Bills of Exchange: ~ All In One

Accounting For Bills of Exchange:
Learning Objectives:
Define and explain bills of exchange.
What are its advantages?
How does a bill differ from a promissory note?
How a bill of exchange functions?
What are the accounting treatments of drawing, accepting, discounting, and paying a bill.

Our present day business transactions are mostly conducted on credit basis. It means that the buyer of goods pays the price of goods purchased within a fixed time after the date of the transaction.
On the other hand the seller has to wait for his money. In many cases the seller cannot afford to do so. He desires payment at the time of selling the goods; but the buyer is not in a position to pay. Then how the matter can be settled so that both the buyer and seller are satisfied? The bill of exchange is one of the means of doing this.

Definition and Explanation of Bill of Exchange:
A bill of exchange has been defined as an unconditional order in writing addressed by one person to another; signed by the person giving it, requiring, the person to whom it is addressed to pay on demand or at a fixed or determinable future time, a certain sum in money to or to the order of a specified person or to bearer.

Difference Between Inland and Foreign Bills:
The bill of exchange may be inland or foreign. An inland bill is a bill which is both drawn and payable within the a country. A foreign bill is one which is drawn in one country but accepted and payable in another country.

Parties to a Bill of Exchange:
There are three parties in a bill:

Drawer
Drawee
Payee

Specimen/Sample of a Bill of Exchange:

	Stamp	Amount	City 1st January, 2010

Three month after date pay to Z or order the sum of [amount] only for value received
	To,
		B (Drawer) City	Sd.X. (Drawer)

Advantages of Bills of Exchange:
Learning Objective:
What are the main advantages of bills of exchange?

The following are the advantages of a bill of exchanges:
It is a legal evidence of debt.
It is a convenient method for the transfer of debt
A creditor can sue on the bill itself
It is a negotiable instrument and can be transferred for settlement of one's debt without difficulty.
It can be cashed before due date by discounting.
A debtor enjoys the benefit of full period of credit.
It affords an ease means of transmitting money from one place to another.
It is for the aforesaid advantage, a buyer can easily be included to purchase goods and accept bills drawn on him by the seller when he is not prepared to pay cash at the time of purchase.

How a Bill of Exchange Functions:
In order to fully grasp the transactions relating to bill of exchange we thoroughly learn the procedure. The following example will make it clear.

Suppose A sells goods to the value of $500 to B. The most ready means of closing the transaction will be cash payment by B to A. But payment of this nature are not many in actual practice. The greatest volume of business is done on credit. That being the case A will have to wait for some time to receive payment from B. A, merchant can hardly afford to be out of funds for long. Moreover, to sell goods on credit is rather a risky job. Therefore as soon as A sells goods to B, he will draw a bill for $500 on B and forward the same to him together with the goods with instructions to B to accept the bill and return the same to A. Upon receipt of the bill, B would write on the face of the bill "accepted" and put his signature below. It means that B approves the bill and also binds himself to pay the amount thereof when due. The bill is thus complete and comes back to A to remain in his possession till maturity or can be endorsed or discounted by him. On the due date the holder of the bill presents it before the acceptor and receives payment of the bill from the acceptor.
Thus the bill of exchange is the instrument, rather the mechanism which finances the major portion of all commercial transactions these days and it helps both the debtor and the creditor alike.

Tenor and Usance:
Tenor is the period of time after which a bill becomes payable. Thus, where a bill is payable after 90 days from the date of drawing or acceptance, the tenor of the bill is 90 days. Bill may be made payable:
On Demand. The bill so drawn is payable as soon as its payment is demanded by the holder of the bill.
A Sight. A bill of exchange so drawn becomes payable immediately it is brought to the notice of the drawee.
After Date. When a bill is drawn 'after date' its due date is calculated from the date of the bill.
After Sight. When a bill is drawn 'after sight' its due date is calculated from the date on which it is sighted or seen by the drawee i.e., from the date of acceptance by the drawee.
Usance. It is the usual time of payment of a bill of exchange as fixed by custom.
Days of grace:

In calculating the due date of payment it is customary in business circle to allow three additional days to the drawee or acceptor to meet the bill. The extra days are called "days of grace" or "grace days". Thus a bill dated 15th March, for three months becomes payable on the 18th June and this is the due date.

