Endorsee’.
Endorsement is executed by putting the signature at the back of the bill.
7. Bill sent for Collection: It is a process when the bill is sent to bank with instruction to
keep the bill till maturity and collect its amount from the acceptor on the date of
maturity.
8. Dishonour of Bill: When the drawee (or acceptor) of the bill fails to make payment of
the bill on the date of maturity, it is called Dishonour of Bill.
9. Noting of Bill: To obtain the proof of dishonour of a bill, it is re-sent to the drawee
through a legally authorized persons called Notary Public charges a small fee for
Providing this service known as Noting charges.
10. Retirement of a Bill: When the drawee makes the payment of the bill before its due
date it is called ‘Retirement of a bill’.
11. Renewal of a Bill: Sometimes drawee is not in the position to pay the amount of the bill
on maturity. Thus drawee request to the drawer to cancel the old bill & write a new bill
with interest and if drawer agree, new bill is drawn with new maturity date. This process
is called the ‘Renewal of Bill’. The interest may be paid in cash or may be added in the
amount of new bill.

Points of Remember
1. When calculating Date of Maturity, the following point must be considered:

i. In case “Bill at Sight” or “Bill on demand” 3 days of grace are NOT allowed.
ii. When the term of bill is mentioned in no of days, then
Date of drawing the bill is not included.
Date of payment is included in determining date of maturity.
If date of maturity falls on a day which is public holiday; the maturity date of the
bill shall be “PROCEEDING DAY’.
If maturity date is on an emergent holiday declared under the Negotiable

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 Installment Act. 1881, the next working day immediately after the holiday will be
considered as the date of maturity.

2. When the period is stated in months the date of maturity shall be calculated in terms of
calendar months ignoring the no. of days in a month.

Case 1: A retains the bill till the date of maturity and also paid the noting charges.
Case 2: A discounts the bill from his bank on 4th June @12% per annum. Noting charges has
been paid by bank.
Case 3: A endorses the bill in favour of C on June 1. C paid the noting charges.
Case 4: A sent the bill to his bank for collection on July 1. Bank paid the noting charges.

The third bill was paid by shyam under rebate of 12 % p.a. one month prior to date of
maturity. The fourth bill was lodged with bank for collection and it was duly met. pass
necessary Journal entries in the books of amit and shyam.

Accounting Treatment for Bills of Exchange

A bill of exchange is 'an unconditional order in writing, addressed by one person to another,
signed by the person giving it, requiring the person to whom it is addressed to pay on
demand, or at a fixed or determinable future time, a sum certain in money to or to the order
of a specified person, or to bearer
Here is detail about the five heads for accounting treatment of bill of exchange, i.e., (I) On the
Due Date, Bill is Honoured; (II) On the Due Date, Bill is Dishonoured; (III) Renewal of Bill; (IV)
Retiring of Bill; and (V) Insolvency of Acceptor.

On The Due Date Bill Is Honoured:

The accounting treatment under this heading is based on the assumption that bill is duly
honoured on maturity of the bill.

Keeping in view the significance of the bill, the drawer can treat the bill in the
following ways:
Bill is retained till the date of maturity
Bill is discounted from the bank
Endorsement of bill
Bill is sent for collection
Now we shall move to discuss the accounting treatment of bill transactions under all above

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cases.

Bill is Retained Till the Date of Maturity:

The receiver may keep the bill till the date of maturity of the bill and bill is honoured. In this
case, the acceptor (drawee) shall make the payment to the receiver (drawer).
The drawer and drawee will record the following journal entries in their respectively
Explanations of the Journal Entries (Using Modern Approach Only):

Transaction (i):
In the books of A, Sales is to be credited (being increase in revenue) and B’s A/c is to be
debited (being increase in assets). In the books of B, Purchases is to be debited (being
increase in expense) and A’s A/c is to be credited (being increase in liabilities)

Transaction (ii):
In the books of A, Bills Receivable A/c is to be debited (being increase in assets) and B’s A/c is
to be credited (being decrease in assets). In the books of B, A’s A/c is to be debited (being
decrease in liabilities) and Bills Payable A/c is to be credited (being increase in liabilities).

Transaction (iii):
In the books of A, Cash A/c is to be debited (being increase in assets) and Bills Receivable A/c
is to be credited (being decrease in assets). In the books of B, Bills Payable A/c is to be debited
(being decrease in liabilities) and Cash A/c is to be credited (being decrease in assets).

