Entering and Posting Bill of Exchange Usage

When you deposit a bill of exchange at a bank, you must post bill of exchange usage. The possible types of usage are as follows: Discounting Collecting Forfaiting

You can post the usage in various ways: You can post manually once the bill amount has been credited to your bank account and is evidenced by a bank statement. You can find more information on mass posting of bills of exchange in Posting Bill of Exchange Presentation

Only manual posting is described in the text that follows. If you require further information on automatic processing, see the online documentation for this program.

Entering and Posting Bill of Exchange Usage

You post bill of exchange usage once the bank credits the bill of exchange to your bank account. You post the cash receipt to your bank account and post the bill of exchange charges to the corresponding expense accounts. The system creates the offsetting entry automatically. It is posted to the bill of exchange liability account (bank subaccount). If the drawee does not pay the bill of exchange on the due date, the bill is subject to protest. The holder of the bill of exchange uses his or her right of recourse and submits the bill of exchange to someone connected with it. All those who have issued, accepted, or endorsed a bill of exchange are liable to the holder as joint debtors. This liability to recourse is managed as a potential bill liability in the system, and is shown in a separate account (potential bill liability account). The system posts to this account automatically when you post the bill of exchange usage. If you wish, you can also manage a separate liabilities account for each usage type and for each bank. The usage indicator differentiates the possible usage types. You do not reverse the bill liability until after the due date and the protest period have elapsed and there is no longer any liability to recourse. The posting procedure is the same no matter how the bill of exchange is used. To start with, you enter the header data and posting specifications in the first screen. You then select the bills of exchange for which you want to post the usage. If no further line items are required, you post the document. The system offers you two options for sorting open items: 1. For individual processing of bills of exchange, choose Accounting Financial accounting Accounts receivable Document entry Bill of exchange Discounting (Collection, Forfaiting)

For mass processing of bills of exchange, choose Accounting Financial accounting Banking Input Bill of Exchange presentation From account The system displays a screen where you can enter bill of exchange usage.

If you enter the system with Bank accounting, the bill of exchange presentation is posted in the foreign currency without exchange rate differences (bank subaccount/bank commitment account). You enter via Accounts Receivable and post a bill of exchange in a foreign currency. This is posted to an exchange rate difference account if the foreign currency to local currency ratio has changed between posting and presentation of the bill of exchange, and you have only entered the foreign currency amount. To avoid any exchange rate differences, enter the foreign currency amount and the local currency amount of the bill of exchange you want to present. Carry out these steps too: 2. Enter data in the document header in the required fields. The field is filled with D, F or I according to the usage type. Besides the Bank account and the Amount, the following fields are also relevant: Use You use the usage indicator to differentiate between the bill liability accounts (bank subaccounts). The usage indicator can be used later as a selection criterion when the bill liability is cleared. In the standard system, D is used for Discounting, F for Forfaiting, and I for Collection. Bank charges In this field, enter the bank fees that the bank has charged for accepting the bill of exchange. The system uses the usage indicator to determine the corresponding expense account and then posts the bank charges.

3.

Choose Edit

Select bill of exchange

You enter the document numbers of the bills of exchange that you have deposited in the bank in the following screen. If you know which document items the bill of exchange referred to, you can enter them here.

4.

Enter the document numbers of the bills of exchange that you require. If the document contains several bill of exchange line items, these are displayed together for you to select the appropriate line item.

In such a case you then select the required bills by choosing the corresponding bill of exchange line items followed by Edit Continue processing. Choose continue You return to the selection screen for bills of exchange.

5.

You post the bill of exchange usage with Document Enter.

The system posts the incoming payment to the bank account, the bill of exchange charges to the corresponding expense accounts, and the potential bill liability to the bank subaccount.

Reversing the Bill Liability

After the expiration date and the country-specific protest period have elapsed, you can reverse the bill of exchange liability. There is no longer any recourse liability (bill of exchange liability). At this point, the bill of exchange receivable is still shown on the customer account, the special G/L account and the liability account (bank clearing account), as shown below. These accounts have to be cleared.

Proceed as follows to reverse the bill receivable and bill liability as follows:

1.

Choose Posting. Bill of exchange Reverse contingent liability. The screen where you enter document header data and selection data is now displayed.

2.

Enter the document header data, the account number of the special G/L account for bills of exchange receivable, and the due date. All further bill of exchange selection data is optional. The main fields for reversing the potential bill liability are: Use The usage indicator is applied to select specific bills of exchange for which the liability is to be reversed. Due date

The system compares the date you enter with the due date (expiry date) in the document line item, taking into account the protest period (payment period). The protest period is countryspecific. The system selects bills of exchange due on or before this date. Document number You can limit the number of bills selected by specifying a document number or a document number interval. Customer You can determine how many bills are selected by specifying a customer account number or an account number interval.

3.

Choose Edit Edit line items. The system displays the selected bills of exchange.

4.

Place your cursor on the line item that you want to select, and choose Edit Item on/off. The selected line item is highlighted or displayed in another color.

5.

Choose Document Post.

The system clears the bill of exchange receivable in the customer account, the special G/L account and the bill liability account (bank clearing account).

Bills of exchange are financial documents that require the individual or business that is addressed in the document to pay a specified amount of money on a date that is cited within the text. Considered to be a negotiable instrument, the date for the demand to pay generally ranges from the current date to a date within the next six calendar months. This type of document will also require the authorized signature of the debtor in order to be considered legal and binding. As an unconditional order to pay a fixed sum of money to a creditor, the bill of exchange can take on many different forms. One of the most common examples is the common bank check. A check specifies who is to receive the funds, with the order to pay the face value of the check to the order of the creditor. The exact amount of the payment is specified. The date specified on the check is often the issue date for the check, but may also be the date that the bank is to honor the payment. This process is referred to as post dating a check, since the creditor will physically receive the check at some time before it will be honored. It is also possible to establish one in the form of a . Like the bank check, drafts are normally set up with a fixed sum of payment, and with specific instructions of when to issue the payment to the creditor. The bill of exchange can be a very simple document, or one that is very detailed. In many countries around the world, the use of one is a common means of conducting business, and is often accompanied by an . In situations where the document is not honored, the holder is free to take legal action against the debtor according to local laws, or to sell it to a collector at a discounted rate of exchange.