Holder:
Holder of a bill is a person who is entitled in his own right to the possession thereof and to claim the amount due thereon.

Holder in Due Course:
When a person takes a bill, complete and regular on the face of it and before its due date, in good faith and for valuable consideration he is called the holder in due course.

Acceptance:
When a drawee signs his name across the face of along with the word "accepted" the bill is said to be accepted and this act of the drawee is called acceptance of a bill. Before this is done, the drawee cannot be made liable for the bill.

Different Kinds of Acceptance:
General Acceptance:
When a bill is accepted without any condition to the order of the drawer, it is called general acceptance.

Qualified Acceptance:
When a bill is accepted with some qualifications to the order of the drawer it is called qualified acceptance.

A qualified acceptance again may be of five different types. These are following types:
Time. When the acceptor agrees to pay the bill on some day other than the date required by the drawer, it is called qualified acceptance as to time.
Place. When a bill is payable at a particular place and there only, it is called local qualified acceptance.
Partial. When a bill is accepted for a part of the amount of a bill, it is called partial qualified acceptance.
Parties. When a bill is accepted by one or two of the drawees, but not all, it is called qualified acceptance as to parties.
Condition. When a bill is accepted subject to a certain condition being fulfilled it is called conditional qualified acceptance.

Promissory Note:
Learning Objectives:
Define and explain promissory note.

Definition and Explanation:
There is another method of payment similar to bill of exchange i.e., promissory note. In this method, in place of the seller drawing a bill of exchange on the purchaser, the purchaser himself makes a written promise to pay the amount to the seller. It is defined as an instrument in writing containing an unconditional promise, signed by the maker to pay on demand or at a fixed or determinable future time, a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.

Difference Between Bill of Exchange and Promissory Note:
Learning Objectives:
What is the difference between bill of exchange and promissory note?

A bill of exchange differs from a promissory note on the following points:

Promissory Note	Bill of Exchange
It is promise to pay	It is an order to pay
There are only two parties the drawer, and the payee.	There are three parties, the drawer, the drawee, and the payee.
There is no necessity of acceptance	It must be accepted
The maker is primarily liable	The drawer is not primarily liable.
It is never drawn in sets	Foreign bills are specially drawn in sets.
Protesting is not necessary after dishonour	A foreign bill must be protested upon dishonor.

Difference Between Bill of Exchange and Cheque/Check:
Learning Objectives:
What is the difference between bill of exchange and cheque/check?

Check	Bill of Exchange
It is drawn on a banker	It may be drawn on any party or individual.
It has three parties - the drawer, the drawee, and payee.	There are three parties - the drawer, the drawee, and the payee.
It is seldom drawn in sets	Foreign bills are drawn in sets
It does not require acceptance by the drawee.	It must be accepted by the drawee before he can be made liable to pay the bill.
Days of grace are not allowed to a banker	Three days of grace are always allowed to the drawee.
No stamp duty is payable on checks	Stamp duty has to be paid on bill of exchange.
It is usually drawn on the printed f	It may be drawn in any paper and need not necessarily be printed.

Recording Transactions of Bill of Exchange:
For the purpose of accounting, bills are classified under two heads:

Bills receivable
Bills payable

Bills Receivable:
A bill of exchange is treated as a bill receivable by one who is entitled to receive the sum due on it. When we draw a bill or receive it by endorsement from our debtors, it is our bill receivable (B/R) and on maturity of such bill if it is held up to that time, we shall receive specified amount from the acceptor.

Bills Payable:
A bills payable is regarded as bill payable by one who has to pay it on the due date. When we accept a bill and thereby become liable to pay on its maturity, it is our bill payable (B/P).

It means the same bill is a bill receivable to one party and a bill payable to the other.
The accounting aspect of a bill of exchange can be divided into following parts:
When a bill is drawn, accepted and discharged.
When the drawer discounted it with the bank
When the drawer sends it for collection to the banker.
When the drawer endorses it to a third party
When a bill is dishonored.
When a bill is renewed for another period of time.
When a bill is retired.
When there is an accommodation bill (including the insolvency of one of the parties).

Drawing, Acceptance, and Payment of Bills of Exchange:
Learning Objectives:
Make journal entries in the books of creditor and debtor at the time of drawing, acceptance, and payment of a bill of exchange.

