CO C Bill o f E xchange CA /C MA S AN TO SH K U MAR

IM PO R T A NT PO INT S O F O UR NO T E S/B O O K S:

1. A ll n o te s /B o ok a re s e lf -w ri t te n by S an to sh si r .
2. He h a s wri t te n v a ri ou s A cc ou n ts b oo ks for C A -F O U ND A T IO N , C A - I NT ER ,
C A -F INA L , C M A -F O U ND A T IO N , C M A - INT E R , C M A -F I NA L , C S -
F O UND A T IO N ,C S - EX EC UT IVE , B .C O M , 12 t h A C C O UNT A NC Y a n d 1 1 t h
A C C O UNT A NC Y.

3. A ll u n so lv e d qu e s ti o ns fr om h i s bo ok s/ n ote s are so lv e d by S A NT O SH S IR
in h i s v id e o cl asse s.

4. Solv e d qu e s tio ns g iv e n i n n ote s/B oo k ar e fo r P rac tice o n ly .

5. O u r No te s /B oo ks co nt ai n a l l im p or ta n t con ce p t b ase d qu e st ion s, p a st

y e ar as ke d qu e s ti on s, e xp e c te d qu e s ti on s, R T P, M T P , S tu d y m ate ria l of
ou r I NST IT UT E.

6. O u r No te s /B oo ks co v e r a l l th e o ry and n u m e rica l. No o th e r bo ok is
re qu i re d /re c om m e n d e d .

IM PO R T A N T PO I NT S O F O UR V I D EO C L A SSE S:

1. A p p ro x 1 0, 00 0 sa ti s fie d s tu d e n ts are cu rre n tly s tu d y i ng f r o m v id e o cl as se s

of SA NT O S H SIR a ll ov e r Wo r ld .

2. San t osh si r’ s v i d e o c las se s a re fu lly u p d ate d . He f ocu se s o n 10 0 % c o nce p t

on ly .

3. His v id e o cl as se s co v e r e a ch and e v e ry t y p e of im p o r ta n t qu e sti on s.

4. He c ov e r s al l p rac ti cal as we l l a s th e ory in h is v id e o c la sse s .

5. You ca n wa tch v id e o cl asse s of SA NT O SH SIR u n lim i te d tim e s ti l l y ou r e x am .

6. San t osh si r’ s v i d e o c las se s a re m a ny tim e s be t te r th a n any li v e cl asse s(B ase d

on op i ni on o f ou r cu rre n t a nd p a st s tu d e nt s )

7. San t osh si r ta ke s d a ily d ou b t se s sio n of PA ID ST UD E NT S be t we e n 4p m t o

7p m (e xce p t Su nd ay ) th r ou g h p h o ne /m a ssag e /wh at’ s ap p . M ore im p o r ta nt
ra re ly a ny d ou b t co m e s i n h i s v id e o c la sse s .

8. No ne e d to wa s te ti m e /m o ne y i n t rav e l ling f or c las se s .

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Bills of exchange
Introduction
Generally when goods are sold on credit, seller would like that purchaser should give promise in writing to
pay amount of goods on creation date. Now it become an commercial practice that creditor gives written
promises to debtor in proper form and which is properly stamped for paying at certain specified date. These
written promises are often accepted by banks and they advance money against these. The written promises
may be in form as Bill as exchange and promissory note.
Bill of exchange (Definition)--According to section 5 of Negotiable instrument Act 1881, A bill of exchange is an
instrument in writing containing an unconditional order sighed by the maker directing a certain person to pay a certain
some of money only to, or to the order of certain person to the bearer of instruments.
In other words, a bill of exchange is an unconditional order in writing given by the creditor to debtors in
writing which is payable on demand at a fixed future time, a certain sum of money.
Essential features of Bill of Exchange are as follows:-
(1) It must be in writing and unconditional order.
(2) It must be dated.
(3) It must contain promise to pay certain sum of money.
(4) Money will be payable to certain person or payable to bearer of Bill at exchange.
(5) Amount payable accepted by creditor in writing on its face.
Specimen of Bill of Exchange