(ii) Bill is Discounted from the Bank:

Bank facilitates the customers to get their bill discounted from it. Banks deduct some amount
as discount and pay the balance of the bill to the customers. In case of need of funds,
customers opt for this facility and obtain the cash in respect of bill by discounting them. The
amount of discount is the interest for lending the money to the customers before the
maturity of the bill. The discount portion usually depends upon the prevailing rate of interest
and the unexpired period of the bill.

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Explanations of the Journal Entries (Using Modern Approach Only):
Transaction (i): In the books of A, Bank A/c is to be debited (being increase in assets),
Discount A/c is to be debited (being an expense) and Bills Receivable A/c is to be credited
(being decrease in assets). In the books of B, no entry shall be made for this transaction as B
is not affected by this transaction.
Transaction (ii): In the books of A, no entry shall be made as A has already received the
payment. Now the payment shall be received by the Bank from the acceptor since the bill
becomes the property of the bank. In the books of B, Bills Payable A/c is to be debited (being
decrease in liabilities) and Bank A/c is to be credited (being decrease in assets). It is worth
mentioning here that instead of cash, bank account should be credited in the books of
drawee because in banking transaction bank deals with the respective Bank of Drawee.

Endorsement of Bill: Signing and transferring the title of the bill is called endorsement. Bill
of exchange is a negotiable instrument which means the amount is payable to the bearer of
the instrument. Bearer of the bill means the person who is in possession of the bill legally.
This feature makes the bill of exchange readily transferable. A bill can be transferred by the
holder unless its transfer is restricted. By putting signatures at the back of the bill along with

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the name of party to whom it is to be transferred, the bill can be endorsed.

Types of Endorsement:
Bill can be endorsed in the following ways:
Blank Endorsement:
In this type of endorsement, only signature of the transferor is required and the bill can be
transferred by mere delivery.
The method of endorsement is as under:
Signed
“Veer Singh”
Special Endorsement:
In this type of endorsement, the intention of the transferor is to transfer the bill to the a
specific person or to transfer the bill on the order of that specific person. It is necessary to
write the name of the party in whose favour the property rights of the bill are endorsed. If a
bill is to be endorsed in favour of Ramesh & Co. by Sippy & Co; of the bill endorsement shall
be shown as under on the back of the bill
“Pay Ramesh & Co. or on order”
Sippy & Co.
Official Signatory
Restricted Endorsement:
Endorsement in favour of a definite person only is known as restricted endorsement.
This is expressed as under:
“Pay Mehra Sons only”
Signed
Manohar Sons

Endorsement Sans Recourse (i.e. without recourse):

The endorsement which relieves the holder of the bill from any liability to all subsequent
endorsees due to dishonour of bill is called endorsement sans recourse. In this case, the
holder of the bill acts only in a representative capacity as agent and not as principal.
The endorsement is completed in the following way:
“Pay Jitender Kumar or order”
Signed
Noor Ali

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Sans Recourse.
Facultative Endorsement:
In this case, the endorser waives some of his rights to which he is entitled. The right which is
given up is clearly stated. In the following manner, the endorsement gets effected;
“Pay Har Govind Parsad or order
Notice of dishonour waived”
Signed
Vishwas & Co.
In this way, the notice of dishonour, need not be given before demanding the payment from
the endorser.
Effects of Endorsement:
After endorsement, the person endorsing the bill is called ‘endorser’ and the person to whom
the bill is endorsed is called ‘endorsee’.
The bill would become payable to the third party instead of original holder. However, during
the term of the bill, the bill may be again endorsed to fourth person unless its endorsement is
restricted.
In the case of unrestricted endorsement, business dues may be settled unrestrictedly.
The following journal entries shall be passed in the books of drawer, drawee and endorsee:

Explanations of the Journal Entries (Using Modern Approach Only):

Transaction (i):
In the books of A, C’s A/c shall be debited (being decrease in liabilities), and Bills Receivable
A/c is to be credited (being decrease in assets). In the books of B, no entry shall be made for
this transaction as B is not affected by this transaction. In the books of C, Bills Receivable A/c
is to be debited (being increase in assets) and A’s A/c shall be credited (being decrease in

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assets).
Transaction (ii):
In the books of A, no entry shall be passed as the bill has been transferred to C. In the books
of B, Bills Payable A/c is to be debited (being decrease in liabilities) and Cash A/c is to be
credited (being decrease in assets). In this case C (creditor) becomes the owner of the bill and
will receive the payment on maturity. In the books of C, Cash A/c is to be debited (being
increase in assets) and Bills Receivable A/c is to be credited (being decrease in assets).
Illustration . (Endorsement to third party)
Rohit sold goods to Ankit worth Rs 11,500. On 1st May, 2010, he drew on Ankit a bill for Rs
11,500 for 3 months. On 5th May, 2010 the bill was endorsed in favour of Shakul, who got the
payment on maturity. Give journal entries in the books of Rohit, Ankit and Shakul.

