Today we are covering the conceptual topic of the Bill of Exchange. So please read it very consciously and in this article, you will learn the meaning of the Bill of Exchange, Features, parties involved, format of Bill of exchange, accounting treatment of Bills of exchange and understand it in much better ways with examples.
What is Bill of Exchange?
A bill of exchange is an instrument that contains a promise to pay some amount of money to a certain person after a certain period of time. It is generally drawn by the seller (may be known as creditor, maker or drawer) on his customer (debtor, acceptor or drawee) and the customer gives the acceptance that he will pay the money to the seller after some certain period or on a specific date.
It should be accepted by the person to whom it is created or by another person on his/her behalf. Without acceptance, this document doesn’t have any value.
Definition:
“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 to the order of, a certain person, or the bearer of the instrument.”
-Section 5 of India’s Negotiable Instruments Act, 1881
The feature of the Bill of Exchange: –
- It should be in writing.
- In order to make a payment on the specific date or after a certain period.
- An unconditional order of payment, it does not contain any condition of payment.
- A certain amount should be described in it.
- It must be signed by both parties Drawer (maker) and Drawee.
- The amount must be payable to either a certain person or on his/her behalf.
- It should be paid on the date of maturity or on-demand or on mutual understanding.
The Parties Involved in the Bill of exchange:-
There are three parties are involved, shown as follows:-
- Drawer
- Drawee
- Payee
1. Drawer: –
The drawer is the person who makes the bill of exchange on his/her debtor and he will also a receiver of the money mention in it. The seller of goods and services is known as a drawer (expect some cases will explain further).
2. Drawee: –
The drawee is the person to whom the bill of exchange was created and he will pay the amount mentioned in it at the time of maturity of a bill. The purchase of goods and services is known as a drawee (expect some cases will explain further). The Drawee is also known as an acceptor because he gives the acceptance to pay the mentioned amount on the mentioned date or after a specific period.
3. Payee: –
The person to whom the payment is made is known as the payee. basically, the drawer of the bill is known as payee but in some cases in which the bill in not retain by the drawer himself then the payee will be the person who has a bill. In the following cases the drawer will not be treated as payee: –
- When the bill is discounted by the drawer from the bank then the bank will be treated as a payee.
- When the drawer endorsed the bill to his/her creditor then the receiver of that bill will be treated as a payee.
Contents of Bills of Exchange: –
Bills of Exchange include the following contents: –
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1. Title of Bill: –
The title “Bill of Exchange” will be mention on the face of the document.
2. Date of drawn: –
The date of drawn a bill should be written on it.
3. Amount to be paid: –
The certain amount payable will be described on it in the figures and also in words.
4. Date of Maturity or Term: –
The specific date or the term of the bill will be mention on it. The term means for 2 months or 3 months etc. The term is the tenure of the bill and runs from the date of the bill. There will be a grace period of 3 days in addition to the total term of the bill.
5. Unique Identification Number: –
Every bill has a unique identification number. it will be mention on it.
6. Name of Both Parties: –
The name of both parties will be mention on the bill.
7. Signature of Both parties: –
The bill is also signed by both parties.
The format of Bills of Exchange: –
The following image shows the specimen of the BOE.
The following are the oldest original document of the bill of exchange.
A 1939 bill of exchange, Rangoon, Burma.
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An 1870 Bill of Exchange payable in London with British Foreign Bill revenue stamps attached
Accounting Treatment of Bills of Exchange: –
Accounting treatment of bills of exchange can be described under the following heading and subheading:
- Bill is honoured on the maturity date.
- Retain by the drawer, till the date of maturity.
- A bill discounted by the drawer from the bank before the maturity date.
- Endorse the bill by the drawer to his/her creditor
- The bill sent for collection
- Bill is dishonoured on the maturity date.
- Retain by the drawer, till the date of maturity.
- A bill discounted by the drawer from the bank before the maturity date.
- Endorse the bill by the drawer to his/her creditor
- The bill sent for collection
- Renewal of bill before the maturity date.