R s .2 0, 0 0 0/ - D el hi
O c t 1 0, 20 1 6
St a m p
T hre e m o nt hs a f t e r da t e pa y t o M / s T a t a So ns o r o rde r t he s u m o f R s . 20, 0 0 0 / -
fo r v a l ue re c e iv e d
Stamp
 T oA foreign bill of exchange is generally drawn-up in triplicate.
 Section 12 of negotiable instruments Act 1881 says that all instruments which are not inland
C o nc e pt o nl i ne c l a s s e s
instruments are foreign.
A -1 1 6 1,areMexamples
Following A Y U R Vof
I Hforeign
A R , DBill
el hi –96
of exchange and Promissory Note

1. A bill drawn in India on a person resident outside India and made payable outside India.
2. A bill drawn outside India and made payable outside India.
3. A bill drawn outside India on a person resident outside India
4. A bill drawn outside India and made payable in India.

Promissory Notes
According to section 4 of Negotiable instrument Act 1881, A promissory note is an instrument in writing ( not being
a bank note or currency note) containing an unconditional undertaking, signed by maker to pay a certain sum of money
only to or to the order of a certain person or to the bearer of the instruments. Under section 31(2) of the reserve bank
of India Act a promissory note cannot be made payable to bearer.

It has following feature or characteristics :-

1. It must be in writing and unconditional promise to pay.
2. Mere acknowledgement of debt is not promissory note.
3. The person who makes promise(promisor) to pay must sign the instrument.
4. The payee must be certain person.
5. Amount payable on promissory note must be certain Amount. It must not contain contingent additions or
subtractions for example, promise to pay Rs.10,000/- including all fines and penal interest is not certain.
6. payment must be in legal currency of the country.
7. It should not be made payable to bearer.
8. It should be properly stamped.

Specimen of promissory note

R s, 5 0, 0 00 / - o nl y
C O N C E P T O N L I N E C L A S SE S
6 1, M A Y U R V I H A R ,
D el hi – 96
st
31 Dec. 2006
Stamp
Si x m o nt hs a f t e r d a t e , I pro m i s e t o pa y X Y Z ( P a y ee ) o r hi s o rde r t h e s um of
R s .5 0, 0 0 0/ - o nl y
To
 x yz
When we talk about Bill of Exchange it includes Promissory Notes also.
A s ho k V i ha r (COC)
Distinction
D el hi – 52 Between Bills of Exchange and Promissory Note:

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 CO C Bill o f E xchange CA /C MA S AN TO SH K U MAR
Bill of Exchange Promissory Notes
 It is an unconditional order directing a  It is an unconditional promise to pay a certain
certain person to pay a certain sum of money sum of money.
 Generally, there are three parties in the bill
of exchange- the drawer, the drawee and the  There are two parties in a promissory note-
payee. the promisor or maker and the payee.
 A bill of exchange requires acceptance by the
drawee after if is drawn by the drawer.
 Bill of exchange may be payable either on  This does not require acceptance. It is written
order or to the bearer. by the person who will pay the amount.
 In case of Bills of exchange notice of  Promissory note can not be payable to bearer
dishonour is given to all parties concerned.
 The maker (Drawer) of the Bill is liable only  In case of promissory note, notice of
when drawee does not make payment. dishonour is not required.
 In Case of foreign bills protest is necessary if  The maker is primarily liable to pay the
it is required as per law of the country where amount.
bill has been drawn.  Protest is not required for promissory note.

Cheque:
A Cheque is a bill of exchange drawn on a specified banker and payable on demand. It includes the electronic
image of a truncated cheque and a cheque in the electronic form.

A cheque is a bill of exchange with two additional qualifications.

 It is always drawn on a specified bank and
 It is always payable on demand.

Distinction between Bills of Exchange and Cheque:
Bill of Exchange Cheque
 This requires acceptance by the drawee.  This does not require acceptance.
 This can be drawn on any person including  This can be drawn on Bank only.
bank.
 Notice of dishonour is necessary.  Notice of dishonour is not necessary.
 A bill of exchange may be payable either on  Cheque is always payable on demand
demand or after a specified period.
 A bill of exchange generally requires stamping.  This does not require stamping.
 Bills of exchange can not be crossed  A cheque may be crossed.
 A time bill should be presented on the due date.  A cheque can be presented at any time within 6
months from the date of cheque.
Negotiability:
Promissory Notes, Bill of Exchange and Cheque all are negotiable instrument. The holder can claim payment
on them subject to conditions that the holder takes them: -
(i) without notice of defect in the title of the transferor, i.e. in good faith.
(ii) for consideration and
(iii) Before maturity.
Example:
If A steals a bill of exchange and passes it on to B who is not aware of A's mode of acquiring the bill and who
takes it for the value and before the due date of the bill, B will be entitled to get payment on the bill. Here B is
a holder in due course. A holder in due course always gets a good title in case of forgery. Moreover
whoever gets the bill after the holder in due course will also get a good title to it; it has been purged of all
defects.