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Bill Sent for Collection:
In the course of business, it may happen that business enterprises receive various bills on
different occasions. But obviously the dates of the bills are different. Further, the maturity
dates may vary according to the tenure of the bills. It may also happen that the various
parties of the bill are located at different locations.
To overcome the burden of encashing all bills falling due on different dates and at different
locations, banks may facilitates its customers to collect on behalf of them, the amounts due
on various bills from the drawees of the bills in time.
In this case, the following journal entries shall be passed in the books of drawer and the
drawee:

Explanations of the Journal Entries (Using Modern Approach Only):

Transaction (i):
In the books of A, Bills Sent for Collection A/c is to be debited (being increase in assets) and
Bills Receivable A/c is to be credited (being decrease in assets). In the books of B, no entry
shall be passed as B is not affected by this transaction.
Transaction (ii):
In the books of A, Bank A/c is to be debited (being increase in assets) and Bills Sent for
Collection A/c is to be credited (being decrease in assets). In the books of B, Bills Payable A/c
is to be debited (being decrease in liabilities) and Cash/Bank A/c is to be credited (being
decrease in assets).
Illustration . (Sending the bill for collection)
Surjit draws a bill on Garima for Rs 25,000 payable 3 months after 1st April, 2010.
Immediately after its acceptance, Surjit sends the bill to his bank for collection. On due date,
bank gets the payment. Make journal entries in the books of both the parties.

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Dishonour of a Bill:
When the acceptor fails to meet his commitment on the date of maturity, the bill is said to
have been dishonoured. Failure to meet the commitment means the acceptor could not pay
the amount of the bill to the holder of the bill on its maturity.
Upon receiving the information about dishonour of the bill, the entries should be passed in
such a way that the original entries passed in the books of drawer and drawee shall be
reversed and the original position of creditor and debtor is restored between the drawer and
the drawee. They are now again considered as creditor and debtor.
Accounting Treatment:
It may happen that on the date of maturity of the bill:
Bill was lying with the drawer,

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Bill was discounted from the bank
Bill was endorsed to the creditor
(iv)Bill was sent for collection
Bill was pledged for obtaining the loan from the bank.
In all these circumstances, the following journal entries shall be passed:

Illustration . (Dishonour of bill)

On 1st Jan. 2005. the X sold goods to Y. for Rs.10,000 on credit basis. On the same date X drew
a bill for Rs.10,000 on Y. at two months. Y accepted the bill and returned it to X. On the due
date Y could not honor acceptance.

Required: Give journal entries in the books of X and Y.

Solution:

X's Journal

Date Particulars L.F Amount (Dr.) Amount (Cr.)

Y A/C................................................Dr.

1.1.2005 Sales A/C 10,000

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 (Goods sold on credit basis) 10,000

Bill receivable A/C...............................Dr.

1.1.2005 Y A/C 10,000
10,000
(Acceptance received at two months)

Y A/C...............................................Dr.
4.3.2005 Bill receivable account A/C 10,000
10,000
(Bill is dishonored on the due date)

When the goods were sold to Y, he became a debtor for Rs.10,000. Then he paid his debts by
giving acceptance (B/R) to X. But when he did not honor his acceptance on the due date, he
again became a debtor of X. (Amount is still due from him).

Y's Journal

Date Particulars L.F Amount (Dr.) Amount (Cr.)

Purchases A/C.....................................Dr.
1.1.2005 X A/C 10,000
10,000
(Goods purchased on credit)

X A/C.................................................Dr.
1.1.2005 Bill payable A/C 10,000
10,000
(Acceptance given at two months)

Bill payable A/C...................................Dr.

4.3.2005 X A/C 10,000
10,000
(Acceptance not honored on maturity)

In the above example, the drawer (X) has not got the bill noted by the notary public and so
no noting charges were paid by him.