- Retiring of the bill.
- 5. Insolvency of an acceptor.
1. Bill is honoured on the maturity date: –
In case, where drawee pays the amount of bill on the date of maturity is known as the bill is honoured on the maturity date. There are four different types of situation as explained below: –
- Retain by the drawer, till the date of maturity.
- A bill discounted by the drawer from the bank before the maturity date.
- Endorse the bill by the drawer to his/her creditor
- The bill sent for collection
i. Retain by the drawer, till the date of maturity: –
The drawer keeps the bill till the date of maturity of the bill and bill is duly paid by the drawee on that date. Then accounting treatment of these process shown in below table: –
Suppose the name of the drawer is X and the name of the drawee is Y
| S. No. | Transactions | In the Books of Drawer | In the Books of Drawee | ||
| 1 |
When goods sold to Mr Y by Mr X. |
Y’s A/c | Dr. |
Purchase A/c | Dr. |
| To Sales A/c |
To X’s A/c |
||||
| (Being goods sold to Mr Y, on credit ) |
(Being goods Purchase from Mr X, on credit ) |
||||
| 2 |
Bill is drawn by Mr X, on the Mr Y and duly accepted by the Mr Y |
Bills Receivable A/c | Dr. |
X’s A/c | Dr. |
| To Y’s A/c | To Bills Payable A/c | ||||
| (Being the acceptance received of the bill receivable from Mr Y) | (Being acceptance of the bill given to Mr X ) | ||||
| 3 | On maturity, the bill is duly paid by the Mr Y | Bank A/c | Dr. |
Bills Payable A/c | Dr. |
| To Bills receivable A/c | To Bank A/c | ||||
| (Being payment received against the bill receivable) | (Being payment made against the bills receivable ) | ||||
ii. A bill discounted by the drawer from the bank before the maturity date: –
The drawer discounted the bill from the bank before the date of maturity of the bill and the bill is duly paid by the drawee on the maturity date. Then accounting treatment of these processes is shown in the below table: –
The First and Second journal entry remains the same with above-said type. The Third journal entry will be changed in the books of the drawer only shown in the following table: –
| S. No. | Transactions | In the Books of Drawer | In the Books of Drawee | ||
| 3 | Bill is discounted by the drawer from the bank | Bank A/c | Dr. |
No entry | |
| Discount A/c | Dr. | ||||
| To Bills Receivable A/c | |||||
| (Being BR discounted from the Bank A/c before the maturity date) |
|||||
| 3 | On maturity, the bill is duly paid by the Mr Y | No entry | Bills Payable A/c | Dr. | |
| To Bank A/c | |||||
| (Being payment made against the bills receivable ) | |||||
Calculation of the amount of Discount:-
It is the amount of interest charged by the bank amount to make payment against bills receivable before the date of maturity. The amount of interest will be calculated for the remaining period until the maturity of the bills Receivable.
