BILLS OF EXCHANGE

13TH JAN, 2022

HELLO BOY!
TODAY'S CLASS WILL BE HIGHLY ILLUSTRATIVE AND INTERACTIVE. 

YOU WILL LEARN THIS TOPIC BY WATCHING VARIOUS SHORT AND
 EXPLANATORY VIDEOS.

LET US BEGIN WITH THE MEANING & CONCEPT OF BILLS OF EXCHANGE

WATCH THE VIDEO BELOW BY CLICKING ON THE LINK

MEANING AND CONCEPT OF BILLS OF EXCHANGE

LINK : MEANING AND CONCEPT OF BILLS OF EXCHANGE

For Example:

 Arjun sold goods to Sahil worth Rs 10,000 on July 18, 2013. 

On the same day, Arjun drew a bill of Rs 10,000 on Sahil for 90 days which is duly accepted on the same date. Below is a representative format of the Bill.

FEATURES OF THE BILLS OF EXCHANGE

Parties to Bills of Exchange

Drawer: The Person who makes and signs the Bill of Exchange is known as Drawer. He/ She is the seller of the goods.

Drawee: The Person who accepts the Bill of Exchange is known as Drawee.  He/ She is the buyer of the goods.

Payee: Payee is the Person whose name is mentioned in the Bill of Exchange, to whom the payment is to be made. Payee can be either Drawer or some other person.

Let us try and understand the basic terminology to be used while dealing in Bills of Exchange.

Term of Bill: 

Term of a Bill refers to the time period in-between the Date of drawing the bill and due date of the bill. In case the bill is drawn after sight then Term of a Bill starts from the date of acceptance of the bill, where as when the bill is drawn after date then term of bill starts from the date when the bill is drawn.


Days of Grace:

It is compulsory to add 3 days of grace while calculating the due date of a bill. Initially the three days of grace were granted as a matter of kindness towards the drawee but now according to the Negotiable Instrument Act three days of grace are a legal right of the Drawee. Days of Grace are not allowed when the Bill is payable “on demand”.

 HANDLING OF THE BILL

WATCH THE VIDEOS BELOW FOR HANDLING OF THE BILL IN EITHER OF THE FOLLOWING WAYS:

1. RETAINING THE BILL TILL THE DATE OF MATURITY 

ACCOUNTING TREATMENT OF RETAINING THE BILL TILL MATURITY

2. DISCOUNTING OF THE BILL WITH THE BANK

LINK : ACCOUNTING TREATMENT OF DISCOUNTING THE BILL WITH THE BANK

3. ENDORSEMENT OF THE BILL

LINK : ACCOUNTING TREATMENT OF ENDORSEMENT OF THE BILL

4.SENDING THE BILL FOR COLLECTION TO THE BANK

LINK : ACCOUNTING TREATMENT OF BILL SENT FOR COLLECTION

CONCEPT OF RENEWAL AND RETIREMENT OF THE BILL

Renewal of Bill: When an acceptor of a bill does not have sufficient fund to meet the obligations of the bill on time, he/she may request the drawer for an extension of time for payment. If the drawer agrees, then a new bill is drawn this is known as Renewal of Bill. Generally, a bill is renewed on the condition that the Drawee has to pay interest for the extended period.

Retirement of Bill: When a holder receives the amount of a bill before its maturity date it is called Retirement of Bill of Exchange. Holder of the bill may give discount for such early payment. This discount is termed as ‘Rebate’.

LINK : CONCEPT OF RENEWABLE AND RETIREMENT OF THE BILL

Dishonour of a Bill: A Bill is dishonoured when the acceptor of the bill fails to make the payment on the date of maturity of the bill. Hence, liability of the acceptor is restored. Entries made for recording dishonour of the Bill of Exchange are reverse of the entries of recording drawing of the bill.
 

Dishonour of a Bill

Dishonour in simpler words means state of disgrace, where one does not value his words. Normally bill is honoured by Drawee at its maturity date but in some cases he/she may refuse to pay the amount or becomes insolvent. Under such circumstances bill is not met on its due date and which leads to dishonour of a bill. When a Bill is dishonoured then the drawer must have some evidence regarding its dishonour, for this he/she gets the dishonoured bill noted from the Notary Public. Although it is not mandatory to get a bill noted at the time of its dishonour but to be on a safer side Drawer or Holder is advised to do this.
 Notary Public charges certain amount of fees for providing service of Noting, this fees is termed as Noting Charges. It is payable by the holder of bill, however he/she recovers it along with the bill amount from the Drawee.

Accounting Treatment when bill is dishonoured
When the bill is dishonoured it is accounted in the books of Drawer and Drawee in the following manner.