The instrument may be passed on from one person to another by endorsement and delivery. The liability of
the endorser to subsequent parties is same as in the case of endorsement of cheque. Thus, if a bill of exchange
is dishonored, i.e. if payment is not made on the due date by the promisor (drawee in case of bill of exchange),
money can be claimed from any of the previous endorsers, the payee and the maker of the instrument.

Discounting of Bills:
When the bill is taken to a bank and the necessary cash is received, the act is known as discounting. The bank
will always deduct a small sum depending upon the rate of interest and the period of maturity.

Maturity of a promissory note or bill of exchange:

"The maturity of a promissory note or bill of exchange is the date at which it falls due." A promissory note or a
bill of exchange may be payable:-
a) On demand; or
b) On a specified date, or
c) After a specified period.

In the first case amount is payable on the instrument, when the demand is made. In the second case, payment
can be claimed on a specified date. In the third case, date of maturity has to be calculated.
Every instrument, payable otherwise than 'on demand' is entitled to three days of grace.

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The following instruments are not entitled to 'days of grace'.

(a) A cheque
(b)A bill or note payable 'at sight' or on presentment' or 'on demand',
© A bill or note in which no time is mentioned.
The following instruments are entitled to 'days of grace':
(a) A bill or note payable on a specified day,
(b)A bill or note payable 'after sight,
(c)A bill or note payable at a certain period after date,
(d)A bill or note payable at a certain period after the happening of a certain event.

 (m.imp) Calculation of date of maturity :--

If a promissory note or bill of exchange is made payable after stated number of months after date or after
sight or after a certain event, it becomes payable three days after the corresponding date of the month
after the stated number of months. If the month in which the period would terminate has no
corresponding day. The period shall be held to terminate on the last day of such month.
1. In the above case, the day on which the instrument is drawn or presented for acceptance or sight or
the day on which the event happens is to be excluded.
2. When the day on which a promissory note or bill of exchange is at maturity is a public holiday, the
instrument shall be deemed to be due on the preceding day. E.g. A bill falling due for payment on
August 15 will have to be paid on August 14.

Dishonour:
A bill may be dishonored either by non-acceptance or by non-payment. When an instrument is dishonored
the holder must give notice of dishonour to the drawer or his previous holders if he wants to make them
liable.

Dishonored by non acceptance:

A bill is said to be dishonored by non acceptance:-
1. when the drawee does not accept it within 48 hours from the time of presentation for acceptance.
2. When presentation for acceptance is excused and the bill remained unaccepted.
3. When the drawee is incompetent to contract.
4. When the drawee is fictitious person or after reasonable search, can not be found.

Dishonored by non payment:

A promissory note, a bill of exchange or cheque is said to be dishonored by non payment: ---
 When the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment
upon being duly required to pay the same; and
 When presentation for payment is excused and the installment when overdue remains unpaid.

Record of bills of exchange or promissory notes:

 A person who receives a promissory note or receives an accepted bill of exchange will treat it as new
assets under the name of Bills Receivable
 A parts "who issues a promissory note or accept a Bill of Exchange will treat it as liability under the
heading of Bills Payable.

Noting charges:-
"Noting" must be recorded with Notary Public within a reasonable time after the dishonour and must contain
the fact of dishonour, the date of dishonour, the reason if any given for such dishonour and the noting
charges. For this service they charge a small fee. This fee is known as noting charges. Noting charges have to
be born by the person responsible for dishonour. Hence, when a bill is dishonored, the amount due is the
amount of the bill plus the noting charges. However, if the acceptor proves that the bill was not properly
presented to him for payment, he may escape his liability.

