Retirement of Bills of Exchange

A bill of exchange is usually honored only on the maturity date. But, in some cases, it can be honored before time. This is known as the Retirement of bills of exchange. Also, a bill may be cancelled before time and a new bill may be written in its place. This is known as Renewal of bills of exchange.

Browse more Topics under Bills Of Exchange And Promissory Notes

• Introduction to Negotiable Instruments
• Promissory Notes
• Journal Entry for Bills of Exchange

Retirement of Bills of Exchange

It may happen sometimes that the drawee has surplus funds. So he may decide to pay the amount of the bill before the date of maturity. Thus, he asks the drawer or the holder whether he is ready to accept the payment before the due date of the bill. The drawer or the holder may agree to pre-payment. This is called the retirement of bills of exchange.

In order to encourage the drawee to pay the bill before the maturity date, the drawer gives him a discount. This discount is known as a rebate on bills. Thus, we calculate the rebate on bills at a certain rate of interest for the time between the date of payment and the date of maturity.

The rebate on bills is an expense of the drawer or the holder of the bill. While it is an income of the drawee or the payer. All journal entries are similar as in case of honor of the bill on the maturity date except for the rebate.

(Source: Alamy)

Journal Entry of Retirement of Bills of Exchange

In the books of Drawer or Holder

Date	Particulars		Amount (Dr.)	Amount (Cr.)
1. The retirement of the bill	Bank/Cash A/c	Dr.	xxxx
	Rebate on bills A/c	Dr.	xxxx
	To Bills receivable A/c			xxxx
	(Being bill retired and rebate allowed)

In the books of Drawee or Payer

Date	Particulars		Amount (Dr.)	Amount (Cr.)
1. The retirement of the bill	Bills payable A/c	Dr.	xxxx
	To Rebate on bills A/c			xxxx
	To Cash/ Bank A/c			xxxx
	(Being bill retired and rebate received)

Solved Example For You

Q. On 15^th June 2018, A sold goods to B for ₹ 20000. B paid ₹ 10000 in cash and accepted a bill for the remaining amount for three months. On 18^th August 2018, B retired the bill under a rebate of 6%p.a. Pass the necessary Journal entries in the books of A and B. Also prepare the necessary ledger accounts.

Ans: Journal Entries in the books of A

Date	Particulars		Amount (Dr.)	Amount (Cr.)
15 June	B’s A/c	Dr.	10000
	Cash A/c	Dr.	10000
	To Sales A/c			20000
	(Being goods sold to B and half amount received in cash)
15 June	Bills Receivable A/c	Dr.	10000
	To B’s A/c			10000
	(Being bill drawn on B and accepted by him)
18 Aug	Cash A/c	Dr.	9950
	Rebate on bills A/c	Dr.	50
	To Bills receivable A/c			10000
	(Being bill receivable retired before maturity date and rebate of 6% p. a. allowed)

B’s A/c

Date	Particulars	Amount		Date	Particulars	Amount
15 June	To Sales A/c	10000		15 June	By Bills receivable A/c	10000

 Cash A/c

Date	Particulars	Amount		Date	Particulars	Amount
15 June	To Sales A/c	10000
18 Aug	To Bills receivable A/c	9950

 Sales A/c

Date	Particulars	Amount		Date	Particulars	Amount
				15 June	By B’s A/c	10000
					By Cash A/c	10000

 Bills Receivable A/c

Date	Particulars	Amount		Date	Particulars	Amount
15 June	To B’s A/c	10000		18 Aug	By Cash A/c	9950
				18 Aug	By Rebate on bills A/c	50

Rebate on bills A/c

Date	Particulars	Amount		Date	Particulars	Amount
18 Aug	To Bills receivable A/c	50

Journal Entries in the books of B

Date	Particulars		Amount (Dr.)	Amount (Cr.)
15 June	Purchases A/c	Dr.	20000
	To Cash A/c			10000
	To A’s A/c			10000
	(Being goods purchased from B and half amount paid in cash)
15 June	A’s A/c	Dr.	10000
	To Bills Payable A/c			10000
	(Being bill drawn by A and accepted by us)
18 Aug	Bills Payable A/c	Dr.	10000
	To Rebate on bills A/c			50
	To Cash A/c			9950
	(Being bill payable retired before maturity date and rebate of 6% p. a. received)

Purchases A/c

Date	Particulars	Amount		Date	Particulars	Amount
15 June	To Cash A/c	10000
	To A’s A/c	10000

 Cash A/c

Date	Particulars	Amount		Date	Particulars	Amount
				15 June	By Purchases A/c	10000
				18 Aug	By Bills payable A/c	9950

 A’s A/c

Date	Particulars	Amount		Date	Particulars	Amount
15 June	To Bills payable A/c	10000		15 June	By Purchases A/c	10000

 Bills Payable A/c

Date	Particulars	Amount		Date	Particulars	Amount
18 Aug	To Cash A/c	9950		15 June	By A’s A/c	10000
18 Aug	To Rebate on bill A/c	50

 Rebate on bills A/c

Date	Particulars	Amount		Date	Particulars	Amount
				18 Aug	By Bills payable A/c	50