A drawer or the seller draws a bill of exchange on the drawee or the purchaser in order to ensure that the latter will pay him the amount due. However, if the holder or the drawer of the bill of exchange needs funds or money before the due date or the maturity date of the bill, he may opt for Discounting of Bills.
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Discounting of Bills
The drawer may discount the bill with the bank before the due date. The bank charges discounting charges from the drawer at a certain rate.
Thus, at the time of discounting the bank deposits the net amount after charging such amount of discount in the account of the holder of the bill.
The discount is an expense for the holder of the bill. Whereas, it is a gain or income for the bank.
Discount = Amount of bill x \(\frac{Rate of interest or discount}{100}\) x \(\frac{Remaining period to maturity}{12}\)
Browse more Topics under Bills Of Exchange
- Meaning and Features of Bills of Exchange
- Dishonor and Discharge of Bills
- Types of Bills of Exchange
- Renewal of Bill
Learn more about Dishonor and Discharge of Bills in detail here.
Journal Entries for Discounting of Bills of Exchange
In the books of Drawer
Date | Particulars | Amount (Dr.) | Amount (Cr.) | |
1. Discounting the bill with the bank | Bank A/c (amount actually received) | Dr. | ||
Discount A/c (amount of discount) | Dr. | |||
To Bills Receivable A/c | ||||
(Being bill discounted with the bank) | ||||
2. Transfer of discount to P&L A/c | Profit and Loss A/c | Dr. | ||
To Discount A/c | ||||
(Being transfer of discount to P&L A/c | ||||
3. Honor of bill | No entry | |||
4. Dishonor of bill | Drawee’s A/c | Dr. | ||
To Bank A/c | ||||
(Being dishonor of bill) |
In the books of Drawee
Date | Particulars | Amount (Dr.) | Amount (Cr.) | |
1. Discounting the bill with the bank | No entry | |||
2. Honor of bill | Bills Payable A/c | Dr. | ||
To Cash/ Bank A/c | ||||
(Being payment made against the bill) | ||||
3. Dishonor of bill | Bills Payable A/c | Dr. | ||
To Drawer’s A/c | ||||
(Being bill dishonored) |
In the books of Bank
Date | Particulars | Amount (Dr.) | Amount (Cr.) | |
1. Bill is discounted with the bank | Bill discounted A/c | Dr. | ||
To Customer’s current A/c | ||||
To Discounting on bill A/c | ||||
(Being bill discounted) | ||||
2. Honor of bill | Cash A/c | Dr. | ||
To Bill discounted A/c | ||||
(Being honor of bill) | ||||
3. Dishonor of bill | Customer’s current A/c | Dr. | ||
To Bill discounted A/c | ||||
(Being dishonor of bill on due date) |
Source: freepik.com
Solved Example For You
On 1^{st} November 2018, Varun draws a bill of ₹5000 for 3 months on Sonil which he accepts. Varun discounts it with the bank at a discount of @ 12% p.a., as he was in need of cash. On the due date, the bill was dishonored and the bank paid noting charges of ₹50. However, Varun settles the claim of the bank in cash. Show necessary journal entries in the books of Varun.
Ans.
In the books of Varun
Journal Entries
Date | Particulars | Amount (Dr) | Amount (Cr) | |
1 Nov | Bills Receivable A/c | Dr. | 5000 | |
To Sonil’s A/c | 5000 | |||
(Being bill received from sonil) | ||||
1 Nov | Bank A/c | Dr. | 4850 | |
Discount A/c | Dr. | 150 | ||
To Bills Receivable A/c | 5000 | |||
(Being discounting the bill with the bank) | ||||
3 Feb | Sonil’s A/c | Dr. | 5050 | |
To Bank A/c | 5050 | |||
(Being dishonor of bill and noting charges due from Sonil) | ||||
3 Feb | Bank A/c | Dr. | 5050 | |
To Cash A/c | 5050 | |||
(Being settlement of bank dues) |
Working notes:
Discount = Amount of bill x \(\frac{Rate of interest or discount}{100}\) x \(\frac{Remaining period to maturity}{12}\)
= 5000 x \(\frac{12}{100}\) x \(\frac{3}{12}\)
= 150
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