When a bill is written it is known as "drawing" a bill. The person who draws it is the creditor and the person to whom it is addressed is the debtor. The creditor and the debtor are also known as the drawer and the drawee respectively. When the drawee signifies his assent to the order in writing he becomes the acceptor of the bill if exchange. It is said to be discharged when the acceptor makes the actual payment on the bill on the maturity date. Journal entries in the books of drawer and drawee are as under:

Creditor's Books
(a) When a bill of exchange is drawn and accepted.
Bill receivable account [Dr]
   To Acceptor's personal account [Cr.]
(b) On the due date the acceptance will be presented to the acceptor for payment.
If the payment is received directly:

Cash account [Dr.]
   To Bills receivable account [Cr.]

Debtor's Books:
(a) When the bill is accepted by the drawee.
Personal account of the drawer [Dr.]
   To Bills payable account [Cr.]
(b) When the bill is met on maturity.
Bills payable account [Dr.]
   To Cash account [Cr.]

Example:
X sold goods to Y for $1,000 on 1st January 1991 and draws on Y a bill of exchange at three months for this amount. Y accepts the bill and returns it to X. The bill is dully met at maturity. Show the journal entries to record the transactions in both the parties books

Journal Entries in the Books of X

1991		$	$
Jan. 1	Y	1,000
	To Sales account		1,000
	(Goods sold on credit)

Jan. 1	Bills receivable account	1,000
	To Y		1,000
	(Acceptance received)

Apr. 4	Cash account	1,000
	To Bills receivable account		1,000
	(Amount of the bill received)

Journal Entries in the Books of Y

1991		$	$
Jan. 1	Purchases account	1,000
	To X		1,000
	(Goods purchased on credit)

Jan. 1	X	1,000
	To Bills payable account		1,000
	(Acceptance given)

Apr. 4	Bills payable account	1,000
	To Cash account		1,000
	(Acceptance paid)

Discounting a Bill of Exchange:
Learning Objectives:
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 called discounting 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.

Journal Entries in the Books of X

1991		$	$
Jan. 1	Bills receivable account	2,000
	To Y		2,000
	(Acceptance received)

Jan. 4	Bank account	1,970
	Discount account	30*
	To Bills receivable account		2,000
	(Bill discounted at bank)

*Calculation of discount: 2000 × 6/10 × 3/12

Journal Entries in the Books of Y

1991		$	$
Jan. 1	X	2,000
	To Bills payable account		2,000
	(Acceptance given)

Apr. 2	Bills payable account	2,000
	To Cash account		2,000
	(Acceptance paid)

Bill of Exchange for Collection:
Learning Objectives:
Make journal entries in the books of creditor, debtor, and that of bank when a bill of exchange is sent to the bank for collection.

When a person receives a bill, he may keep it till the date of maturity in order to receive the full amount. But in order to ensure safety, he may send it to his bank with the instructions that the bill should be retained till maturity and should be realised on that date. This does not mean discounting of bill. The bank will not credit the customer or client until the amount is actually realised. If the bill is sent to the bank with such instructions it is know as "bill sent for collection". It will be recorded in the books of the creditor as under:

Creditor's Books
(a) When a bill of exchange is sent to the bank for collection:
Bank for collection account [Dr.]
   To Bills receivable account [Cr.]
(b) On receipt of information from the bank as to collection of the bill on the due date:
Bank account [Dr.]
   To Bank for collection account [Cr.]

Debtor's Books:
No entries are recorded in debtor's books. He has no concern with collection of bills.

Banker's Books:
If the bill is received by bank from its customer for collection, there will be no entry until the bill is collected, when the bill is collected, the following entry will be passed:

Cash account [Dr.]
   To Customer's personal account [Cr.]
   To Collection Charges account [Cr.]

Example:
P sold goods worth $1,000 to Q on credit for which a bill was drawn by P on Q. It was duly accepted by Q. P sent the bill to his banker for collection and the bank charged $5 for collecting the bill. The bill was met by Q on the due date.

Record the above transactions in the books of P, Q and Bank.

