Bills of Exchange

Discounting of Bills

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 \(\frac{Remaining period to maturity}{12}\)

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)

 Discounting of Bills

Source: freepik.com

Solved Example For You

On 1st 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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