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Also known as a discounting of bill, a bill discounting is a process that involves effectively selling a bill to a bank or similar entity for an amount that is slightly less than the par value and before the maturity date associated with the bill of exchange. The debtor tenders payment to the new owner of the discounted bill in the full amount agreed upon originally. This approach allows the issuer of the bill to receive cash before the actual due date associated with the bill, while also allowing the buyer to make a modest profit on the cash advance extended to the bills originator. One of the easiest ways to understand how bill discounting works is to consider a bill of exchange issued by ABC Company to its client, XYZ Company. ABC Company decides to cash in the outstanding bill in order to make use of the revenue now rather than later. To this end ABC approaches a bank with an offer to sell the bill for 90% of the par value. The bank looks over the transaction and decides the deal is viable. Upon approval, ABC receives 90% of the par value of the bill and instructs XYZ Company to remit payment to the bank. Once the bank receives full payment from XYZ, the deal is considered complete.

iscounting of a Bill of Exchange:

When the acceptor of a bill of exchange is a reputable person the bill is as good as money, and any bank will discount it.

Definition and Explanation of Discounting a Bill:

If the drawer of the bill does not want to wait till the due date of the bill and is in need of money, he may sell his bill to a bank at a certain rate of discount. The bill will be endorsed by the drawer with a signed and dated order to pay the bank. The bank will become the holder and the owner of the bill. After getting the bill, the bank will pay cash to the drawer equal to the face value less interest or discount at an agreed rate for the number of days it has to run. This process is know as discounting of a bill of exchange.

Example:
For example, a drawer has a bill for $10,000. He discounted this bill with his bank two months before its due date at 15% p.a. rate of discount. Discount will be calculated as the follow: 1,000 15/100 2/12 = 250 Thus the drawer will receive a cash worth $9,750 and will bear a loss of $250. The bank will keep this bill in possession till the due date. On maturity (due date) the bank will present the bill to the acceptor and will receive cash from him (if the bill is honored). In case, the acceptor does not make the payment to the bank, then the drawer on any person who has discounted the bill have to take this liability and will pay cash to the bank. Until the bill is honored on the due date, there is always a chance that the drawer will become liable on the bill. This is called a contingent liability - a liability that will only arise if a certain event occurs - the acceptor does not honor the bill.

Drawer discounted the bill for $9,750 and suffered a loss of $250. In other words drawer had to pay the price in order to receive the cash before maturity.

When a bill is discounted by the holder, the following entries are passed in the books of drawer, drawee and bank: When the bill is drawn by the drawer (A) and accepted by drawee (B) Drawer's Journal B/R A/C..................XXX B A/C..................XXX (Acceptance received) When a bill is discounted at bank: Bank A/C......................XXX Discount A/C.................XXX B/R A/C....................XXX (Bill discounted at bank) No journal entry at the time of discounting of bill in the books of drawee. Drawee's Journal A A/C..................XXX B/P A/C.................XXX (Acceptance given)

The entry for discounting a bill in drawer's journal shows increase in drawer's bank balance at present value (face value - discount given), increase in a loss (discount given) and decrease in an asset (bill receivable). The entry in the journal of bank will be as under: When a bill is discounted at bank: B/R A/C............XXX Drawer A/C........XXX Discount A/C.....XXX (Bill discounted) This journal entry indicates, increase in assets (B/R) in the bank, increase in a liabilities (the amount transferred to the drawer's account) and in revenue for the bank (discount). When the bank presented the bill to the acceptor on maturity date and the acceptor met his obligation, the following entries are passed:

Drawer's Journal

Drawee's Journal Bill payable A/C...XXX Cash A/C.........XXX (Acceptance honored and cash paid to bank on presentation of the bill)

Bank's Journal Cash A/C.......XXX B/R A/C.........XXX (Cash received from acceptor equal to full value of the bill)

No entry in the books of drawer.

Note that the drawee pays full amount of the bill to the bank at the time of maturity but bank pays face value less discount to the drawer when drawer discounts the bill with the bank. This difference (discount) is revenue of the bank and expense of the drawer

Discounting a Bill of Exchange:

Learning Objectives:

1.

Make journal entries in the books of creditor and debtors at the time of discounting of bill of exchange.

If the holder of a bill is need of money before the due date of the bill he may sell it to the bank. The bank (buyer) will give cash fir it in consideration of a small charge. This is calleddiscounting the bill. The amount deducted by bank of the bill from the face value of the bill is called "discount". The discount is usually calculated at a certain rate per annum on the amount of the bill. The accounting entries will be:

Creditor's Books
(a) When a bill of exchange is discounted. Bank account (discounted value) [Dr.] Discount account (amount of discount) [Dr.] To Bills receivable account [Cr.]

Debtor's Books:
The acceptor has no concern with the discounting of the bill. He has to pay it on the due date to the holder. Whoever he may be. There will be no journal entry for discounting of the bill of exchange.

Example:
X draws a three month bill for $2,000 on Y on the 1st January, 1991 for the value received. Y accepts it and returns it to X, who discounts it on 4th January, 1991 with his bank at 6 per cent per annum. Y pays acceptance on the due date. Record the transactions in the books of X and Y.