BILLS OF EXCHANGE & PROMISSORY NOTES

A.

TRADE BILL (GENUINE BILL)

A.1 Meaning of Bills of exchange

A bill of exchange has been defined as:
an " instrument in writing
containing an unconditional order
signed by the maker /drawer
directing a certain person (drawee)
to pay a certain sum of money only
to or to the order of a certain person or to the bearer of the
instrument". (payee)
Draft of a Bill of Exchange
To,
Mr. B
Gokulpeth
Nagpur

Accepted
Signed B

Stamp

Pay Rs. 5000/- (Rupees five thousand only) to me or my order, 30 days

after the date of bill, for value received.
14th April 2012
Nagpur

Signed by A

A cheque is a bill of exchange but all bills of exchange are not

cheque.
In above bill of exchange A is drawer as well as payee and B is
drawee.
A.2 Parties to a bill of exchange:
(i)
Drawer: Drawer is a person, who draws the bill. He is the
creditor who has right to receive the money;
(ii) Drawee: Drawee (acceptor), is the person to whom the bill
is addressed or on whom it is drawn and who accepts the
bill. He is the debtor; who is liable to pay and
(iii) Payee: Payee is the person who is to receive payment under
the bill. The drawer in many cases is also the payee.
(iv) Endorsee: He is the person in whose favour the bill is
endorsed by the drawer. He is usually the creditor of the
drawer.

A.3 Meaning of Promissory Note:

A Promissory note is:
an instrument is writing,
not being a bank note or currency note,
containing an unconditional undertaking (promise)
signed by the maker (promisor)
to pay a certain sum of money only to or to the order of a certain
person. (promisee)

Draft of a Promissory Note

To,
Mr. A
Sitabuldi
Nagpur

Stamp

I hereby promise (undertake) to pay you or your order a sum of Rs.

5000/- (Rupees five thousand only) one month after the date of this
note, for value received.
20th April 2012
Nagpur

Signed by B

In the above promissory note B is promisor (same as drawee) A is

promisee (payee)

A.4 Parties to a promissory note:

There are two parties to promissory note.
(i)
Maker/ promisor: He is the person, a debtor who makes the
promissory note i.e. promises to pay.
(ii) Promisee: He is the person, a creditor in whose favor a
promissory note is made. He is entitled to receive the
money.

A.5 Demand bill

Bill which is payable as and when demanded by payee is known as
demand bill,
That means no specific period is specified.
No days of grace are added.
A.6 Usance bill or Time bill
Usance bill or time bill is a bill payable after a certain period
specified in the bill.
Say after 30 days or after 2 months etc.
Such period is counted from (i) the date of bill/date of drawing the
bill or (ii) date of acceptance/date of presentation, as may be
mentioned in the bill.
While calculating due date, 3 days of grace are added.

A.7 Accounting for transactions of bills/ promissory notes

For the purpose of accounting, it makes no difference whether it is
a bill of exchange or promissory note.
It should be classified as Bills Receivable (BR) or Bills Payable (BP)
for the party in whose books of account entry is being made.
For the purpose of accounting, bill is Bills Receivable for seller of
goods and it is Bills payable for the purchaser of goods.
After receiving the bill, the seller (drawer) can deal with the bill in
either of the following ways:
(i) Retain it and present on the due date for payment or
(ii) Can discount the bill with bank & get the amount
immediately, then the Bank will present the bill for payment
on due date or
(iii) Can transfer/Endorse the bill in favor of some other party
to whom he may be liable to pay, who will present the bill for
payment on due date or
(iv) Can send it for collection through bank & will get the
payment through Bank on due date.
The purchaser after accepting the bill is not concerned with the above
treatments of bill i.e. it will not require any accounting entry in his
books. On the due date whosoever will present the bill to him, purchaser
will either pay (i.e. honour) or will not pay (i.e. dishonour) the bill.
A.8 Noting of Bill and Noting charges
When a bill is dishonored the holder of the bill (holder can be
drawer, endorsee or Bank) may present it to notary public (A
Government appointed Authority),
Notary public will present the bill to the acceptor of the bill and if
he doesn't pay, the notary public will note the fact of dishonor on
the bill.
This (Noting) becomes a final evidence for court cases.
The charges charged by notary for this service are called noting
charges.
Noting charges will be paid by the holder of the bill but ultimately
it will be recovered from the drawee/acceptor (Party which
dishonors the bill).
Hence, noting charges will be an expense for the drawee
(acceptor) of the bill & income for the Notary Public.

