Bills of Exchange

Renewal of Bill

Sometimes, it may so happen that the drawee realizes that he will be unable to pay the amount of bill to the drawer on the maturity date. In this case, he may request the drawer to cancel the old bill. When the drawer agrees to it, he cancels the old bill and draws a new bill along with the amount of interest on the drawee. This process is known as Renewal of Bill.

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Renewal of Bill

The drawee may pay some amount of the old bill in cash and accept the new or fresh bill for the balance amount.

Also, he has an option to either pay the amount of interest on the new bill in cash or include the amount of interest in the bill.

Thus, the amount of new bill = Amount of old bill – cash paid + interest amount.

Learn more about Dishonor of Bill here in detail.

Journal Entries

In the books of Drawer

Date Particulars Amount (Dr) Amount (Cr)
1. Dishonor of bill As the case may be
2. For interest on renewed period Drawee’s A/c Dr.
To Interest A/c
(Being interest due on the bill)
3. When interest received in cash Cash A/c Dr.
To Interest A/c
(Being receipt of interest in cash
4. For a fresh bill Bills Receivable A/c Dr.
To Drawee’s A/c
(Being fresh bill drawn)

 

In the books of Drawee

Date Particulars Amount (Dr) Amount (Cr)
1. Dishonor of bill Bills Payable A/c Dr.
To Drawer’s A/c
(Being dishonor of bill)
2. For interest on renewed period Interest A/c Dr.
To Drawer’s A/c
(Being interest due on the bill)
3. When interest paid in cash Interest A/c Dr.
To Drawer’s A/c
(Being payment of interest in cash
4. For a fresh bill Drawer’s A/c Dr.
To Bills Payable A/c
(Being fresh bill drawn)

Renewal of Bill

Source: freepik.com

Solved Example for You

Kara sells goods to Mira on 1st September 2018 for ₹15000. Mira accepts a bill for 3 months. On the due date, Mira requests Kara to renew the bill for a period of 2 months. Kara agrees to it if Mira pays interest at 10% immediately in cash. Mira agrees and accepts a fresh bill in favor of Kara. She duly meets the second bill on the due date. Show necessary journal entries in the books of Kara and Mira.

Ans.

Journal Entries

In the books of Kara

Date Particulars Amount (Dr) Amount (Cr)
1 Jul Mira’s A/c Dr. 15000
To Sales A/c 15000
(Being sales to Mira)
1 Jul Bills Receivable A/c Dr. 15000
To Mira’s A/c 15000
(Being bill drawn on Mira for 3 months accepted by her)
4 Oct Mira’s A/c Dr. 15000
To Bills Receivable A/c 15000
(Being cancellation of the bill due to renewal)
4 Oct Cash A/c Dr. 250
To Interest A/c 250
(Being receipt of interest in cash @ 10% p.a.)
4 Oct Bills Receivable A/c Dr. 15000
To Mira’s A/c 15000
(Being fresh bill drawn)
8 Dec Cash A/c Dr. 15000
To Bills Receivable A/c 15000
(Being receipt of money due from B/R)

In the books of Mira

Date Particulars Amount (Dr) Amount (Cr)
1 Jul Purchases A/c Dr. 15000
To Kara’s A/c 15000
(Being purchases from Kara)
1 Jul Kara’s A/c Dr. 15000
To Bills Payable A/c 15000
(Being bill drawn by Kara for 3 months accepted)
(Being interest due on the bill)
4 Oct Bills Payable A/c Dr. 15000
To Kara’s A/c 15000
(Being cancellation of the bill due to renewal)
4 Oct Interest A/c Dr. 250
To Cash A/c 250
(Being payment of interest in cash @ 10% p.a.)
4 Oct Kara’s A/c Dr. 15000
To Bills Payable A/c 15000
(Being fresh bill accepted)
8 Dec Bills Payable A/c Dr. 15000
To Cash A/c 15000
(Being payment of money due in respect of B/P)

 

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