Bills of Exchange Accounting Entries
Bills of exchange account entries are also known as an instrument that is used in writing any unconditional or conditional statement or a statement that is signed by a maker which directs that a particular person has to pay the specified amount to bear the product. The bill of exchange has to satisfy some specific terms and conditions. One of them is that the terms and conditions should be written and not just said. Also, it should be signed by a drawer. Lastly, three parties should be present while the instrument carries on to be exhibited.
Journal Entries of Bills of Exchange
Three different parties help in the understanding of journal entries for bills of exchange. They are:
Drawer:
A drawer is a person who makes the bill of exchange. He or she is the person who is responsible or has the duty of selling goods and receiving the payments from those goods.
Acceptor or the Drawee:
He or she is the person who is responsible for the drawing of the bill of exchange. This particular individual has the duty of making the payment to the ones who supply the goods.
Payee:
Payee is the individual to whom the payment is supposed to be made. A payee can be the drawer himself if there is no presence of a third party in the matter.
Accommodation Bill Journal Entries
Recording Transactions
Accounting bills can be classified into two categories:
Bills Receivable
Any bill of exchange is treated like a bill receivable only by the one who is entitled to receive the total sum that is due to it. When one draws a bill that is received by the debtors, the bill receivable is on maturity and it is held up to a specific period.
Bills Payable
A bill payable refers to the bills that one has to pay on the due dates. The bill becomes liable once it is paid by a person. This means that the same bill is received by one party and paid by another party.
Bill of Exchange All Journal Entries
Discounting of Bills
When the holder of any bill has a sudden need for money then she or he can sell it to the bank with its given amount.
Bill of exchange is known as the shortcoming funding as a means of exchange.
Any bill can carry out the discounting bill only if the bank states establishing the process.
This results in the immediate payment of the amount and the bill are reduced by the discount cost.
Bill of exchange is then sent to the maturity date collection
The acceptor does not have any concerns regarding the discounting bill.
Goods can be bought or sold for cash or on credit. When products are sold or purchased with cash, payment is made immediately. If products are sold/purchased on credit, however, payment is deferred until the latest date. In such a case, the company usually relies on the party to pay by the due date. However, in some cases, in order to minimize any risk of delay or failure, a credit note is used, in which case the buyer assures the seller that the payment will be canceled in accordance with the agreed terms.
Under the Negotiable Instruments Act of 1881, an exchange bill is a non-negotiable tool. It is a writing tool. Includes an unconditional order authorizing someone to pay a certain amount of money for a given date. Drawer, Drawee, and Payee are three people involved.
An Exchanged Bill Must be Written in Order For it to Take Effect.
It is a payment order.
Unconditional payment order.
The exchange bill must be signed by the person who created it.
The amount due must be guaranteed.
The date on which the payment is made must also be clear.
An exchanged bill must be made payable to an individual.
The amount specified in the trade bill must be paid before or before the due date or at the end of the predetermined period.
Must be stamped in accordance with legal requirements.
A Drawer is a person who creates or designs a bill before sending it to an artist or payer for approval. The Bill becomes a Draw-on Debt and a Debt is designated or payable upon receipt.
The Drawee has the option to approve the bill for someone else, who will be the owner of the bill. The owner submits the bill to the nominee for payment by the due date.
The payer is one person who is responsible for paying the debt. In most cases, the nominee is also the payer, however, there are cases where a third party pays the debt on behalf of the nominee, where the third party becomes the payer.
The Exchange Bill Involves Three Parties:
An exchanged bill was created by a Drawer. The seller/creditor who is in debt to the creditor may write an exchange bill to the consumer/debtor who is in debt. After writing the exchange bill, the drawer must sign as the creator of the exchange bill.
The person to whom an exchange bill is issued is known as an artist, drawee, buyer or debtor of goods which is the subject of an exchange bill issued.
The recipient is the person who will receive the money. If he or she keeps the debt up to the due date, he or she will be paid the amount he or she owes.
Promise Notes
A promissory note is defined as a written instrument (not a banknote or cash) containing an unconditional promise signed by the manufacturer to pay only a certain amount of money or on behalf of a specific person, or manager. of the instrument, in terms of the Negotiable Instruments Act 1881. The pledge note paid by the supervisor, on the other hand, is prohibited under the State Bank of India Act. As a result, a promissory note cannot be paid to the manager.
Benefits of the Bill of Exchange
An exchange loan is a mechanism that provides a framework for allowing credit transactions between a lender and a lender and a borrower/debtor as agreed.
Time and condition guarantee: The lender knows when to repay the loan, and the borrower is fully aware of the deadline. He has to pay a fee. This is because the terms and conditions are very important.
Regarding credit relationship with the lender, as required. The exchange bill clearly states the amount to be paid, the due date, the amount of interest to be paid, if any, and the place of payment.
An exchanged bill is a simple form of credit that allows a consumer to buy goods on credit and pay off the balance at the end of the credit period. Even after a loan is extended, the seller may receive a faster payment by reducing the bank debt or authorizing it on behalf of a third party.
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FAQs on Bills of Exchange: Journal Entry Solutions
1. What is a Bill of Exchange in accounting and who are the parties involved?
A Bill of Exchange is a written, unconditional order signed by the maker, directing a certain person to pay a specific sum of money on demand or at a future date to a certain person or to the bearer of the instrument. As per the Negotiable Instruments Act, 1881, there are three primary parties involved:
- The Drawer: The person who creates the bill (the seller or creditor).