Journal Entries in the Books of P

	$	$
Q	1,000
To Sales account		1,000
(Goods sold on credit)

Bills receivable account	1,000
To Q		1,000
(Acceptance received)

Bank for collection account	1,000
To Bills receivable account		1,000
(Bill sent to bank for collection)

Bank account	995
Bank charges account	5
To Bank for collection account		1,000
(acceptance collected by the bank)

Journal Entries in the Books of Q

	$	$
Purchases account	1,000
To P		1,000
(Acceptance given)

P	1,000
To Bills payable account		1,000
(Acceptance given)

Bills payable account	1,000
To Cash account		1,000
(Bill paid)

Journal Entries in the Books of Bank

Cash account	1,000
To P		995
To Collection charges account		5
(Being the proceeds of a bill is collected)

Note: When the bill is received by the banker from P for collection, there will be no entry in the books of the bank until the bill is collected.

Endorsement of Bill of Exchange:
Learning Objectives:
What are the journal entries in the books of drawer, acceptor and endorsee when a bill of exchange is endorsed by the drawer?

When a bill of exchange is negotiated i.e., transferred from one person to another person so as to constitute the transferee the holder of a bill, each person through whose hands it passes, must write his name on the back of the bill. This is know as the "endorsement of a bill of exchange". Some times the drawer of the bill does not keep the bill with him until the date of the maturity. He endorses it to some other party in payment of the debt due from him. When the bill is endorsed to any other party the journal entries will be:

Drawer's Books
When a bill of exchange is endorsed:
Endorsee's personal account [Dr.]
To Bills receivable account [Cr.]

Acceptor's Books:
His books remain unaffected. He will pay it on the due date to the holder and usual entry for the payment will be passed:

Endorsee's Books:
When he will receive an endorsed bill, he will treat it just like an ordinary bill:

Bill receivable account [Dr.]
To Transfer's personal account [Cr.]

Example:
A bill for $2,000 is drawn by P on Q and accepted by the later. P transfers it to his creditor R. On the due date the acceptance is duly met.

Record the above transactions in the books of P, Q and R.

Journal Entries in the Books of P

Bills receivable account	2,000
To Q		2,000
(Acceptance received)

R	2,000
To Bank for collection account		2,000
(Bill endorsed)

Journal Entries in the Books of Q

P	2,000
To Bills payable account		2,000
(Acceptance given)

Bills payable account	2,000
To Cash account		2,000
(Bill paid)

Journal Entries in the Books of R

Bill receivable account	2,000
To P		2,000
(Bill received from from a debtor - Q)

Cash account	2,000
To Bill receivable account		2,000
(amount of the bill received)

Dishonour of a Bill of Exchange:
Learning Objectives:
Make journal entries when a bill of exchange is dishonoured by the drawee.

Definition and Explanation:
A bill of exchange is said to be dishonoured when the drawee refuses to accept or make payment on the bill. A bill may be dishonoured by non-acceptance or non-payment.
If the drawee refuses to accept the bill when it is presented before him for acceptance, it is called dishonour by non-acceptance. When a bill is dishonoured by non-acceptance, an immediate right of recourse against the drawer and endorser accrues to the holder. In this case, presentment for payment is not necessary.
If the drawer has accepted the bill, but on the due date, he refuses to make payment of the bill, it is called dishonour by non-payment. In this case the holder has immediate right of recourse against each party to the bill.
Noting Charges: When a bill of exchange is dishonoured, the holder can get such fact noted on the bill by a notary public. The advantages of noting is that the evidence of dishonoured is secured. The noting is done by recording the fact of dishonoured, the date of dishonour, the reason of dishonour, if any. For doing all this the notary public charges his fees which is called noting charges.

Journal entries on the dishonour of the bill of exchange:
Creditor's Books:
At the time a bill is dishonoured, it may be either with the drawer or with his banker with whom he has discounted it or with a creditor of whose favor he may have endorsed it:

(a) When the bill of exchange is still in the drawer's possession:
Acceptor's personal account (full value of the bill and noting charges) [Dr.]
   To Bills receivable account [Cr.]
   To Cash account (noting charges) [Cr.]
(b) When the bill of exchange has been discounted with the bank:
Acceptor's personal account [Dr.]
   To Bank [Cr.]