Renewal of a bill
Sometime the accepter is unable to pay the amount and he himself moves that he should be given an
extension of time. In such a case, a new bill will be drawn and the old bill will be cancelled. If this happens,
entries should be passed for cancellation of the bill as in case of dishonour of bill. When the new bill is
received, entries for receipt of bill will be repeated.

Accommodation of Bills
Bills of exchange are usually drawn to facilitate trade transaction, finance actual purchase and sale of goods.
But apart from, financing transaction in goods, bills may also be used for raising fund temporarily.
Suppose, A needs finance to the extent of Rs. 10000/- for 3 months. In this case he may induce his friend B to
accept a Bill of Exchange drawn on him for Rs. 10000/- for 3 months. A can then get the bill discounted with
his bank paying a small sum of discount.
Thus he can use the funds for 3 months and just before maturity, he will remit the amount to B to whom the
bill will be presented by the bank for payment.
If both A and B need money, the same device can be used. Either A accepts a bill of exchange or B does. In
either case the bill will be discounted with the bank and proceeds divided between the two parties according
to mutual agreement. The discounting charges must also be born by two parties in the same ratio in which the
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proceeds are divided on the due date the acceptor will receive from the other party his share. The bill will
then be met. When bills are used for such purpose, they are known as accommodation bills.

 In case of accommodation of bills, all the journal entries are passed in the books of two parties as same
in the ordinary bills.
 The only additional entries to be passed are for sending the remittance to the other parties and also
debiting the other parties with the requisite amount of discount.

Bankruptcy:
Bankruptcy/Insolvency of a person means person who has accepted the bill is unable to pay his liabilities and
 When it is known, the acceptor of the bill has become insolvent; entry for dishonour of his acceptance
must be passed.
 When and if an amount is received, cash account will be debited and personal account of debtor will
be credited.
 The remaining amount will be irrecoverable and should be written off as bad debt.

CONCEPT BUILDING QUESTION

(IF BILL HONOURED ON DUE DATE)

Question: 1 Firm sold goods to X for Rs. 2,00,000 and received his acceptance payable after 3 months. On
the due date bill was met.

Question: 2 Firm sold goods to X for Rs. 2,00,000 and received his acceptance payable after 3 months. Bill
was discounted by firm @ 12% p.a. On the due date bill was met.

Question: 3 Firm sold goods to X for Rs. 2,00,000 and received his acceptance payable after 3 months. Firm
endorsed his acceptance to Mr. C, a creditor for Rs. 2,00,000. On due date bill was met.

Question:4 Firm sold goods to X for Rs. 2,00,000 and received his acceptance payable after 3 months. Firm
endorsed his acceptance to Mr. C, a creditor for Rs. 2,20,000 in full settlement of his claim.

Question:5 Firm sold goods to X for Rs. 2,00,000 and received his acceptance payable after 3 months. Firm
endorsed his acceptance to Mr. C, a creditor, for Rs. 2,20,000 in part settlement of his claim.

Question:6 Firm sold goods costing Rs. 1,60,000 for Rs. 2,00,000 to X and received his acceptance payable
after 3 months. Firm sent bill to his bank for collection. On due date bill was met. Bank charged Rs. 50 for his
service.

IF BILL DISHONOURED ON DUE DATE

Question:7 Firm sold goods to X for Rs. 2,00,000 and received his acceptance payable after 3 months. Bill
was dishonored on due date. Noting charges paid Rs.200.

Question:8 Firm sold goods to X for Rs. 2,00,000 and received his acceptance payable after 3 months. Bill
was discounted by firm @ 12% p.a. Bill was dishonored on due date. Noting charges Rs. 200.

Question:9 Firm sold goods to X for Rs. 2,00,000 and received his acceptance payable after 3 months. Firm
endorsed his acceptance to Mr. C, a creditor for Rs. 2,00,000. Bill was dishonored on due date and noting
charges paid Rs. 200.

Question:10 Firm sold goods to X for Rs. 2,00,000 and received his acceptance payable after 3 months. Firm
endorsed his acceptance to Mr. C,a creditor for Rs. 2,20,000 in full settlement of his claim. Bill was
dishonored on due date and noting charges paid Rs. 200.

Question:11 Firm sold goods to X for Rs. 2,00,000 and received his acceptance payable after 3 months. Firm
endorsed his acceptance to Mr. C, a creditor, for Rs. 2,20,000 in part settlement of his claim. Bill was
dishonored on due date and noting charges paid Rs. 200.

