Home BOOK KEEPING B/KEEPING FORM 4 TOPIC 1: BILLS OF EXCHANGE | B/KEEPING FORM 4

TOPIC 1: BILLS OF EXCHANGE | B/KEEPING FORM 4

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TOPIC 1: BILLS OF EXCHANGE | B/KEEPING FORM 4
TOPIC 1: BILLS OF EXCHANGE | B/KEEPING FORM 4

TOPIC 1: BILLS OF EXCHANGE | B/KEEPING FORM 4

Meaning of a Bill of Exchange

Define a bill of exchange
Bill of exchange is written order letter in which there is not any
condition.
Writer’s sign will be in it.
In this letter, order to other
person is given to pay the certain sum of money to the writer of letter
or to pay any other authorized person or who has this bill of exchange.
The Nature of Interest of a Bill of Exchange
Explain the nature of interest of a bill of exchange
Essential of a Bill of Exchange

It should be in written.

Unconditional order to pay.

Signed by writer.

Debtor must be a certain person.

Payment must be a certain amount.

Payment must be done on maturity of bill.

Acceptance must be given by debtor on this bill.

Bills
of Exchange and Promissory Notes are treated alike for accounting
purposes.
That is, both are treated and recorded under the common
account “Bills of Exchange”.
We come across four parties to a Bill:

(a) Drawer,

(b) Drawee (Acceptor),

(c) Endorser, and

(d) Endorsee.

When
a drawer endorses a Bill, which he received from the Acceptor, he
becomes Endorser.
Endorsee is a person to whom the Bill is transferred.
When the endorsee, again, endorses the Bill, he becomes an Endorser and
the receiver of the endorsed Bill is an Endorsee.
A
bill of exchange or Promissory Note may be treated as Bills Receivable,
when payment has to be received against it.
Thus, a bill of exchange is
Bills Receivable for the drawer as he has to receive the amount.
A bill
of exchange or Promissory Note may be treated as a Bill Payable, when
payment has to be made against it.
Thus,
a bill of exchange is a Bill Payable for the drawee (Acceptor).
Thus,
it is clear that Bills of Exchange or Promissory Notes can be Bills
Receivable to one party and Bills Payable to another party.
The Bill in the possession of the Creditor may be dealt with in any one of the following ways:

One can keep the Bill till the date of maturity and realize the payment against it.

One can discount the Bill with a bank before its maturity, if he is in need of money.

One can transfer the Bill, against a debt, to his Creditor by endorsing it.

One can send the Bill to the bank for collection of amount against it.

We shall discuss the accounting treatment of transactions:
Aaaa1 1471237775335
Bill Recieved
Account for bill received
Accrued Interest; Default of Bill; Default or Dishonor ; The
Discounting of a Bill of Exchange
Account for: Accrued interest; Default of bill; Default or dishonor;
The discounting of a bill of exchange
Drawing, Accepting and Discharge of A Bill:
On
March 10th, A sold goods to B and draws on B a Bill at three months for
Rs 800, which B accepts immediately and returns it to A. The Bill is
honoured on the due date. Pass entries in the books of both A and B.
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Discounting the Bill:
Illustration 2:
A
accepted a four months’ draft for Rs 1,000 drawn on him by B on 15th
April. The Bill was discounted with the bankers on the next day at 12%.
On maturity the Bill was met. Make journal entries in the books of A and
B.
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Endorsing the Bill:
On
1st June Ram drew a bill upon Krishna for Rs 500 at four months date.
This was duly accepted and payable at Canada Bank. After the acceptance,
the Bill was endorsed to Gopal.
On the due date, the Bill was honoured.
Pass the journal entries in the books of all parties.
Abaa7 1471531950386
Dishonouring the Bill:
(a) When Drawer is the Holder of the Bill:
Illustration 4:
Mr.
Ravi draws a Bill for Rs 2,000 on Gopal on 15th September for three
months.
On maturity, Gopal failed to honour the Bill. Pass the necessary
journal entries in the books of Ravi and Goipal, if he had retained the
Bill with him till maturity.
(Calicut)
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(b) When Banker is the Holder of the Bill:
On
15th June, Niranjan sold goods to Prema, valued at Rs 2,000. He drew a
Bill at 3 months for the amount and discounted the same with his bankers
at Rs 1,960. On the due date, the Bill was dishonoured and Niranjan
paid the bank the amount due plus the noting charges of Rs 10. Pass the
journal entries in the books of the two parties. (B.Com Mysore)
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(c) When Endorse is the Holder of the Bill:
On
1st January, A drew a Bill on B for Rs 1,000 payable after three
months. B accepted the bill and returned it to A.
After 10 days A
endorsed the Bill to his Creditor C.
On
the due date, the Bill was dishonoured and C paid Rs 5 as noting
charges. Record the transactions in the journals of A, B and C.
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(d) When the Bill is Sent for Collection:
Illustration 6:
On
1st January, A drew a bill on B for Rs 1,000, payable after three
months.
Immediately after its acceptance, A sent the Bill to his Bank
for collection.
On the due date, the Bill was dishonoured.
Record the transactions in the journals of A and B.
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Renewal of the Bills:
Illustration 7:
On
1st May, Merchant & Company sold goods to A B & Co. for Rs 500
and drew upon him a Bill at three months for the amount.
A B & Co.
accepted the draft and returned to Merchant & Co. On the due date A B
& Co.
expressed their inability to meet the Bill and offered Rs 300
in cash and to accept a new bill for the balance plus interest at 12%
p.a. for three months.
Merchant & Co. agreed to the proposal.
On
maturity, the bill was duly met by A B & Co.
Pass entries in the books of the parties to record the above transactions. (B. Com., Karnataka, Madras)
Solution:
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Effects of Dishonour of a Bill:

When
a bill is dishonoured, it becomes valueless and the original position
of debtor and creditor is restored between the drawee and the drawer.

Upon its dishonor, the holder of a bill has a right of action against the drawee or any previous endorser.

When an endorser makes the payment to the endorsee, he can sue any previous endorser or the drawer.

Upon
dishonour, to avoid confusion and multiplicity of legal actions,
generally the drawer takes up the bill and exercises his rights upon the
drawee.

Expenses incurred for establishing the fact of
dishonour of a bill (noting charges) are generally paid by the holder,
but ultimately these are recoverable from the drawee.

Retiring a Bill under Rebate:
Illustration 8:
On
1st January, A sold goods to B for Rs 1,000 and drew upon him a Bill at
three months for the amount. B accepted the Bill and returned it to A.
On 4th March, B returned the Bill under rebate of 12% p a.
Record these transactions in the journals of A and B.
Ab7 1471244487203
Illustration 9:
On
1st February, Ram received from Hari three acceptances for Rs 6,000, Rs
8,000 and Rs 10,000 for two months.The first Bill for Rs 6,000 was
endorsed to Mohan; the second Bill for Rs 8,000 was held till due date;
and the third Bill for Rs 10,000 was discounted for Rs 50.
At maturity
all the Bills were dishonored.
Give journal entries in the books of Ram
and the ledger accounts in the books of Hari, in respect of these
transactions. (CA)
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Journalise the following transaction in the books of Nilesh.

(a) Naresh informs Nilesh that Snajay’s acceptance for `. 8,000 endorsed to Naresh has been dishonoured. Noting charges `. 200.

(b)
Sujit renews his acceptance to Nilesh for `. 4,800 by paying `.1,600 in
cash and accepting a new bill for the balance plus interest for 3
months @12% p.a.

(c) Prakash’s acceptance to Nilesh for `.24,000 retired one month before its due date at a discount of 12% p.a.

(d) Bank informs Nilesh, the dishonour of Prashant’s acceptance for `. 8,000, discounted with Bank. Noting charges `.160.

Journal of Nilesh
Date Particulars LF Debit (`.) Credit (`.)
Sanjay A/c…………………………..Dr. To Naresh A/c(Being endorsed bill dishonoured and noting charges paid) 8,200 8,200
Sujit A/c………………………………Dr. To Bills Receivable A/c(Being Bills cancelled) 4,800 4,800
Sujit A/c………………………………Dr. To Interest A/c(Being interest receivable) 96 96
Cash A/c……………………………..Dr. To Sujit A/c(Being part payment received) 1,600 1,600
Bills Receivable A/c………………..Dr. To Sujit A/c(Being new bill drawn and accepted due after 3 months) 3,296 3,296
Cash A/c………………………………Dr.Discount A/c…………………………Dr. To Bills Receivable A/c(Being Bill Retired) 23,760240 24,000
Prashant A/c…………………………Dr. To Bank A/c(Being discounted bill dishonorued and noting charges paid) 8,160 8,160

 

A bill of Exchange with Interest Charges included in the Face Amount
Account for a bill of exchange with interest charges included in the face amount
The Concept of Present Value in Accounting of a Log-term Bill of Exchange
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