Note: The amount will include the noting charges. No separate entry will be passed for noting charges as in case (a) above

(c) When the bill of exchange has been sent for collection:
Acceptor's personal account [Dr.]
   To Bank for collection account [Cr.]
(d) When the bill of exchange has been sent for collection:
Acceptor's personal account [Dr.]
   To Personal account of creditor [Cr.]
It may be noted that in all four cases the drawer debits the acceptor's credits that party's account who presents the bill for payment.

Debtor's Books:
When the bills payable is dishonoured the debtor has to pass the same journal entry in all the cases The journal entry is:

Bill payable account (full value of the bill) [Dr.]
Trade expenses account (noting charges) [Dr.]
   To personal account of drawer [Dr.]

Example 1:
P draws a bill on Q for $2,000 who accepts and returns it to P on the same date. The bill is dishonoured by Q on the due date. P pays $30 as noting charges.
Record the above transactions in the books of P and Q.

Solution:

Journal Entries in the Books of P

Bills receivable account	2,000
To Q		2,000
(Acceptance received)

Q	2,030
To Bills receivable account		2,030
To Cash account		30
(Bill endorsed)

Journal Entries in the Books of Q

P	2,000
To Bills payable account		2,000
(Acceptance given)

Bills payable account	2,000
Trade expense account	30
To P		2,030
(Acceptance dishonoured and noting charges paid)

Journal Entries in the Books of R

Bill receivable account	2,000
To P		2,000
(Bill received from from a debtor - Q)

Cash account	2,000
To Bill receivable account		2,000
(amount of the bill received)

Example 2:
On 1st January, 1991 P draws on Q a three months bill for $2,000 who accepts and return it to P on the same date. On 4th January P discounts it with his bank at 6% per annum. The acceptance is dishonoured in the due date, and bank pays $30 as noting charges.
How these transactions should be recorded in the journal of P & Q.

Solution:

Journal Entries in the Books of P

1991
Jan. 1	Bills receivable	2,000
	To Q		2,000
	(Acceptance received)

Jan. 4	Bank account	1,970
	Discount account	30
	To Bills receivable account		2,000
	(bill discounted)

April 4	Q	2,030
	To Bank account		2,030
	(Q's acceptance dishonoured)

Journal Entries in Books of Q

1991
Jan. 1	P	2,000
	To Bills payable account		2,000
	(Acceptance given)

April 4	Bills payable account
	Trade expense
	To P
	(Bill dishonoured, noting charges paid.)

Example 3:
P draws a bill for $2,000 on Q who accepts and returns it to P on the same date. P sent the bill to his banker for collection. On the due date the bill is dishonoured by Q. Give journal entries in the books of P.

Solution:

Bills receivable account	2,000
To Q		2,000
(Acceptance received)

Bank for collection account	2,000
To Bills receivable account		2,000
(Bill sent for collection)

Q
To Bank for collection account
(Bill dishonoured)

Renewal of a Bill of Exchange:
Learning Objectives:

Make journal entries in the books of drawer and acceptor when the original bill is cancelled and a new bill is drawn on the acceptor.

When the acceptor of a bill finds himself unable to make payment of the bill on the due date; he may request the drawer of the bill, before it is due, to cancel the original bill and draw on him a new bill for an extended period. This is called renewing a bill of exchange. The acceptor has to pay interest for the extension of time. The new bill therefore, includes not only the amount of the original bill but also interest etc. Journal entries in this case are:

Creditor's Books:
In this case first of all entries recording the original bill will to be cancelled. Next entry for interest would be passed. A further entry will be passed for a new bill of exchange.

(a) When the old bill is cancelled:
Personal account of the acceptor [Dr.]
   To Bill receivable account [Cr.]
(b) When interest is charged by the drawer:
Personal account of the acceptor [Dr.]
   To Interest account [Cr.]
(c) When acceptance on new bill is received:
Bill receivable account [Dr.]
   To Acceptor's personal account [Cr.]
Debtor's Books:

Debtor will make the following entries in his books:
(a) When the old bill is cancelled:
Bill payable account [Dr]
   To Drawer's account [Cr]
(b) When interest is charged by the drawer:
Interest account [Dr]
   To Drawer's account [Cr]
(c) When a fresh bill is accepted:
Drawer's account [Dr]
   To bill payable account [Cr]

Example 1:
P draws a bill for $2,000 on Q who accepts and returns it to P. When the bill was about to mature, Q expressed has inability to meet it and request to P to renew it. P agrees but adds $10 to the new bill for interest. Give necessary journal entries in the books of P and Q when the bill is renewed.

