Bills of Exchange

Bills of Exchange

A bill of exchange has been defined as, “an instrument in writing containing an unconditional order signed by the maker directing certain person to pay a certain sum money only to or to the order of a certain person or to the bearer of the instrument.”

Bill of exchange has the following characteristics

Ø  It must be in writing

Ø  It must be dated

Ø  It must contain an order to pay a certain sum of money

Ø  The promise to pay a must be unconditional

Ø  The money must be payable to a definite person or to his order or to the bearer

Ø  It should be properly stamped

The party which makes the order or draws the bill is known as the Drawer.

The party which accept the bill is known as the acceptor or the Drawee.

The party to whom the amount is to be pay is known as the Payee.

Difference between a Bill of Exchange and Promissory Note

Term / Period of Bill of Bill

The term of a bill is the period of credit given by the seller to the buyer. The term can be in months or days.

If the bill is drawn as “After Date” the term of bill starts from the Date of Drawing the Bill.

If the bill is drawn as “After Sight” the term of bill starts from the Date of Acceptance.

Due Date:- The date on which the term of the bill is completed or expires is called as Due Date.

Days of Grace:- Every instrument payable other than on demand is entitled 3 days of Grace

Maturity Date:- The date which comes after adding 3 days of grace to the due date is called as Maturity Date.

Note:     If Due Date is a Public Holiday, the preceding working day is taken as due date.

                If Due Date is a suddenly declared holiday, the next working day is taken as due date.

Example: Calculate the Due/ Maturity Date for the following bills
                  Date of Bill                Term of Bill
                  23 November, 2018      2 Months
                  14 January, 2019          60 Days
                  26 Janyary, 2019         3 Months
                  18 April, 2019              75 Days
                  30 May, 2019              2 Months

• One the Drawer receives the Bill, he has the following 4 option with reference to the bill -

Journal Entries in the Books of Drawer

1. For Credit Sales
    Drawee A/c                        Dr.
          To Sales A/c

2. For Receipt of Bill
    Bills Receivable A/c          Dr.
          To Drawee A/c

3. If the Bill is Retained till Due Date
    NO ENTRY

4. If the Bill is Discounted with Bank
    Bank A/c                            Dr.
    Discount A/c                      Dr.
          To Bills Receivable A/c

5. If the Bill is Endorsed
    Endorsee A/c                      Dr.
          To Bills Receivable A/c

6. If the Bill is sent to Bank for Collection
    Bank for Collection A/c      Dr.
          To Bills Receivable A/c

Note: In a given question only one of the 4 entries from entry no. 3 to entry no. 6 will come.

On the Due Date

8. If the Bill is Honoured    a) Bill Retained and Honoured
        Bank A/c                        Dr.
            To Bills Receivable A/c

    b) Bill Discounted and Honoured
          NO ENTRY
  
    c) Bill is Endorsed and Honoured
          NO ENTRY
 
    d) Bill is sent to Bank for Collection and Honoured
        Bank A/c                        Dr.
             To Bank for Collection A/c    

9. If the Bill is Dishonoured
    a) Bill Retained and Dishonoured 
        Drawee A/c                    Dr.
             To Bills Receivable A/c

    b) Bill Discounted and Dishonoured
        Drawee A/c                    Dr.
             To Bank  A/c

   c) Bill is Endorsed and Dishonoured
       Drawee A/c                    Dr.
             To Endorsee  A/c

    d) Bill is sent to Bank for Collection and Dishonoured
        Drawee A/c                    Dr.
             To Bank for Collection A/c    

Note: In a given question only one of entry from entry no. 8 or from entry no. 9 will come.

10. Retirement of Bill
      Bank A/c                          Dr.
      Rebate A/c                       Dr.
            To Bills Receivable A/c   
      (Rebate is the discount allowed on the retirement of Bill)

11. Renewal of Bill
      a) Pass entry for Dishonour of Bill

      b) Interest on Renewal
          Drawee A/c                   Dr.
                To Interest A/c

      c) Receipt of New Bill and Some amount in Cash
          Bills Receivable A/c      Dr.
          Cash A/c                        Dr.
                 To Drawee A/c

12. On Drawee becoming Insolvent
       a) Pass entry for Dishonour of Bill

       b) For Bad Debts and Receipt of Part Cash
            Cash A/c                       Dr.
            Bad Debts A/c              Dr.
                   To Drawee A/c