Renewal of the Bill:

Sometimes, the acceptor finds it difficult to meet the obligation of the bill on due date of the
bill. To avoid dishonouring of the bill, he may request the drawer of the bill, to extend the
maturity date. In that case, the drawer may cancel the old bill and draw a new bill, with new
terms, on the drawee. This is known as renewal of the bill. In this case, noting of the bill is

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not required as the cancellation of the bill is mutually agreed upon by both the parties of the
bill.
The drawer may demand the interest charges for the extended period. The interest may be
included in the amount of a new bill or can be paid in cash. Sometimes, the acceptor of the
bill requests for cancellation of the old bill, partly for a new bill and partly for cash. For
example, a bill of Rs. 20,000 may be cancelled on cash payment of Rs. 12,000 and on
acceptance of a new bill for the balance of Rs. 8,000 plus interest as agreed between both the
parties of the bill.
Accounting Treatment:
For recording the entries in the books of both the parties, the entries shall be passed in two
phases. In the first phase, an entry for cancellation of the old bill is to be passed in the books
of both the parties of the bill. This entry would be the same as that of dishonour of bill. In the
second phase, entries for interest and drawing and accepting a new bill shall be recorded in
the books of the parties.
The following journal entries will be passed in the books of both the parties:

Illustration . (Renewal of bill)

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Pass the journal entries in each of the following alternative cares in the books of drawer and
drawee:

Retiring of Bill:
In case of sufficient funds, the acceptor of the bill may approach the drawer to accept the
payment of the bill before due date of the bill. The intention of the drawee is either to utilize
the surplus funds which otherwise would be lying idle or to withdraw the bill from further
circulation.
If the holder of the bill agrees to the proposal of the acceptor, the bill is said to be retired.
Sometimes, the holder of the bill inspires the acceptor of the bill for retiring the bill before
the due date of the bill. In both the cases some discount is allowed to the acceptor which is
known as ‘rebate’ and recorded in the books of both the parties as ‘Rebate on Bills A/c’.
The rebate allowed by the holder is an expense for him and gain for the acceptor. The
amount of rebate shall be calculated as a fixed percentage and on the unexpired period only.
Accounting Treatment:
In the case of retiring a bill, the entries shall be passed in the same way as were passed in the
case when bill was honoured on the due date of the bill. In addition to that ‘Rebate on Bill
A/c’ is to be debited in the books of the holder (being an expense). Similarly, the acceptor of
the bill shall credit the ‘Rebate on Bill A/c’ (being gain for him).
The following journal entries are passed in the books of both the parties:

Illustration. (Retiring of bill)

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Vijayshree retired her acceptance for Rs 1,10,000 by giving Rs 1,09,000 to Hari. Give the
entries in the book of Hari.

Insolvency of Acceptor:
Insolvent is the person whose assets are not sufficient to pay off his liabilities in full. In that
case, the court appoints a legal person who is known as ‘Official Assignee’ or Official
Receiver’. This person realizes all the assets of the acceptor of the bill and pays off to his
creditors in proportion to their debts. The amount that could not be given to the holder shall
be considered as ‘Bad Debts’ from the point of view of the holder and ‘Deficiency’ from the
point of view of the acceptor of the bill.
Accounting Treatment:
In case of insolvency of the acceptor, the holder would get the proportionate amount of what
is due from the bill. In this case, entries shall be recorded in the books of both the parties in
two phases. In the first phase, entry for cancellation of the bill shall be passed in the books of
both the parties. This entry shall be same as would be passed at the time of dishonouring of
the bill. In the second phase, entry for recording the amount received (if any) and amount
that could not receive, shall be recorded.
The journal entries for this in the books of debtor and creditor are as follows:

Illustration . (Insolvency of Debtor)

On Jan. 1, 2010 R. Singh drew upon S. Singh for goods sold, a bill at 3 months for Rs 12,000. R
Singh discounted the bill with his bankers, who charges Rs 200 for discount. On the due date,
the bill was dishonoured and the bank paid Rs 50 for Noting charges. On April 10, S. Singh
accepted a new bill for Rs 6,000 payable after 3 months and paid the balance in cash. On July
1, before the bill matured S. Singh was declared insolvent and a first and final dividend of 50

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paise in a rupee was received from his private estate on 31s‘ July, 2010. Make Journal entries
in the books of both R. Singh and S. Singh

Journal entries in the books of both R. Singh and S. Singh

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