Bills of Exchange and

Promissory Notes-Part 3/6

CPT Section A Fundamentals of
Accountancy Chapter 7 Unit 3
CA. Ajay Lunawat

ACCOUNTING TREATMENT Basics

Accounting Entries for Seller

Debtor
A/c
Dr.
At the time of
To
Sales
A/c
credit sales
At the time of Bank A/c Dr.
receipt of
To Debtor A/c
payment

Accounting Entries for Buyer

At the time of Purchase A/c Dr.
credit
To Creditor A/c
purchase
At the time of Creditor A/c Dr.
making the
To Bank A/c
payment

Accounting Treatment

In the Books of
DRAWER

In the Books of
DRAWEE

Drawers Situation
Receives a Promissory Note or
Receives an accepted Bill of Exchange
Treatment :

A new asset : BILLS RECEIVABLE

Drawees Situation
Makes a Promissory Note or
Accepts a Bill of Exchange
Treatment :

A new liability : BILLS PAYABLE

ACCOUNTING TREATMENT
In the Books of Drawer

In the Books of Drawer

At the time of Acceptance of Bill

Bill Receivable A/c

To Debtor A/c

Dr.

Example 1
A accepts a Bill of exchange drawn on
him by B. In the books of B the entry
will be
Bills Receivable A/c
To As A/c

Dr.

Example 2
A sends to B the acceptance of D. In
this case also, the entry in the books
of B will be
Bills Receivable A/c
To As A/c

Dr.

DRAWER has 3 Options

Hold till
Maturity

Endorse

Discount
with Bank

Held Till Maturity

Drawer retains the bill till the date of maturity
No transaction to be recorded till the date of
maturity
On the date of maturity, either the bill is
Honored
Dishonored

Accounting for DRAWER

Held Till Maturity On Honour

Bank/Cash A/c Dr.

To Bills Receivable A/C

Endorsement of Bill
Drawer has a liability towards some third
party, say, creditor
He endorses the bill to the third party
The Bill Receivable, which is an asset, is
thus used to settle another liability

Accounting for DRAWER

At the time of Endorsement

Endorsee/Creditor A/c Dr.

To Bills Receivable A/c

Example 3
B draws a bill on A for Rs. 3,000. B has to pay C Rs.
3,000. He endorses this bill to C. What are the
entries to be passed
Bills Receivable A/c Dr. 3,000
To As A/c
Cs A/c

3,000
Dr. 3,000

To Bills Receivable A/c 3,000

Accounting for DRAWER

Endorsement Honour of Bill

No Entry in the books of DRAWER

Discounting with Bank

Drawer is urgently in need of money
He approaches a bank, hands over the B/R
to bank, and gets cash
The bank deducts sum amount called as
DISCOUNT in the form of finance charges

Accounting for DRAWER

Discounts with Bank

Bank/Cash A/C Dr.

Discount A/c
Dr.
To Bills Receivable A/C

Calculation of Discount
Discount is based on three factors
Amount of Bill (A)
Rate of Interest / Discount (R)
Balance Duration (T) = Maturity Date
Discounting Date

Discount = A * R/100 * (T)/ 12 or 365

Example 3
Ram gets Ghoshs acceptance for Rs. 12,000 discounted at
2 months at 12% p.a. The amount of discount will be
calculated as :
Amount of Bill (A) = Rs. 12,000
Rate of Interest (R) = 12 % p.a.
Balance Duration of Bill (T) = 2 months
Discount = Rs.12,000 X 12/100 X 2 /12 = Rs. 240

Example 4
On 1.1.2011, X draws a bill on Y for Rs. 50,000 for 3
months. X got the bill discounted 4.2.2011 at 12% rate.
The amount of discount on bill will be
Maturity Date = 4.4.2011
Amount of Bill (A) = Rs. 50,000
Rate of Interest (R) = 12 %
Balance Duration of Bill = 4.4.2011 4.2.2011 = 2 months
Discount = Rs. 50,000 X (12/100) X (2/12) = Rs. 1,000

ACCOUNTING TREATMENT
In the Books of Drawee

In the Books of Drawee

At the time of Acceptance of Bill

Drawer/Creditor A/c
To Bills Payable A/c

Dr.

DRAWEE has 3 Modes of Settlement

Hold till
Maturity

Endorse

Discount
with Bank

Accounting for DRAWEE

Held Till Maturity On Honour

Bills Payable A/c

Dr.
To Cash / Bank A/c

Accounting for DRAWEE

Endorsement On Honour

Bills Payable A/c

Dr.
To Cash / Bank A/c

Accounting for DRAWEE

Discounts with Bank On Honour

Bills Payable A/c

Dr.
To Cash / Bank A/c

Who can be the PAYEE

Payee is the party to whom the payments is made
In case of held till
maturity

DRAWER

In case of
Endorsement

ENDORSEE

In case of Discounting
with Bank

BANK

Question No 1
Under which circumstances drawer and payee is
same person:
(a) When drawer discounted the bill with banker
(b) When drawer endorse the bill to the third party
(c) When drawer held the bill till maturity
(d) When drawee rejects to accept the bill

Answer (c)

Question No 2
X draws a bill on Y. X endorsed the bill to Z. The
payee of the bill will be

(a) X

(b) Y

(c) Z

(d) None
Answer (c)

Question No 3
Kuntal draws a bill on Shyam for Rs 3,000. Kuntal
endorsed it to Ram. Ram endorsed it to Rahim. The
payee of the bill will be:
a) Kuntal

b) Ram
c) Shyam
d) Rahim

Answer (d)

Question 4
Katraks acceptance to P. Patel for Rs. 5,000 discharged
by P. Modys acceptance to Katrak for a similar amount.
Which is correct entry
a. Bills Payable A/c
Dr. 5,000
To Bills Receivable A/c
5,000
b. Bills Receivable A/c
Dr.
5,000
To Bills Payable A/c
5,000
c. P.Patels A/c
Dr.
5,000
To M.Modys A/c
5,000
d. M.. Modys A/c
Dr.
5,000
To P. Patels A/c
5,000

Answer (a)

THANK YOU