Bills of Exchange: Meaning, Accounting Entries, and Discounting

Overview

A bill of exchange is a negotiable instrument used to record and secure credit transactions. It provides written evidence of debt and a definite date of payment. In accounting, bills are treated separately as Bills Receivable (asset) and Bills Payable (liability). Bills may be held till maturity, discounted with a bank for immediate cash, or endorsed to a creditor. Dishonour and renewal require special entries.

Key Terms

• Bill of exchange — A written unconditional order to pay a fixed sum on demand or at a fixed future date.
• Drawer — Person who draws the bill (seller/creditor).
• Drawee — Person on whom bill is drawn (buyer/debtor).
• Acceptor — Drawee who accepts the bill and becomes liable to pay.
• Payee — Person who receives payment.
• Bills receivable — Bills accepted by debtors and held by business (asset).
• Bills payable — Bills accepted by business in favour of creditors (liability).
• Tenor — Time period of the bill.
• Maturity — Date on which bill becomes payable.
• Endorsement — Transfer of bill to another person.
• Discounting — Receiving cash from bank before maturity after deducting discount.
• Dishonour — Non-payment of bill on maturity.
• Noting charges — Notary charges paid on dishonour.

Meaning and features of bills of exchange

A bill of exchange is a written instrument containing an unconditional order, signed by the drawer, directing the drawee to pay a certain sum of money to a specified person or to his order on demand or at a fixed future time.

Features:

• Written and signed by drawer.
• Unconditional order to pay a definite amount.
• Accepted by drawee to create legal liability.
• Negotiable and transferable.
• Provides certainty of payment date.

Parties to a bill

• Drawer: creditor/seller.
• Drawee/Acceptor: debtor/buyer who accepts and pays.
• Payee: the person entitled to receive payment (often the drawer).

Important terms (tenor, maturity, endorsement)

• Tenor is the duration (e.g., 2 months, 90 days).
• Maturity date is the due date after including days of grace (where applicable).
• Endorsement transfers rights in the bill to another party by signing on the back.

Discounting of bill

When the holder needs immediate funds, the bill can be discounted with a bank. The bank pays the bill amount after deducting discount (interest for the remaining period). Discount is an expense for the holder.

Accounting entries (Bills Receivable)

1. On receiving bill from debtor: Bills Receivable A/c Dr.
   To Debtor’s A/c

2. If bill is discounted: Bank A/c Dr. (net proceeds)
   Discount A/c Dr. (discount)
   To Bills Receivable A/c (full amount)

3. If bill is held till maturity and honoured: Bank/Cash A/c Dr.
   To Bills Receivable A/c

4. If bill is endorsed to creditor: Creditor’s A/c Dr.
   To Bills Receivable A/c

Accounting entries (Bills Payable)

1. On acceptance of bill: Creditor’s A/c Dr.
   To Bills Payable A/c

2. On payment at maturity: Bills Payable A/c Dr.
   To Bank/Cash A/c

Dishonour, noting charges, renewal (basic)

Dishonour of bills receivable (held till maturity)

Debtor becomes liable again: Debtor’s A/c Dr.
To Bills Receivable A/c

If noting charges are paid: Debtor’s A/c Dr.
To Bank/Cash A/c

Dishonour of discounted bill

When bank informs dishonour: Debtor’s A/c Dr. (bill amount + noting charges if any)
To Bank A/c

Renewal (basic)

Old bill is cancelled and a new bill is drawn for the bill amount plus interest (if charged). Interest is credited to Interest A/c and debtor is debited.

Quick recap (1-minute revision)

• Bills receivable = asset; bills payable = liability.
• Discounting gives immediate bank money; discount is an expense.
• Dishonour restores debtor liability; noting charges are recoverable.
• Renewal cancels old bill, charges interest, and creates a new bill.