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Accountancy > Bill of Exchange > Dishonour of Bill
Bill of Exchange

Dishonour of Bill

When the drawee (a person who is liable to pay) is not able to make the payment on the date of maturity of a bill, a bill is said to be dishonoured. In this situation liability of drawee is restored. Dishonour of a bill can be either by non-acceptance or non-payment. A dishonoured bill is equivalent to the bounced cheque.

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Dishonour by Non-Acceptance

Bill of exchange requires acceptance by the drawee when it is presented, however, if on presenting the bill of exchange, it gets non-acceptance, it will amount to dishonour.

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Dishonour by Non-Payment

When the drawee of the bill of exchange commit default in making the payment of the bill on maturity to the drawer, it is said to be dishonoured of a bill of exchange by non-payment.

Possible reasons why the bill is dishonoured by non-payment?

  • Due to insufficient funds in the drawee’s a/c.
  • The drawee is unable to pay because of insolvency, or
  • The drawee simply does not want to pay

When the bill gets dishonoured, entries that were made at the time of receipt of a bill are reversed.

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Solved Examples for You

Example 1

Rashi (drawer) received a bill of exchange duly accepted by Ayushi (drawee), which was dishonoured. The entries of dishonour will be as follows in the books of Rashi (drawer):

When the bill was kept by Rashi till maturity

Ayushi a/c Dr
To  Bill Receivables A/c

When the bill had been endorsed by Rashi in favour of Raghav

Ayushi a/c Dr
To  Raghav  A/c

When the bill was discounted by Rashi with her bank

Ayushi a/c Dr
To  Bank  A/c

When the bill was sent for collection by Rashi

Ayushi a/c Dr
To Bill Sent for Collection A/c

Example 2

On April 01, 2018 Pinky sold goods to Shreya for Rs. 20,000 and drew upon her a bill of exchange for 3 months. Shreya accepted the bill and returned it to Pinky. On the date of maturity, the bill was dishonoured by Shreya. Entries in all the cases listed below in the books of Pinky and Shreya will be:

Case 1: When the bill is kept by Pinky till its maturity;

Books of Pinky

Journal Date Particulars L.F Amount Amount
April 01, 2018 Shreya a/c Dr 20,000
To  Sales  A/c 20,000
 (Sold goods to Shreya)
April 01, 2018 Bills Receivable A/c Dr 20,000
To Shreya 20,000
 (Received Shreya’s acceptance)
July 04, 2018 Shreya a/c Dr 20,000
To Bills Receivable A/c 20,000

 Case 2: When the bill is discounted by Pinky with the bank for Rs. 19,600

Books of Pinky

Journal Date Particulars L.F Amount Amount
April 01, 2018 Shreya a/c Dr 20,000
To  Sales  A/c 20,000
 (Sold goods to Shreya)
April 01, 2018 Bills Receivable A/c Dr 20,000
To Shreya 20,000
 (Received Shreya’s acceptance)
April 01, 2018 Bank  a/c Dr 19,600
Discount a/c Dr 400
To Bills Receivable A/c 20,000
 (Bill discounted by Pinky in the bank)
July 04, 2018 Shreya a/c Dr 20,000
To Bank a/c 20,000
(Discounted bill dishonoured by Shreya)

 

When the bill is endorsed to Navin by Pinky.

 Books of Pinky

Journal Date Particulars L.F Amount Amount
April 01, 2018 Shreya a/c Dr 20,000
To  Sales  A/c 20,000
 (Sold goods to Shreya)
April 01, 2018 Bills Receivable A/c Dr 20,000
To Shreya 20,000
 (Received Shreya’s acceptance)
April 01, 2018 Navin  a/c Dr 20,000
To Bills Receivable A/c 20,000
 (Shreya acceptance endorsed in favour of Navin)
July 04, 2018 Shreya a/c Dr 20,000
To Navin a/c 20,000
(Endorsed bill dishonoured by Shreya)

 Whereas, in the book of Shreya, the following entries will be recorded

Books of Shreya

Journal Date Particulars L.F Amount Amount
April 01, 2018 Purchases a/c Dr 20,000
To  Pinky  A/c 20,000
 (Purchased good from Pinky)
April 01, 2018 Pinky a/c Dr 20,000
To Bills Payable 20,000
 (Accepted Pinky’s draft)
July 04, 2018 Bills Payable a/c Dr 20,000
To Pinky a/c 20,000
 (Acceptance in favor of Pinky dishonoured)

 

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