Entry for all normal transactions of bills

Question A.1:
A sells goods worth Rs. 1800 to B, A draws on B four bills dated 01Jan-2013 which B duly accepts and returns to A. 1st bill is for Rs. 300/-,
the second is for Rs. 500/-, the third is for Rs. 600/- and the fourth is for
Rs. 400/-. The second bill is endorsed to C, The third bill is discounted
with the Bank for Rs. 590/- on 4th January, and the fourth bill is sent for
collection.
Pass the entries in the journal of A & B assuming
(1) The bills are met on maturity and
(2) Bills are dishonored on maturity.

A.9 Renewal of a bill

On the due date, if acceptor is unable to pay the amount of bill,
then he can approach the Drawer, for renewal of the bill.
Renewal means giving further time for the payment of bill.
For this delay the Drawer will/may collect Interest from acceptor
on the delayed amount [total amount (-) amount if any paid at the
time of renewal] for delayed/extended period.
Renewal will involve cancellation of the old bill, accruing the
interest and preparing a new bill for balance amount with interest.
(Some part amount may be paid immediately)
Entry for Renewal of the Bill on due date
Question A.2:
Mohan sold goods on 1st September, 2012 for Rs. 2,50,000/- to Sohan.
Sohan immediately accepted a 3 month bill. On the due date Sohan
offered to pay Rs. 50,000 and requested for the renewal of the bill for a
further period of two months. Sohan agrees to pay interest @ 9% per
annum to be included in the new bill. Determine the amount of the new
bill. Give the necessary journal entries for renewal.

A.10 Retirement of the bill

Retirement of the bill means that payment is made before the due
date.
Therefore, normally the receiver will allow some rebate/discount to
the payer.
Entry for payment/ receipt will be recorded net of rebate.
Thus retirement is the opposite of renewal. In retirement payment
is made early whereas in renewal payment is delayed.
Retirement of Bill
Question A.3:
On 1st January, 2012, A sells goods for Rs.10,000 to B and draws a bill
at three months for the amount. B accepts it and returns it to A. On 1st
March, 2012. B retires his acceptance under rebate of 12% per annum.
Record these transactions in the journals of A and B.

Endorsed Bill dishonoured

Question A.4:
Neeraj sold goods to Dhiraj for Rs. 4,000 on 1st May, 2011. On the same
day, he drew on Dhiraj a bill for the amount for 3 months which Dhiraj
duly accepted. Neeraj endorsed the bill to Suraj. Just before the due
date, on 2nd August, 2011 Dhiraj became insolvent and the bill was
dishonored. Suraj paid Rs. 100 as noting charges.
Later, Dhirajs estate could pay only 40% of the amount due. Pass the
journal entries in the books of Neeraj.
Calculation of interest/rebate
Question A.5:
Calculate interest /discount/rebate @ 12% in following cases
(a) A bill of Rs. 10,000 for 3 months discounted after one month.
(b) A bill of Rs. 5,000 for 3 months retired one month before the due
date.
(c) A 3 month bill of Rs. 10,000 renewed for 2 month on the condition
that 30% is paid immediately.
(d) A 3 month bill of Rs. 5,000 was dishonoured, noting charges were
Rs. 100 & bill is being renewed for 4 month.

B.

ACCOMODATION BILL

Meaning & Purpose of Accommodation Bill

Accommodation bill is the bill drawn for financial accommodation
(help) of one or both the parties.
It is not backed by any trade transactions.
Parties involved will be related to each other.
Either one bill may be drawn or both may draw bill on each other.
Such bills are discounted, proceeds are used & on maturity
amount is returned to Bank.
Alternatively both parties may draw bill on each other & get them
discounted respectively.
Entries are passed in the books of two parties exactly in the same
way as for ordinary bills. The only additional entry to be passed is
for sending the remittance to the other party and also for debiting
the other party with the requisite amount of discount.
Accommodation Bill discounted and proceeds shared
Question B.1:
X draws on Y a bill of exchange for Rs. 1500/- on 1st April, 2012 for 3
months. Y accepts the bill and send it to X who gets it discounted for Rs.
1470/-. X immediately remits Rs.490/- to Y. On the due date, X, remits
the amount due, and Y honors the bill. Give the journal entries in the
books of X and Y.

Accommodation Bill Cross Billing

Question B.2:
On 1st January, 2013 Mohan draws on Ram a bill for 3 months for Rs.
2000/- which Ram duly accepts. Mohan discounts the bill for Rs. 1980/- On
the same date Ram draws on Mohan a bill for Rs. 2000/- which is accepted
by Mohan. Ram gets the bill discounted with his bankers at 6 per cent. On
the due date Ram and Mohan meets bill. Give journal entries in the books
of Mohan & Ram.