- The Drawee: The person who is ordered to pay the bill (the purchaser or debtor). Upon signing the bill, the drawee becomes the 'acceptor'.
- The Payee: The person to whom the payment is to be made. The drawer can also be the payee.
2. What are the basic journal entries for a Bill of Exchange in the Drawer's books?
In the books of the Drawer (the person who draws the bill), the key journal entries are:
- When the bill is drawn and accepted: The entry is passed to record the new asset.
Bills Receivable A/c Dr.
To Drawee's Personal A/c - When the bill is honoured on maturity: The entry is passed to record the receipt of money.
Cash/Bank A/c Dr.
To Bills Receivable A/c - When the bill is dishonoured on maturity: The original entry is reversed to make the Drawee a debtor again.
Drawee's Personal A/c Dr.
To Bills Receivable A/c
3. What are the corresponding journal entries for a Bill of Exchange in the Drawee's books?
In the books of the Drawee (the person who accepts the bill), the key journal entries are:
- When the bill is accepted: The entry is passed to record the new liability.
Drawer's Personal A/c Dr.
To Bills Payable A/c - When the bill is honoured on maturity: The entry is passed to record the payment made.
Bills Payable A/c Dr.
To Cash/Bank A/c - When the bill is dishonoured on maturity: The acceptance entry is reversed to re-establish the Drawer as a creditor.
Bills Payable A/c Dr.
To Drawer's Personal A/c
4. What is the difference between a Trade Bill and an Accommodation Bill?
The primary difference lies in their purpose. A Trade Bill is drawn to settle a genuine trade transaction, like the sale of goods on credit. Its purpose is to facilitate credit in business. An Accommodation Bill, on the other hand, is drawn without any underlying trade transaction. Its sole purpose is to provide financial assistance to one or both parties involved, who can then discount it with a bank to raise short-term funds.
5. How do the journal entries change if the Drawer discounts the bill with a bank?
When a drawer discounts a bill with the bank before its due date, the journal entry in the Drawer's books is:
Bank A/c Dr. (with the amount received)
Discounting Charges A/c Dr. (with the discount deducted by the bank)
To Bills Receivable A/c (with the full value of the bill)
If the bill is honoured by the drawee on the due date, the drawer passes no further entry. However, if the bill is dishonoured, the drawer must record the dishonour by debiting the Drawee and crediting the Bank.
6. What is the journal entry for the dishonour of a bill and the payment of noting charges?
When a bill is dishonoured, the bill's acceptance is first cancelled. If the holder of the bill incurs legal expenses called 'Noting Charges' to prove the dishonour, these are also recovered from the Drawee. The combined journal entry in the Drawer's books (assuming the Drawer held the bill) would be:
Drawee’s A/c Dr. (with Bill Amount + Noting Charges)
To Bills Receivable A/c (with Bill Amount)
To Cash/Bank A/c (with Noting Charges paid)
7. Why are 'Noting Charges' debited to the Drawee's account upon dishonour?
Noting charges are an expense incurred to obtain official proof of dishonour. While the holder of the bill (e.g., the Drawer or the bank) initially pays these charges, the legal liability for these charges falls upon the Drawee. The dishonour occurred because the Drawee failed to make the payment. Therefore, these charges are ultimately recovered from the Drawee, which is why their account is debited for the amount of noting charges paid on their behalf.
8. What is meant by 'Renewal of a Bill' and what are the typical journal entries involved?
Renewal of a bill is a process where the old bill is cancelled and a new bill is drawn for an extended period, often including interest charges. This happens when the Drawee is unable to pay on the due date and requests more time. The process involves four steps and corresponding entries in the Drawer's books:
- Cancellation of the old bill: Drawee’s A/c Dr. To Bills Receivable A/c.
- Charging interest for the extended period: Drawee’s A/c Dr. To Interest A/c.
- Receiving any part payment (if agreed): Bank A/c Dr. To Drawee’s A/c.
- Drawing and accepting the new bill: New Bills Receivable A/c Dr. To Drawee’s A/c.
9. Is any journal entry passed by the Drawer when a bill endorsed to a creditor is honoured by the Drawee? Explain why.
No, the Drawer passes no journal entry when an endorsed bill is honoured. The reason is that when the Drawer endorsed the bill to a creditor (Endorsee), they transferred their right to receive payment. The accounting entry at the time of endorsement (Endorsee's A/c Dr. To Bills Receivable A/c) already settled the Drawer's asset. On the due date, the transaction is strictly between the Endorsee (the new holder) and the Drawee (the acceptor). The Drawer is no longer a party to this specific transaction unless the bill is dishonoured.
10. What is the key difference in accounting treatment between a Bill of Exchange and a Promissory Note?
The key difference in accounting treatment stems from who creates the instrument. In a Bill of Exchange, the creditor (Drawer) draws the bill, so it is 'Bills Receivable' for the Drawer and 'Bills Payable' for the Drawee. In a Promissory Note, the debtor (Maker) creates the note and promises to pay. Therefore, for the Maker, it is a 'Bills Payable' from the start, and for the person to whom it is given (Payee), it is a 'Bills Receivable'. A Bill of Exchange requires formal acceptance by the Drawee, whereas a Promissory Note does not require acceptance as it is a promise made by the debtor themselves.