Solution:

Journal Entries in the Books of P

Bills receivable account 2,000
   To Q 2,000
(Acceptance received)

Q 2,000
   To Bills receivable account 2,000
(bill dishonored)

Q 10
   To Interest account 10
(Being the interest charged for renewal of a bill)

Bills receivable account 2,010
   To Q 2,010
(Being the new bill accepted.)
Journal Entries in the Books of Q

P 2,000
   To Bills payable 2,000
(Acceptance given)

Bill payable 2,000
   To P 2,000
(bill dishonored - cancelled)

Interest account 10
   To P 10
(Being the interest charged for renewal of a bill)

P 2,010
   To Bill payable 2,010
(Acceptance given.)

Example 2:
X having accepted a bill for $450 is unable to meet the same. Before the due date, he requests Y, the drawer of the bill, to receive $310 in cash ($10 being for interest) and to draw on him a new bill for a period of 3 months for $150 and cancel the old bill which is about to due. Y agrees to this proposal.

Show the journal entries in the books of X and Y.

Journal Entries in the Books of Y

X	450
To Bills receivable account		450
(old bill cancelled)

Cash account	310
To X		300
To Interest account		10
(Being the amount received from X including interest)

Bills receivable account	150
To Q		150
(Acceptance received)

Journal Entries in the Books of X

Bill payable account	450
To Y		450
(old bill cancelled)

Y	300
Interest account	10
To Cash account		310
(Being the amount received from X including interest)

Y	150
To Bill payable		150
(Acceptance given)

Retiring of a Bill of Exchange:
Learning Objectives:
Make journal entries in the books of drawer and drawee when a bill of exchange is retired before it maturity.

Definition and Explanation:
Retiring a bill means making payment before the date of maturity. When the acceptor of a bill is prepared to make the payment of the bill before the due date, he may ask the holder to accept the payment, provided he receives some rebate or discount for the unexpired period. Such a rebate or discount is an expense to the party receiving the payment and gain to the party making the payment.

Journal entries:
Creditor's Books:
Cash account (actual amount received) [Dr]
Rebate account (rebate granted) [Dr]
   To Bill receivable account [Cr]

Debtor's Books:
Bill payable account [Dr]
   To cash account [Cr]
   To Rebate account [Cr]

Example:
A sells goods for $1,000 to B and draw a bill at three months for the amount. B accepts it and returns to A. B retires his acceptance under a rebate of $10.

Record the transactions in the books of A and B.

Solution:

Journal Entries in the Books of A

B	1,000
To sales account		1,000
(Goods sold on credit)

Bills receivable account	1,000
To B		1,000
(Acceptance received)

Cash account	990
rebate account	10	1,000
To Bills receivable account
(Amount of the bill received and rebate allowed)

Journal Entries in the Books of B

Purchases account	1,000
To A		1,000
(Goods purchased on credit)

A	1,000
To Bills payable		1,000
(Acceptance received)

Bills payable account	1,000
To Cash account		990
To rebate account		10
(Acceptance retired under rebate)

Example 2:
A bill for $600 is drawn by B & Co. on C and accepted by the latter payable at his bank. Show what entries should be passed in the books of B & Co. under each of the following circumstances:
If they retain the bill till the due date and then realized it on the maturity.
If they discounted it with their bank for $580
If they endorsed it over to their creditors M & Co. in settlement of their debt.
If they sent the same to their bank for collection.
State what further entries would be passed in the books of B & Co. in each of the above cases if the bill was dishonored on the due date.

Solution:

Journal Entries in the Books of B & Co.

