Bills of Exchange

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

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.

Discharge of Bills

Source: freepik.com

Solved Example For You

On 1st 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 1st 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)

 

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