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Bills of Exchange And Promissory Notes

Journal Entry for Bills of Exchange

Before we start with the Journal Entry for Bills of Exchange, let us understand first what a bill of exchange is. A bill of exchange is a negotiable instrument under the Negotiable Instrument Act, 1881. It is an instrument in writing. It contains an unconditional order requiring a certain person to pay a certain sum of money on a stipulated date. There are three parties i.e. Drawer, Drawee, and Payee.

Journal Entry for Bills of Exchange

The drawer is the person who draws or makes the bill and sends it to the drawee or the payer for the acceptance. Once accepted, the bill becomes Bills Receivable for the drawer and Bills Payable for the drawee or payee.

The drawer may endorse the bill to another person who becomes the holder of the bill. On the due date, the holder presents the bill to the drawee for payment.

The payee is the person who eventually pays for the bill. Drawee will be the payee as well most of the time but sometimes a third party will pay the bill on behalf of the drawee then the third party will become the payee

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Treatment of Bills of Exchange

The drawer can treat the bill in the following ways:

  1. Retain it till maturity
  2. Discount it with the bank
  3. Endorse it in favor of another person

On the due date, there can be two situations:

  1. The bill is honored.
  2. The bill is dishonored.

Journal Entry for Bills of Exchange

Journal Entry for Bills of Exchange

Drawer’s Books

Date Particulars Amount (Dr) Amount (Cr)
1. The issue of bill Bills Receivable A/c Dr.  xx
To Drawee’s A/c  xx
(Being bill was drawn and accepted)
2. The Bill is retained until maturity No entry
a. In case of honor Cash/Bank A/c Dr.  xx
To Bills Receivable A/c  xx
(Being bill retained till maturity and payment received)
b. In case of dishonor Drawee’s A/c Dr.  xx
To Bills Receivable A/c  xx
(Being bill retained till maturity and dishonored)
3. The bill is discounted with the bank Bank A/c (amount actually received) Dr.  xx
Discount A/c  (amount of discount) Dr.  xx
To Bills Receivable A/c  xx
(Being bill discounted with the bank)
a. In the case of honor No entry
b. In case of dishonor Drawee’s A/c Dr.  xx
To Bank A/c  xx
(Being discounted bill dishonored)
4. The bill is endorsed Creditor’s/ Endorsee’s A/c Dr.  xx
To Bills Receivable A/c  xx
(Being bill endorsed in favor of creditor)
a. In case of honor No entry
b. In case of dishonor Drawee’s A/c  Dr.  xx
To Creditor’s/ Endorsee’s A/c  xx
(Being bill endorsed dishonored)

Drawee’s or the Payer’s Books

Date Particulars Amount (Dr) Amount (Cr)
1. The issue of bill Drawer’s A/c Dr.  xx
To Bills Payable A/c  xx
(Being bill was drawn and accepted)
2. The Bill is retained until maturity No entry
a. In case of honor Bills Payable A/c Dr.  xx
To Cash/ Bank A/c  xx
(Being  payment made against the bill)
b. In case of dishonor Bills Payable A/c Dr.  xx
To Drawer’s A/c  xx
(Being bill dishonored)
3. The bill is discounted with the bank No entry
Bills Payable A/c Dr.  xx
To Cash/ Bank A/c  xx
(Being  payment made against the bill)
a. In case of honor Bills Payable A/c Dr.  xx
b. In case of dishonor To Drawer’s A/c  xx
(Being bill dishonored)
No entry
4. The bill is endorsed Bills Payable A/c Dr.  xx
To Cash/ Bank A/c  xx
(Being  payment made against the bill)
a. In case of honor Bills Payable A/c Dr.  xx
b. In case of dishonor To Drawer’s A/c  xx
(Being bill dishonored)

 Holder/endorsee’s Books

Date Particulars   Amount (Dr.) Amount (Cr.)
1. Endorsed to a creditor Bills Receivable A/c Dr.  xx
To Drawer’s / Debtor’s A/c  xx
(Being endorsed bill received)
a. In case of honor Cash/ Bank A/c Dr.  xx
To Bills Receivable A/c  xx
(Being  payment received against the bill)
b. In case of dishonor Drawer’s A/c Dr.  xx
To Bills Receivable A/c  xx
(Being bill dishonored)

The drawer may feel that the drawee may dishonor the bill. In this case, he can give it to the Notary Public. Notary Public presents the bill to the Drawer for payment instead of the Drawer. If the bill is honored, they hand over the money to the Drawer.

In case of dishonor, they note the reasons for dishonor and give the bill back to the drawer. They charge fees for this known as Noting charges. In case of dishonor, the person who is responsible for the dishonor bears the noting charges.

Solved Example For You

Q. On 1st August 2018, A sold goods to B for ₹ 10000 on credit. He drew a bill on B on the same date for the amount to be paid on 1st October 2018. B accepted the bill. A got the bill discounted with the bank on 1 Aug @12% p.a. On the due date, the bill was dishonored and noting charges paid by A ₹50.

Pass the necessary journal entry for bills of exchange in the books of A and B.

Ans: Journal Entry for Bills of Exchange are as follows

Journal Entries in the books of A

Date Particulars Amount (Dr.) Amount (Cr.)
1 Aug B’s A/c Dr. 10000
To Sales A/c 10000
(Being goods sold to B)
1 Aug Bills Receivable A/c Dr. 10000
To B’s A/c 10000
(Being bill drawn on B and accepted by him
1 Aug Bank A/c Dr. 9800
Discount A/c Dr. 200
To Bills Receivable A/c 10000
(Being bill discounted with the bank @12%p.a.)
1 Oct B’s A/c Dr. 10050
To Bank A/c 10000
To Cash A/c       50
(Being bill dishonored and noting charges paid on behalf of B)

Journal Entries in the books of B:

Date Particulars Amount (Dr.) Amount (Cr.)
1 Aug Purchases A/c Dr. 10000
To A’s A/c 10000
(Being goods purchased from A)
1 Aug A’s A/c Dr. 10000
To Bills Payable A/c 10000
(Being bill drawn by A accepted)
1 Oct Bills Payable A/c Dr. 10000
Noting charges A/c Dr.       50
To A’s A/c   10050
(Being bill dishonored and noting charges paid by A on our behalf)

 

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