1	Bill receivable account	600
	To C		600
	(Acceptance received)

	Cash account	600
	To bill receivable account		600
	(Payment of the bill received)

2	Bills receivable account	600
	To C		600
	(Acceptance received)

	Bank account	580
	Discount account	20
	To Bills receivable account		600
	(Bill discounted)

3	Bills receivable account	600
	To C		600
	(Acceptance received)

	M & Co	600
	To Bills receivable account		600
	(Bill endorsed)

4	Bill receivable account	600
	To C		600
	(Acceptance received)

	Bank for collection account	600
	To Bill receivable account		600
	(Bill sent for collection)

When the bill is dishonoured the following further entries would be passed in each of the circumstances:

1	C	600
	To Bills receivable account		600
	(Bill dishonoured)

2	C	600
	To Bank account		600
	(Bill dishonoured)

3	C	600
	To M & Co.		600
	(Bill dishonoured)

4	C	600
	To Bank for collection		600
	(Bill dishonoured)

Accommodation Bills of Exchange:
Learning Objectives:
Define and explain an accommodation bill of exchange.
What is the difference between trade bill and an accommodation bill?
Make journal entries in the books of drawer and acceptor when accommodation bills are used.

Definition and Explanation of an accommodation bill:
An accommodation bill of exchange is a bill of exchange which has been drawn for the mutual financial accommodation of the parties involved. Generally it is drawn not for value received. In order to oblige friends, many times bills are drawn, accepted and endorsed by businessmen without any consideration. By accepting such a bill the acceptor is able to lend his name, and the other party (drawer) taking advantages of the reputation of the acceptor gets it discounted with his bank. After meeting his aim with this temporary finance, he (drawer) sends back money to the acceptor thus making it possible for him to meet the bill on the due date. Since such bills are accepted without consideration, therefore, there is no liability of the acceptor to the drawer but since the third party takes such a bill for value, therefore, the acceptor is liable to the third party.

Difference Between Trade Bill and Accommodation Bill:
Following is the distinction between a trade bill of exchange and an accommodation bill of exchange.

Trade Bill		Accommodation Bill
1	Trade bills are drawn for trade purposes.	1	Accommodation bills are drawn and accepted for financial assistance
2	These are drawn against proper consideration.	2	These are drawn in absence of any consideration
3	These bills are proof of debt	3	These are not a proof of debt
4	If discounted full sum retains with holder of the bill	4	If discounted the amount may be divided between drawer and acceptor in pre-determined ratio.
5	For obtaining the debt from drawee, drawer can resort to legal action.	5	Legal action cannot be resorted for recovery of amount against these bills by the immediate parties.

The bookkeeping entries in connection with accommodation bills are made in the same way as for genuine bills. Generally there are three methods of raising money on accommodation bills. They are as under:

When accommodation bill is written for the accommodation of the drawer.
When accommodation bill is written for the mutual accommodation of the drawer and the drawee.
When the drawer and the drawee write accommodation bills on each other.

All these bills have been discussed below:

Accommodation of the drawer:
When a bill is written for the accommodation of the drawer then the drawee of the bill accepts the bill without any consideration and returns the bill to the drawer. The drawer gets the bill discounted with his bank and uses the amount in his business. On the due date he remits the amount to the acceptor or the bill to enable him to honour the bill on the due date.

Example (Accommodation of the Drawer):
A accepts a bill drawn by B for his accommodation on 1st January, 1991 for $500 at 3 months. The bill is discounted $ 490 on 4th January. On due date B sends a cheque to A to meet the bill. A duly honours his acceptance.
Pass journal entries in the books of both the parties.

Solution:

Journal Entries in the books of B
1991		500
Jan. 1	Bills receivable account		500
	To A
	(Bills drawn on A)

Jan. 4	Bank account	490
	Discount account	10
	To Bill receivable account		500
	(Bill discounted)

April 4	A	500
	To Bank account		500
	(Cheque sent to A)

Journal Entries in the books of A
1991
Jan. 1	B	500
	To Bill payable account		500
	(Acceptance given)

April 4	Cash account	500
	To B		500
	(Cheque received)

April 4	Bills payable account	500
	To Cash account		500
	(Acceptance met)

Accommodation of the Drawer and the Drawee:
When a bill is drawn by one party for the mutual accommodation then the drawee after accepting the bill returns to the drawer. The drawer gets the bill discounted with his banker and after retaining the agreed portion of the proceeds of the bill remits rest of the proceeds to the acceptor of the bill. On the date of maturity the drawer of the bill remits rest to the acceptor the amount retained by him earlier to enable the acceptor to honour the bill. The expenses of discount are shared by the parties.