Question:12 Firm sold goods costing Rs. 1,60,000 for Rs. 2,00,000 to X and received his acceptance payable
after 3 months. Firm sent bill to his bank for collection. Bill was dishonored and noting charges paid Rs. 200.

AFTER DISHONOURED

Question.13 Assume after question 7 to 12 , Mr. X requested to pay Rs. 1,20,200 immediately and to give a
new acceptance for the balance amount together with interest @ 12% p.a. payable after 2 months. On the
due date bill was met.
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Question.14 Assume after question 7 to 12, Mr. X requested to pay Rs. 1,20,200 immediately together with
interest at the rate of 12% p.a. on the balance amount for 3 months and to accept a new bill for the balance
amount. On the due date of renewed bill, Mr. X became insolvent and official receiver declared a first and final
dividend of 60% of the amount due.

(Renewal of Bill)
Question:15 Mohan sold goods to Gupta on 1st September, 2005 for Rs. 1,600. Gupta immediately accepted
a three months bill. One due date Gupta requested that the bill be renewed for a fresh period of two months.
Mohan agrees provided interest at 9% was paid immediately in cash. To this Gupta was agreeable. The
second bill was met on due date. Give Journal entries in the books of Mohan.

Under Rebate
Question:16 On 1st January, 2006, A sells goods for Rs. 10,000 to B and draws a bill at three months for the
amount. B accepts it and returns it to A. On 1st March, 2006, B retires his acceptance under rebate of 12% per
annum. Record these transactions in the journals of A.

Question:17 On 1st April 2009 Rohit sold goods to Mahesh for Rs 10,000 and drew upon him a bill for the
amount at 3 months. Mahesh accepted the bill . On 4th April 2009 , Rohit got the bill discounted with his
bankers @ 10% per annum. Just before the due date , Mahesh approached Rohit with a request for renewal
of the bill for 3 month . Rohit agreed on the conditions that new bill will be drawn for Rs 10310 which
included Rs 310 by way of interest . Mahesh found the condition reasonable and accepted the new bill on
4th july ,2009 . On 29th September, 2009 Mahesh was declared insolvent . On 2nd November, 2009 a first
and final dividend of 40 paise in a rupee was received from the insolvent ‘s receiver .

Question:18 On 1st January 2010, Arun purchased from Barun goods invoiced at Rs 10,000. On the same
date Barun drew upon Arun a bill for the amount at 2 months and Arun accepted the same. On 4th January
2010 Barun got the bill discounted with his bank @ 12% per annum. On due date, Arun told Barun that he
was not in a position to pay the full amount and requested Barun to accept Rs 5000 in cash and Drew a
fresh bill at 2 months for the remaining amount plus interest at 15% P.A. Barun agreed . The second bill was
duly met on the due date.
Give journal entries to record the above transaction in the books of Barun.

MUTUAL ACCOMODATION
( YE CONCEPT SIRF HUM HI SAMAJH SAKTE HAI, AUR KOI NAHI, FEEL GOOD)

Question:19. For helping Mr. X, Y gave his acceptance for Rs. 20,000 payable after 3 months. X discounted
the bill with his bank @ 18% p.a. Just before due date X remitted the necessary amount to Y. On due date
bill was met. Make journal entries.
Question:20. For mutual accommodation of X and Y, X drew a bill for Rs. 60,000, Which was duly accepted
by Y. X discounted the bill with his bank @ 12% p.a. for 3 months and remitted 1/3 rd of the proceeds to
Y. Just before due date, X remitted the balance amount to Y and Y met the bill on due date. Make journal
entries.

Question:21. Anil drew a bill for Rs. 20,000 on Sunil and Sunil drew a bill for Rs. 30,000 on Anil for mutual
accommodation for 3 months. Both of them discounted their bill with bank @ 12% p.a. Just before due date
they settled their account among themselves. On the due date, both met their bill.

Question.22( IMP Question) Bose and Mitra were in need of funds. On 1st May, 2014 Bose accepted Mitra’s
draft for Rs.6,000 at 3 months. Mitra got it discounted at 6%p.a. and remitted 1/3 of the proceeds to Bose.
On the due date Mitra was not able to send the amount instead he accepted to Bose’s bill for Rs. 4,500 at two
months. Bose got it discounted for 4,420. Out of this Rs. 280 were sent to Mitra . Before the maturity of the
renewed bill, Mitra became insolvent and only 60% was realized from his estate. Give Journal entries in the
books of Bose and Mitra.