iii. Endorse the bill by the drawer to his/her creditor: –
When the drawer endorses the bills Receivable to his/her creditor is known as an endorsement of a bill of exchange and the bill is duly paid by the drawee on the maturity date. Then accounting treatment of these processes is shown below table: –
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The First and Second journal entry remains the same as the above-said type. The Third journal entry will be changed in the books of the drawer only shown in the following table: –
*Suppose the X have creditor named Mr Z: –
| S. No. | Transactions | In the Books of Drawer | In the Books of Drawee | ||
| 3 | Bill is endorsed by the drawer to his/her Creditor. | Z’s A/c | Dr. |
No entry | |
| To Bills Receivable A/c | |||||
| (Being B/R endorse to Mr Z) | |||||
| 3 | On maturity, the bill is duly paid by the Mr Y | No entry | Bills Payable A/c | Dr. | |
| To Bank A/c | |||||
| (Being payment made against the bills receivable ) | |||||
In the books of endorsee: –
Here will be the third person involved in the whole process. So, we have to prepare the books of this person also. This is shown below: –
| S. No. | Transactions | In the Books of Endorsee | |
| 3 | Bill is endorsed by the drawer to his/her Creditor. | Bills Receivable A/c | Dr. |
| To X’s A/c | |||
| (Being B/R received from Mr X) | |||
| 3 | On maturity, the bill is duly paid by the Mr Y | Bank A/c | Dr. |
| To Bills receivable A/c | |||
| (Being payment received against the bill receivable) | |||
iv. The bill sent for collection: –
When the drawer sent the bills Receivable to his/her bank for the collection of the bill on the maturity date is known as the bill sent for collection , and the bill is duly paid by the drawee on the maturity date. Then accounting treatment of these processes is shown in the below table: –
The First and Second journal entry remains the same with above-said type. The Third journal entry will be changed and posted in the two-part in the books of the drawer only shown in the following table: –
| S. No. | Transactions | In the Books of Drawer | In the Books of Drawee | ||
| 3 | Bill sent for collection to the bank by Mr X. | Bill sent for collection A/c | Dr. |
No entry | |
| To Bills Receivable A/c | |||||
| (Being B/R endorse to the Mr Z) | |||||
| 3 | On maturity, the bill is duly paid by the Mr Y | Bank A/c | Dr. |
Bills Payable A/c | Dr. |
| To Bill sent for collection A/c | To Bank A/c | ||||
| (Being payment collected by the bank against the bill receivable) | (Being payment made against the bills receivable ) | ||||
2. Bill is dishonoured on the maturity date:-
In case, where drawee did not pay the amount of bill on the date of maturity is known as the bill is dishonoured on the maturity date. There are four different types of situation as explained below: –
- Retain by the drawer, till the date of maturity.
- A bill discounted by the drawer from the bank before the maturity date.
- Endorse the bill by the drawer to his/her creditor
- The bill sent for collection
All the Journal entries remain the same but only the last transaction will change in all cases, shown in the following table : –
1st Case : Retain by the drawer, till the date of maturity
| S. No. | Transactions | In the Books of Drawer | In the Books of Drawee | ||
| 3 | Retain by the drawer, till the date of maturity | Y’s A/c | Dr. |
Bills Payable A/c | Dr. |
| To Bills Receivable A/c | Noting Charges A/c | Dr. | |||
| To Cash A/c (noting charges If any) | To X’s A/c | ||||
| (Being B/R dishonoured on the maturity and noting charges paid to the bank) | (Being B/P dishonoured on the maturity and noting charges paid to the bank by Mr X ) | ||||
2nd Case : A bill discounted by the drawer from the bank before the maturity date.
| S. No. | Transactions | In the Books of Drawer | In the Books of Drawee | ||
| 3 | A bill discounted by the drawer from the bank before the maturity date. | Y’s A/c | Dr. |
Bills Payable A/c | Dr. |
| To Bank A/c | Noting Charges A/c | Dr. | |||
| (add: noting charges If any) | To X’s A/c | ||||
| (Being B/R dishonoured on the maturity and noting charges paid to the bank) | (Being B/P dishonoured on the maturity and noting charges paid to the bank by Mr X ) | ||||
3rd Case Endorse the bill by the drawer to his/her creditor
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| S. No. | Transactions | In the Books of Drawer | In the Books of Drawee | ||
| 3 | Endorse the bill by the drawer to his/her creditor | Y’s A/c | Dr. |
Bills Payable A/c | Dr. |
| To Z’s A/c | Noting Charges A/c | Dr. | |||
| (add: noting charges If any) | To X’s A/c | ||||
| (Being B/R dishonoured on the maturity and noting charges paid by Mr Z to the bank) | (Being B/P dishonoured on the maturity and noting charges paid to the bank by Mr X ) | ||||
In the books of endorsee: –
| S. No. | Transactions | In the Books of Endorsee | |
| 3 | On maturity, the bill is duly paid by the Mr Y | X’s A/c | Dr. |
| To Bills Receivable A/c | |||
| To Cash A/c (noting charges If any) | |||
| (Being B/R dishonoured on the maturity and noting charges paid to the bank) | |||
4th Case The bill sent for collection
| S. No. | Transactions | In the Books of Drawer | In the Books of Drawee | ||
| 3 | Endorse the bill by the drawer to his/her creditor | Y’s A/c | Dr. |
Bills Payable A/c | Dr. |
| To Bill sent fro collection A/c | Noting Charges A/c | Dr. | |||
| To Bank A/c (noting charges If any) | To X’s A/c | ||||
| (Being B/R dishonoured on the maturity and noting charges paid to the bank) | (Being B/P dishonoured on the maturity and noting charges paid to the bank by Mr X ) | ||||
3. Renewal of bill before the maturity date: –
Sometimes, The acceptor of the bill finds that he can’t pay the amount of the bill on the due date of the bill. to avoid the dishonouring of the bill, he may request the drawer to renew the bill with some interest or without interest. If the Drawer agrees to this then they cancelled the old bill and create a new bill with interest amount or with interest amount (interest received in cash).