(a) In the books of Drawer: When the bill which is held till its maturity gets dishonoured, it has two effects in the books of Drawer. Firstly, Bills Receivable Account is credited as Bill (asset) as no bill exists now, on the other hand Drawee's Account is debited with the bill amount as Drawee will again become the debtor of the Drawer. Similarly, in all the other cases of Bills of Exchange Drawee's Account will be debited in case of dishonour whereas Bank Account is credited when the bill which is discounted with the bank gets dishonoured, Endorsee Account is credited when the bill is endorsed and Bills sent for collection and Cash Account(with the amount of noting charges) is credited in the last case. If Noting Charges are paid by the Drawer, then for this he/she will debit Drawee's Account (as noting charges are recoverable from the Drawee) and credit Cash Account with the amount of Noting Charges. Point to be noted here, is that although Noting Charges is paid by Drawer but he/she is also recovering the same from Drawee, so it will not be treated as an expense in the books of Drawer.

(b) In the books of Drawee: When bill gets dishonoured it has two effects in the books of Drawee as well. Firstly due to dishonour, Bills Payable is debited as no bill exists now and on the other hand Creditor's Account is credited as the liability is to be recreated. In case bill is noted by Drawer then, Noting Charges are to be debited because it is an expense for the Drawee. On the other hand, Creditor's Account will be credited as these charges are to be paid back to Drawer (or Creditor).

Following Journal Entries will be passed in the books of Drawer and Drawee on the dishonour of a bill.

	Journal
S.No.	In the Books of Drawer		In the Books of Drawee
1	At the time of sale of goods on credit		At the time of purchase of goods on credit
	Party’s Name (Purchaser)	Dr.	Purchases A/c	Dr.
	To Sales A/c		To Party’s Name (Seller)
	(Goods sold on credit)		(Goods purchased on credit)
2	When bill is drawn and received		When bill is accepted and sent to drawer
	Bills Receivable A/c	Dr.	Party’s Name (Seller)	Dr.
	To Party’s Name (Purchaser)		To Bills Payable A/c
	(Acceptances received against amount due)		(Acceptances given)
3	When Bill is held till its maturity		When Bill is held till its maturity
	On dishonour of bill on the due date		On dishonour of bill on the due date
	Drawee	Dr.	Bills Payable A/c	Dr.
	To Bills Receivable A/c		To Drawer
	(Dishonour of bill)		(Dishonour of bill)
	Noting Charges paid during the year		Noting Charges paid during the year
	Drawee	Dr.	Noting Charges A/c	Dr.
	To Cash/Bank A/c		To Drawer
	(Noting Charges recoverable)		(Noting Charges are required to be paid to Drawer)
	Instead of above two entries a Combined entry can be passed		Instead of above two entries a Combined entry can be passed
	Drawee	Dr.	Bills Payable A/c	Dr.
	To Bills Receivable A/c		Noting Charges A/c	Dr.
	To Cash/Bank A/c		To Drawer
	(Bill is dishonoured and noting charges paid)		(Bill is dishonoured and noting charges paid)
4	When Bill is discounted and thereafter it gets dishonoured		When Bill is discounted and thereafter it gets dishonoured
	When bill is discounted with Bank		When bill is discounted with Bank
	Cash A/c	Dr.	NO ENTRY
	Discounting Charges A/c	Dr.
	To Bills Receivable A/c
	On dishonour of bill		On dishonour of bill
	Drawee	Dr.	Bills Payable A/c	Dr.
	To Cash or Bank A/c		Noting Charges A/c	Dr.
	(Dishonour of a discounted bill)		To Drawer
			(Dishonour of bill)
5	When bill is endorsed to creditors and thereafter it get dishonoured		When bill is endorsed to creditors and thereafter it get dishonoured
	When bill is endorsed in favour of Creditors		When bill is endorsed in favour of Creditors
	Party’s Name (Creditor/Endorsee)	Dr.	NO ENTRY
	To Bills Receivable A/c
	On dishonour of bill		On dishonour of bill
	Drawee	Dr.	Bills Payable A/c		Dr.
	To Endorsee		Noting Charges A/c		Dr.
	(Dishonour of a endorsed bill)		To Drawer
			(Dishonour of bill)
6	When bill is sent to bank for collection and thereafter it get dishonoured		When bill is sent to bank for collection and thereafter it get dishonoured
	Bills Sent for Collection A/c	Dr.
	To Bills Receivable A/c		NO ENTRY
	(Bill is sent to bank for collection)
	On dishonour of bill		On dishonour of bill
	Drawee	Dr.	Bills Payable A/c	Dr.
	To Bills Sent for Collection A/c		Noting Charges A/c	Dr.
	To Cash or Bank A/c		To Drawer
	(Bill sent for collection is dishonoured)		(Bill dishonoured and noting charges are paid)