Question:23 Sohan drew an accommodation bill for Rs 12,000 on Mohan. The proceeds are to be shared by
Sohan and Mohan in the ratio of 2:1 respectively. Mohan accepts the bill . Sohan gets the bill discounted
at a discount of Rs 720 and remits 1/3rd of the proceeds to Mohan. Before the due date, Mohan draws
an accommodation bill for Rs 16,800 to arranges the funds to pay the first bill. The second bill is
discounted for Rs 16320. The first bill is paid with the proceeds and a sum of Rs 2880 is remitted to
Sohan.
Sohan become insolvent before the due of the second bill and Mohan received 50 paise in a rupee as the
first and final dividend from sohan’s estate .
Pass necessary journal entries in the books of Mohan and prepare sohan’s account in the ledger of
Mohan .
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Question:24 On 1st December 2004 Shyam accepted for mutual accommodation a bill drawn on his by Ram
for Rs 80000 at three month . The bill was discounted at 5% per annum and the proceeds were shared
equally .On the same day and for the same purpose , Shyam received an acceptances from Ram for Rs 90000
at three months. The bill was discounted for Rs 1800 as discount and the proceeds were shared as to two
thirds to Shyam and one third to Ram .
On the due date Shyam met his acceptence , but Ram could not do so because he had become insolvent . On
31st march , 2005 his estate paid a first and final dividend of 50 paise in a rupee.
Pass the journal entries for the transactions in the books of Shyam.
Answer:

Journal entries in the books of shyam

Date Particular Dr Cr
2004 Ram 80000
Dec 1 To B i l l s p a ya b l e A / c 80000
( b e i n g a c c e p t a n c e gi ve n t o R a m )
Dec 1 B i l l r e c e i v a b l e A/ c 90000
To R a m 90000
( b e i n g a c c e p t a n c e s g i v e n b y R a m fo r m u t u a l )
Dec 1 B a n k A/ c 88200
D i s c o u n t A/ c 1800
To b i l l s r e c e i v a b l e A/ c 90000
( B e i n g b i l l d i s c o u n t wi t h t h e b a n k)
Dec 1 Ram 30000
To b a n k s
To d i s c o u n t A / c 30000
(being one –third proceeds sent to ram)
Dec1 B a n ks A / c 39500
D i s c o u n t A/ c 500
To R a m 40000
( b e i n g o n e – h a l f o f p r o c e e d s r e c e i ve d f r o m
Ram)
2005 B i l l s p a ya b l e A / c 80000
March 4` To b a n k A/ c 80000
(being our acceptances met on due date )
Mar 4 Ram 90000
To b a n k s A / c
(being dishonour of ram ‘s acceptance due to 90000
insolvency )
March 4 B a n k A/ c 35000
Bad-debts 35000
To R a m 70000
(being receipt of 50 paise in the rupee as
d i vi d e n d f r o m R a m ’ s e s t a t e )

Ram ‘s A/c
Particular Amount Particular Amount
To bills payable 80000 By bills 90000
A/c receivable A/c
To banks A/c 29400 By bank A/c 39500
To discount A/c 600 By discounts 500
A/c
To bank A/c 90000 By banks A/c 35000
By bad debts 35000
2,00,000 2,00,000

Question:25 Mr. David draws two bills of exchange on 1.1.95 for Rs. 6,000 and Rs. 10,000. The
bill of exchange for Rs. 6,000 is for two months while the bill of exchange for Rs. 10,000 is for three
months. These bills are accepted by Mr. Thomas. On 4.3.95 Mr. Thomas requests Mr. David to renew
the first bill with interest at 18% p.a. for a period of two months. Mr. David agrees to this proposal.
On 20.3.95 Mr. Thomas retires the acceptance for Rs. 10,000, the interest rebate i.e. discount being
Rs. 100. Before the due date of the renewed bill, Mr. Thomas became insolvent and only 50 paisa in
a rupee could be recovered from his estate.
You are required to give the Journal entries in the books of Mr. David.

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