So, the Accounting treatment of the bill is shown below: –
| S. No. | Transactions | In the Books of Drawer | In the Books of Drawee | ||
| 1 | Cancellation of the Old bill | Y’s A/c
To Bills Receivable A/c (Being old bill cancelled before the maturity date ) |
Dr. | Bills payable A/c
To X’s A/c (Being old bills payable cancelled before the maturity date ) |
Dr. |
| 2 | Interest charges on the amount of the bill for the extended period.
if paid in cash by Mr Y |
Cash A/c
To Interest A/c (Being interest received on the amount due from Mr Y) |
Dr. | Interest A/c
To Cash A/c (Being interest paid to Mr x on the amount due to him ) |
Dr. |
| 2 | If interest not paid in cash | Y’s A/c
To Interest A/c ( Being interest due on the amount due from Mr Y ) |
Dr. | Interest A/c
To X’s A/c (Being interest due to Mr X ) |
Dr. |
| 3. | When the new bill received from Mr Y | Bills Receivable A/c
To Y’s A/c (Being acceptance received of the new bill) |
Dr. | X’s A/c|
To Bills Payable A/c (Being acceptance given for new bill ) |
Dr. |
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4. Retiring of the bill: –
Sometimes, The Acceptor has sufficient funds to pay the bill before the maturity date of the bill. The drawer will give some rebate because the amount was paid earlier than the maturity.
So, the Accounting treatment of the bill is shown below: –
| S. No. | Transactions | In the Books of Drawer | In the Books of Drawee | ||
| 1 | When Y paid cash for the bills before the due date. | Cash A/c
Rebate A/c To Bills Receivable A/c (Being Bill retire before the due date and allow the rebate) |
Dr.Dr. | Bills payable A/c
To X’s A/c To Rebate A/c (Being Bill retire before the due date and received the rebate) |
Dr. |
5. Insolvency of an acceptor: –
Sometimes, The Acceptor will be declared insolvent by the court. When he doesn’t have cash or asset to pay his/her liabilities.
So, the Accounting treatment of the bill is shown below: –
| S. No. | Transactions | In the Books of Drawer | In the Books of Drawee | ||
| 1 | When Acceptor or Drawee declare insolvent. ( pass journal entry as same with Bill dishonoured ) | Y’s A/c
To Bills Receivable A/c (Being Bill Receivable cancelled due to Drawee declare insolvent ) |
Dr. | Bills payable A/c
To X’s A/c (Being Bill dishonoured due to insolvency ) |
Dr. |
| 2 | Some portion of the total amount due received | Cash A/c Bad Debts A/c To Y’s A/c (Being only some portion is recovered from the Y’s due to he declare insolvent) |
Dr. | X’s A/c
To Cash A/c To Deficiency A/c (Being the amount due to X settled ) |
Dr. |
| 2 | When nothing could be recovered from the total amount due. | Bad Debts A/c
To Y’s A/c (Being nothing could be recovered from the Y’s due to he declare insolvent) |
Dr. | X’s A/c
To Deficiency A/c (Being the amount due to X write off ) |
Dr. |
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