Dishonor and Discharge of Bills

A bill of exchange is a negotiable instrument in writing under the Negotiable Instrument Act, 1881. It is an unconditional order requiring a certain person to pay a certain sum of money on a specific date. There are three parties to a bill of exchange i.e. Drawer, Drawee, and Payee. The drawer is the person who draws or makes the bill and sends it to the drawee or the payer for the acceptance. The bill is also endorsable to another person who then becomes the holder of the bill. On the due date, the holder of the bill presents it to the drawee for receiving the payment. When the drawee makes the payment it is known as the Discharge of Bills.

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Dishonor and Discharge of Bills

The drawer can deal with the bill in the following ways:

1. Retain till maturity
2. Discount with the bank
3. Endorse in favor of another person
4. Send it for collection to the bank

Browse more Topics under Bills Of Exchange

• Meaning and Features of Bills of Exchange
• Types of Bills of Exchange
• Discounting of Bills
• Renewal of Bill

Learn here the Renewal and Retiring of Bills of Exchange here in detail.

Journal Entries for Discharge and Dishonour of Bills of Exchange

In the books of Drawer

Date	Particulars		Amount (Dr.)	Amount (Cr.)
1. Bill is drawn and accepted	Bills Receivable A/c	Dr.
	To Drawee’s A/c
	(Being bill drawn and accepted)
2. Retaining the bill until maturity	No entry
a. Discharge of bill	Cash/Bank A/c	Dr.
	To Bills Receivable A/c
	(Being discharge or honor of bill)
b. Dishonor of bill	Drawee’s A/c	Dr.
	To Bills Receivable A/c
	(Being dishonor of bill)
3. 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)
a. Discharge of bill	No entry
b. Dishonor of bill	Drawee’s A/c	Dr.
	To Bank A/c
	(Being dishonor of bill)
4. Endorsing the bill to a creditor	Creditor’s/ Endorsee’s A/c	Dr.
	To Bills Receivable A/c
	(Being endorsement of bill in favor of creditor)
a. Discharge of bill	No entry
b. Dishonor of bill	Drawee’s A/c	Dr.
	To Creditor’s/ Endorsee’s A/c
	(Being bill endorsed dishonored)
5. Bill sent for collection	Bill sent for collection A/c	Dr.
	To Bills Receivable A/c
	(Being bill sent for collection)
a. Discharge of bill	Bank A/c	Dr.
	Collection charges A/c	Dr.
	To Bill sent for collection A/c
	(Being discharge of bill)
b. Dishonor of bill	Drawee’s A/c	Dr.
	To Bill sent for collection A/c
	To Bank A/c
	(Being dishonor of bill and noting charges due from drawee)

 In the books of Drawee or the Payer

Date	Particulars		Amount (Dr.)	Amount (Cr.)
1. Bill is drawn and accepted	Drawer’s A/c	Dr.
	To Bills Payable A/c
	(Being bill drawn and accepted)
2. Retaining the bill until maturity	No entry
a. Discharge of bill	Bills Payable A/c	Dr.
	To Cash/ Bank A/c
	(Being  payment made against the bill)
b. Dishonor of bill	Bills Payable A/c	Dr.
	To Drawer’s A/c
	(Being dishonor of bill)
3. Discounting the bill with the bank	No entry
a. Discharge of bill	Bills Payable A/c	Dr.
	To Cash/ Bank A/c
	(Being discharge of bill)
b. Dishonor of bill	Bills Payable A/c	Dr.
	To Drawer’s A/c
	(Being dishonor of bill)
4. Endorsing to a creditor	No entry
a. Discharge of bill	Bills Payable A/c	Dr.
	To Cash/ Bank A/c
	(Being  discharge of bill)
b. Dishonor of bill	Bills Payable A/c	Dr.
	To Drawer’s A/c
	(Being dishonor of bill)
5. Bill sent for collection	No entry
a. Discharge of bill	Bills Payable A/c	Dr.
	To Bank A/c
	(Being discharge of bill)
b. Dishonor of bill	Bills Payable A/c	Dr.
	Noting charges A/c	Dr.
	To Drawer’s A/c
	(Being dishonor of bill and noting charges due from drawee)

In the books of holder/endorsee

Date	Particulars		Amount (Dr.)	Amount (Cr.)
1. Endorsement to a creditor	Bills Receivable A/c	Dr.
	To Drawer’s / Debtor’s A/c
	(Being endorsed bill received)
a. Discharge of bill	Cash/ Bank A/c	Dr.
	To Bills Receivable A/c
	(Being  payment received against the bill)
b. Dishonor of bill	Drawer’s A/c	Dr.
	To Bills Receivable A/c
	(Being dishonor of bill)

 

On the dishonor of the bill, the person responsible for the dishonor bears the noting charges.

Source: freepik.com

Solved Example For You

On 1^st Jan 2018, Anuj sells goods to Bharat for ₹ 20000. He draws a bill on Bharat on the same date for the amount for a period of 2 months. Bharat accepts the bill. Anuj discounts the bill with the bank on 1^st Jan @12% p.a. On the due date, Bharat dishonors the bill. Anuj pays noting charges of ₹100.

Pass the necessary journal entries in the books of Anuj and Bharat.

Ans.

In the books of Anuj

Journal Entries

Date	Particulars		Amount (Dr.)	Amount (Cr.)
1 Jan	Bharat’s A/c	Dr.	20000
	To Sales A/c			20000
	(Being sale of goods to Bharat)
1 Jan	Bills Receivable A/c	Dr.	20000
	To Bharat’s A/c			20000
	(Being bill drawn on Bharat and accepted by him)
1 Jan	Bank A/c	Dr.	19600
	Discounting charges A/c	Dr.	400
	To Bills Receivable A/c			20000
	(Being bill discounted with the bank @12%p.a.)
1 Mar	Bharat’s A/c	Dr.	20100
	To Bank A/c			20000
	To Cash A/c			100
	(Being dishonor of bill and payment of noting charges on behalf of Bharat)

In the books of Bharat

Journal Entries

Date	Particulars		Amount (Dr.)	Amount (Cr.)
1 Jan	Purchases A/c	Dr.	20000
	To Anuj’s A/c			20000
	(Being purchase of goods from A)
1 Jan	Anuj’s A/c	Dr.	20000
	To Bills Payable A/c			20000
	(Being bill drawn by Anuj accepted)
1 Mar	Bills Payable A/c	Dr.	20000
	Noting charges A/c	Dr.	100
	To Anuj’s A/c			20100
	(Being dishonor of bill and payment of noting charges by Anuj on our behalf)