Accounting entries relating to a Bill of Exchange depend on the stage and manner in which the Bill is dealt with. A Bill may be drawn and accepted, retained until maturity, discounted with a bank, endorsed to another party, honoured on the due date, or dishonoured.
From the point of view of the Drawer, an accepted Bill represents an amount receivable and is recorded as a Bill Receivable. From the point of view of the Drawee or Acceptor, the accepted Bill represents an amount payable and is recorded as a Bill Payable.
Drawing and Acceptance of a Bill
When the Drawer draws a Bill on the Drawee and the Drawee accepts it, the existing amount due from the Drawee is converted into a Bill Receivable in the books of the Drawer.
In the books of the Drawer, the Drawee’s personal account is credited and the Bills Receivable Account is debited.
Journal Entry in the Books of Drawer:
Bills Receivable A/c Dr.
To Drawee’s A/c
The entry shows that the ordinary debt due from the Drawee has now been converted into a formal Bill Receivable.
In the books of the Drawee or Acceptor, the liability towards the Drawer is converted into a Bill Payable.
Journal Entry in the Books of Drawee:
Drawer’s A/c Dr.
To Bills Payable A/c
Thus, the same accepted Bill is a Bill Receivable for the Drawer and a Bill Payable for the Drawee.
Bill Retained Till Maturity and Honoured
The Drawer may retain the Bill until its due date. If the Drawee makes payment on maturity, the Bill is said to be honoured.
In the books of the Drawer, cash or bank is received and the Bills Receivable Account is closed.
Journal Entry in the Books of Drawer:
Cash/Bank A/c Dr.
To Bills Receivable A/c
In the books of the Drawee, the Bills Payable Account is closed because the liability has been discharged by payment.
Journal Entry in the Books of Drawee:
Bills Payable A/c Dr.
To Cash/Bank A/c
Therefore, on honour of the Bill, the Drawer receives the amount and the Drawee settles the Bill liability.
Discounting of a Bill with a Bank
The Drawer may require funds before the maturity date of the Bill. In such a case, the Bill may be discounted with a bank.
The bank pays the amount of the Bill after deducting a certain amount as discount. The amount received from the bank is debited to the Bank Account, the discount charged by the bank is debited to the Discount Account, and the Bills Receivable Account is credited.
Journal Entry in the Books of Drawer:
Bank A/c Dr.
Discount A/c Dr.
To Bills Receivable A/c
The amount credited to Bills Receivable is the full value of the Bill. The difference between the face value of the Bill and the amount received from the bank represents the discount expense.
For example, if a Bill of ₹10,000 is discounted and the bank deducts ₹500 as discount, the Drawer receives ₹9,500.
The entry will be:
Bank A/c Dr. ₹9,500
Discount A/c Dr. ₹500
To Bills Receivable A/c ₹10,000
Endorsement of a Bill
The Drawer may transfer a Bill Receivable to another party in settlement of an amount due to that party. Such transfer is known as endorsement of the Bill.
When a Bill is endorsed to a creditor, the creditor’s personal account is debited and the Bills Receivable Account is credited.
Journal Entry in the Books of Endorser:
Creditor/Endorsee’s A/c Dr.
To Bills Receivable A/c
The Bills Receivable Account is credited because the Bill is no longer held by the Drawer. The creditor’s account is debited because the liability towards the creditor is settled through endorsement of the Bill.
Dishonour of a Bill
A Bill is said to be dishonoured when the Drawee or Acceptor fails to make payment on the due date.
On dishonour, the amount previously represented by the Bill again becomes due from the Drawee. Therefore, in the books of the Drawer, the Drawee’s personal account is debited and the Bills Receivable Account is credited.
Journal Entry in the Books of Drawer, when the Bill was retained:
Drawee’s A/c Dr.
To Bills Receivable A/c
In the books of the Drawee, the Bills Payable Account is debited and the Drawer’s personal account is credited.
Journal Entry in the Books of Drawee:
Bills Payable A/c Dr.
To Drawer’s A/c
Dishonour of a Bill does not automatically mean that the amount becomes a Bad Debt. It means that the Bill has not been paid and the amount again becomes recoverable from the Drawee.
Dishonour of a Discounted Bill
If a Bill discounted with a bank is dishonoured on maturity, the bank recovers the amount from the Drawer.
In the books of the Drawer, the Drawee again becomes liable for the amount.
Journal Entry:
Drawee’s A/c Dr.
To Bank A/c
The Drawee’s Account is debited because the amount is again recoverable from the Drawee. The Bank Account is credited because the bank recovers the amount of the dishonoured Bill from the Drawer.
Dishonour of an Endorsed Bill
If a Bill endorsed to a creditor is dishonoured, the Endorsee or creditor may recover the amount from the Endorser.
In the books of the Drawer or Endorser, the Drawee again becomes liable and the creditor’s account is restored.
Journal Entry:
Drawee’s A/c Dr.
To Creditor/Endorsee’s A/c
This entry shows that the amount is again due from the Drawee and the liability towards the creditor or Endorsee is restored.
Summary of Important Accounting Entries
| Transaction | Journal Entry |
|---|---|
| Bill accepted by Drawee in Drawer’s books | Bills Receivable A/c Dr. To Drawee’s A/c |
| Acceptance in Drawee’s books | Drawer’s A/c Dr. To Bills Payable A/c |
| Bill honoured in Drawer’s books | Cash/Bank A/c Dr. To Bills Receivable A/c |
| Bill honoured in Drawee’s books | Bills Payable A/c Dr. To Cash/Bank A/c |
| Bill discounted with bank | Bank A/c Dr., Discount A/c Dr. To Bills Receivable A/c |
| Bill endorsed to creditor | Creditor/Endorsee’s A/c Dr. To Bills Receivable A/c |
| Bill dishonoured in Drawer’s books | Drawee’s A/c Dr. To Bills Receivable A/c |
| Bill dishonoured in Drawee’s books | Bills Payable A/c Dr. To Drawer’s A/c |
| Discounted Bill dishonoured | Drawee’s A/c Dr. To Bank A/c |
| Endorsed Bill dishonoured | Drawee’s A/c Dr. To Creditor/Endorsee’s A/c |
Exam Focus
An accepted Bill is recorded as Bills Receivable in the books of the Drawer and Bills Payable in the books of the Drawee or Acceptor.
On acceptance of the Bill:
Drawer’s Books → Bills Receivable A/c Dr. To Drawee’s A/c
Drawee’s Books → Drawer’s A/c Dr. To Bills Payable A/c
When a Bill is honoured on maturity, the Drawer debits Cash or Bank and credits Bills Receivable. The Drawee debits Bills Payable and credits Cash or Bank.
When a Bill is discounted with a bank, Bank Account and Discount Account are debited and Bills Receivable Account is credited.
When a Bill is endorsed to a creditor, Creditor or Endorsee’s Account is debited and Bills Receivable Account is credited.
On dishonour of a Bill, the amount again becomes due from the Drawee. Therefore, Drawee’s Account is debited in the books of the Drawer.
A very important examination point is that dishonour of a Bill does not automatically create a Bad Debt. The amount again becomes recoverable from the Drawee.