Bills of Exchange: Meaning, Accounting Entries, and Discounting Questions

Question 1

Define bill of exchange.

Accepted Answer

A bill of exchange is a written instrument containing an unconditional order to pay a specified sum of money on demand or at a fixed future date.

Question 2

Who is a drawer?

Accepted Answer

Drawer is the person who draws the bill of exchange, usually the seller/creditor.

Question 3

Who is an acceptor?

Accepted Answer

Acceptor is the drawee who accepts the bill and becomes primarily liable to pay on maturity.

Question 4

What is discounting of bill?

Accepted Answer

Discounting means obtaining cash from a bank before the maturity of a bill after deducting discount.

Question 5

What is dishonour of bill?

Accepted Answer

Dishonour of bill means failure of the acceptor to pay the bill amount on the due date.

Question 6

What are bills receivable?

Accepted Answer

Bills receivable are bills accepted by debtors and held by the business, representing an amount receivable and treated as assets.

Question 7

Explain parties to a bill of exchange.

Accepted Answer

The main parties to a bill of exchange are: (1) **Drawer**—the person who draws the bill (usually the seller/creditor). (2) **Drawee/Acceptor**—the person on whom the bill is drawn and who accepts it, thereby becoming legally liable to pay (usually the buyer/debtor). (3) **Payee**—the person entitled to receive payment (often the drawer himself). If the bill is transferred, there may also be an endorser and endorsee.

Question 8

Differentiate between bills receivable and bills payable.

Accepted Answer

Bills receivable are bills accepted by customers and held by the business, so they represent an amount **receivable** and are shown as **assets**. Bills payable are bills accepted by the business in favour of suppliers/creditors, so they represent an amount **payable** and are shown as **liabilities**. Bills receivable are debited when received and credited when realised/endorsed/discounted; bills payable are credited on acceptance and debited on payment.

Question 9

Pass journal entry for discounting of a bill receivable.

Accepted Answer

When a bill receivable is discounted, the bill is removed from bills receivable and bank gives net proceeds after deducting discount. Entry:

Bank A/c Dr. (net amount received)
Discount A/c Dr. (discount charged by bank)
	To Bills Receivable A/c (full bill amount)

Question 10

Explain dishonour of a bill receivable (when held till maturity).

Accepted Answer

If a bill receivable held till maturity is dishonoured, the bill is cancelled and the debtor becomes liable again. The entry is: Debtor’s A/c Dr. To Bills Receivable A/c (for bill amount). If noting charges are paid by the holder, they are also recoverable from the debtor, so Debtor’s A/c is further debited and Bank/Cash A/c is credited for noting charges.

Question 11

Write a short note on trade bill and accommodation bill.

Accepted Answer

A **trade bill** arises from a genuine credit sale or purchase of goods, so it represents a real business transaction between seller and buyer. An **accommodation bill** is drawn and accepted without any actual sale; it is used mainly to raise finance. The parties mutually help each other by discounting the bill to obtain funds and arrange payment at maturity.

Question 12

Pass journal entry for dishonour of a discounted bill.

Accepted Answer

When a discounted bill is dishonoured, bank debits our account and the debtor again becomes liable. Entry:

Debtor’s A/c Dr. (bill amount + noting charges, if charged)
	To Bank A/c

Question 13

Explain bills of exchange and state its features.

Accepted Answer

A bill of exchange is a negotiable instrument in writing containing an unconditional order, signed by the drawer, directing the drawee to pay a definite sum of money to the payee or to his order on demand or at a fixed future date. It is widely used in credit transactions because it provides written evidence of debt and certainty of payment.

**Features:** (1) It must be in writing and properly stamped as per law. (2) It contains an unconditional order to pay a definite amount. (3) It is signed by the drawer and accepted by the drawee, creating legal liability on the acceptor. (4) It has definite parties and a definite tenor/maturity. (5) It is negotiable and can be transferred by endorsement and delivery. (6) It can be discounted with a bank to obtain cash before maturity. These features make bills useful as a credit instrument and as a source of short-term finance.

Question 14

Explain accounting treatment of bills receivable: (i) receiving bill, (ii) discounting, (iii) dishonour.

Accepted Answer

Bills receivable accounting shows how a debtor’s liability is converted into a bill and how it is settled or re-established on dishonour.

**(i) On receiving/acceptance of bill:**
Bills Receivable A/c Dr.
	To Debtor’s A/c
(Being bill received from debtor)

**(ii) On discounting the bill with bank:**
Bank A/c Dr. (net proceeds)
Discount A/c Dr. (discount charged)
	To Bills Receivable A/c (full amount)
(Being bill discounted)

**(iii) On dishonour of discounted bill:**
Debtor’s A/c Dr. (bill amount + noting charges, if any)
	To Bank A/c
(Being bill dishonoured and bank debited our account; debtor again becomes liable)

If the bill was held till maturity and dishonoured, the entry is Debtor’s A/c Dr. To Bills Receivable A/c and noting charges (if paid) are also debited to debtor. Thus, dishonour restores the debtor’s liability.

Question 15

Explain dishonour and renewal of a bill with necessary entries (basic).

Accepted Answer

**Dishonour** means failure of the acceptor to pay the bill on maturity. If a bills receivable held till maturity is dishonoured, the debtor becomes liable again: Debtor’s A/c Dr. To Bills Receivable A/c. If noting charges are paid to a notary, they are recoverable from the debtor: Debtor’s A/c Dr. To Bank/Cash A/c.

**Renewal** means replacing a dishonoured bill by a new bill for a further period. First, the old bill is cancelled (as above). Interest for the extended period is charged to debtor: Debtor’s A/c Dr. To Interest A/c. Then the new bill is drawn for the total (bill amount + interest): Bills Receivable A/c Dr. To Debtor’s A/c. Thus, renewal records cancellation of the old bill, charging of interest, and creation of a new bill.

Bills of Exchange: Meaning, Accounting Entries, and Discounting

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