Revision Notes

Chapter-6
Accounting for Bills of Exchange

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

Understand the concept of Bill of Exchange and Promissory Note

Distinguish 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.

A 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.
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 or maker:- 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 received money from the drawee
(acceptor).
2. Drawee or Acceptor:- 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.

Kinds of Bills of Exchange

1. Trade Bills:- Those bills that are written because of business transactions are called trade
bills.
2. Accomodation Bill:- Those bills that the business writes for mutual help are called
accomodation bill.

Specimen of Bill of exchange

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

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
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.

Accounting Treatment of Bill Transations

A. On the Due Date bill is Honoured:-

In the Books of
Transactions In the Books of Drawer
Drawee

When goods are sold on credit by drawer Drawee's A/c Dr. Purchase A/c Dr.

To sales A/c To Drawer's A/c

(good sold on credit) (goods Purchased)

When Bill is drawn & Accepted by the

Bill Receivable A/c Dr Drawee's A/c Dr.
Drawee

To Drawee's A/c
(Bill received from To Bill Payable A/c
drawee)

Note:- First Two entires are common in all the cases which we are going to discuss below.

Case-I When the bill was retained by drawer till maturity

Transactions In the Books of Drawer In the Books of Drawee

At the time of Maturity of bill Cash/Bank A/c Dr. Bill Payable A/c Dr.

To Bill Receivable A/c To Cash/Bank A/c

(Being bill met on maturity) (Being bill met on maturity)

Case-II When the bill was discounted from the bank by owner before maturity.
 Transactions In the Books of In the Books of Drawee
Drawer

At the time of Discounting the bill from

Bank A/c Dr. No Entry
Bank

Discount A/c Dr

To Bill Receivable
A/c

At the time of Maturity of bill No Entry Bill Payable A/c Dr.

To Cash/Bank A/c
(Being bill met on
maturity)

Case-III When the bill was endrose in favour of creditor by drawer/holder

Transactions In the Books of Drawer In the Books of Drawee

At the time of endorsing of

Endorsee's A/c Dr. No Entry
bill

To Bill Receivable A/c

(Bill endorse in favour of
Endorses)

At the time of Maturity of

No Entry Bill Payable A/c Dr.
bill

To Cash/Bank A/c
(Being bill met on
maturity)

Note :- In this case one additional book may be asked to maintained i.e. Endrosee Book

Transactions In the Book of Endorse

At the time of Receiving the bill from Drawer/Debtor Bill Receivable A/c Dr.

To Drawer
 (Being Bill received from drawer)

At the time of Maturity of bill Cash/Bank A/c Dr.

To Bill Receivable A/c

(Being Bill met on maturity)

Case-IV When the bill is sent to bank for collection

In the Books of
Transactions In the Books of Drawer
Drawee

At the time of bill sent for

Bill sent for collection A/c Dr. No Entry
collection to bank

To Bill Receivable A/c

(Being bill sent from collection to
bank)

At the time of Maturity of bill Bank A/c Dr. Bill Payable A/c Dr.

To Bill sent for collection To Cash/Bank A/c

(Being bill sent for collection (Being bill met on
reaised of maturity) maturity)

Note:

There will be no effect in the books of Drawee either the bill is discounted from the
bank or endorsed to a creditor or sent to the bank for collection. The drawee makes
the payment in normal manner.
It is only in the books of drawer where an additional entry is passed to record the
effect of the above transaction.

B. When Bill is dishonoured on the date of maturity.

Case I : Bill is retained by the drawer till the date of maturity.

In the Books of
Transactions In the Book of Drawer
Drawee
 When bill is Drawee Dr. Bills payable A/c Dr.
dishonoured

Noting charges A/c

To Bills Receivable
Dr.

To Cash A/c To Drawer

(Being bill dishonoured & Nothing charges

(Bill dishonoured)
paid)

Note:
Entry passed in the book of Drawee will be SAME in all cases.

Case II : When the bill was discounted by owner before maturity

In the Books of
Transactions In the Book of Drawer
Drawee

When bill is Bills payable A/c

Drawee Dr.
dishonoured Dr

Noting charges A/c

To Bank A/c
Dr

(Being bill dishonoured & Nothing charges paid

To Drawer
by bank)

(Bill dishonoured)

Case III : When the bill was entered in favour of creditor by drawer/holder

Transactions In the Book of Drawer In the Books of Endorsee

When bill is
Drawee Dr. Drawer Dr.
dishonoured

To Endorsee To Bills Receivable A/c

(Being bill dishonoured & Nothing

charges paid by endorsees) To Cash A/c
 (Bill bill dishonoured &
Nothing Charges paid)

Case IV : When the bill is sent to bank for collection

Transactions In the Books of Drawer

When bill is dishonoured Drawee Dr.

To Bank A/c

To Bill Sent for collection

(Being bill dishonoured & Nothing charges paid by bank)

C. Renewal of a Bill

Transactions In the Books of Drawer In the Books of Drawee

Cancelling the Original Bill Drawee Dr. Bill Payable A/c Dr.

To Bill Receivable A/c To Drawer

(Being the cancellation of bill Being the cancellation of

receivable) bill payable)

Amount of interest paid in

Cash A/c Dr. Interest A/c Dr.
cash

To Interest A/c To Cash A/c

(Interest received in cash) (interest paid in cash)

Recording of interest for

Drawee Dr. Interest A/c
extended period

To Interest A/c To Drawer

(Interest charged for (Interest payable for

extended period) extended period)

Part payment Received or

Cash/Bank A/c Dr. Drawer Dr.
paid
 To Drawee TO Cash/Bank A/c

(Being the part payment (Being the part payment

Received) paid)

New bill Drawn/Accepted Bill Receivable A/c Dr. Drawer A/c Dr.

To Drawee A/c To Bill Payable A/c

(Bill receivable drawn) (Bill accepted)

D. Retiring bill under Rebate

Transactions In the Books of Drawer In the Books of Endorsee

When Drawee retires

Cash A/c Dr. Bills Payable A/c Dr.
the bill before Maturity

Rebated A/c Dr. To Cash A/c

To Bill Receivable A/c To Rebate A/c

(The bills is retire under rebate (The bills is retired under rebate
before the date of maturity) before the date of maturity)

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
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.