Example (Accommodation of the Drawer and the Drawee):
For mutual convenience of X and Y, X draws a bill for $1,000 on Y at three months on 1at January, 1991. The bill is discounted on 4th January by X at 6 per cent per annum with his bank: half the proceeds being handed over to Y. On the bill falling due date, X remits $500 by cheque to Y who then pays the bill.

Pass journal entries in the books of X and Y.
Solution:

Journal Entries in the Books of X
1991
Jan. 1	Bills receivable account	1,000
	To Y		1,000
	(Bill drawn on Y)

Jan. 4	Bank account	985
	Discount account	15
	To Bills receivable account		1,000
	(Bill discounted)

April 4	Y	500
	To Cash account		492.5
	To Discount account		7.5
	(Half the proceeds remitted)

April 4	Y	500
	To Cash account		500
	(Cheque sent to him)

Journal Entries in the Books of X
1991
Jan. 1	X	1,000
	To Bills payable account		1,000
	(Acceptance given)

Jan. 4	Cash account	492.5
	Discount account	7.5
	To X		500
	(Half the proceeds received)

April 4	Cash account	500
	To X		500
	(Cheque received from him)

April 4	Bills payable account	1,000
	To Cash account		1,000
	(Acceptance given)

Accommodation Bills Written on Each Other:
In this case both the parties draw bills on each other and get them discounted from their bankers. On the due date each meets his own bill. The expenses of discount is to be paid by each on other's bill.

Example (Accommodation bills written on Each Other):
On 1st January 1991 P draws a bill on Q at four months for $500 and Q draws on P for similar amount and term. Both the bills are accepted and discounted respectively at 6 per cent. At maturity both the parties meet their respectively acceptances. Show the journal entries in the books of both the parties.

Solution:

Journal Entries in the Books of P
Jan. 1	Bills receivable account	500
	To Q		500
	(Bill drawn on Q)

	Q	500
	To Bill payable account		500
	(Acceptance given)

	Bank account	490
	Discount account	10
	To Bill receivable account		500
	(Bill discounted)

May 4	Bill payable account	500
	To Cash account		500
	(Acceptance met)
Journal Entries in the Books of Q
Jan 1	P	500
	To Bill payable account		500
	(Acceptance given)

	Bill receivable account	500
	To P		500
	(Acceptance received)

	Bank account	490
	Discount account	10
	To bill receivable account		500
	(Bill discounted)

May 4	Bill payable account	500
	To Cash account		500
	(Acceptance met)

Insolvency of Acceptor in Bills of Exchange:
Learning Objectives:
How the matter is treated in accounting for bills of exchange when the drawee becomes insolvent?

Insolvency of a person means that he is unable to pay his liabilities. This will mean that bill accepted by him will be dishonoured. Therefore, when it is known that a person has become insolvent, entry for dishonour of his acceptance should be passed, Later something may be received from his estate.

When amount is received, the following journal entry is passed:
Cash Account [Dr.]
To Debtor's Personal Account [Cr.]
The remaining amount will be irrecoverable and therefore, should be written off as a bad debt.

Example:
On 1st January, 1991. A drew and B accepted a bill at 3 months for $1,000. On 4th January, 1991, A discounted the bill at his bank at 6 percent per annum and remitted half the proceeds to B. On 1st February, 1991. B drew and A accepted a bill at 3 months for $400. On 4th February, 1991, B discounted the bill at 6 percent, per annum and remitted half the proceeds to A. A & B agreed to share the discount equally.

At maturity A met his acceptance, but B failed to meet his and A therefore had to pay the bill. A drew and B accepted a new bill at 3 months for the amount of the original bill plus interest at 6% per annum. On 1st July, 1991,B became insolvent and only 50 cents in a dollar were received from him.

Record the above transactions in A's journal and write up B's account.

Solution:

Journal Entries in the Books of A

1991	Bills receivable account	1,000
Jan. 1	To B		1,000
	(Bill drawn on B)

Jan. 4	Bank Account	985
	Discount account	15
	To Bills receivable account		1,000
	(Bill discounted)

	B	500
	To Bank account		492.5
	To Discount account		7.5
	(Half the proceeds remitted to B)

Feb. 1	B	400
	To Bills payable account		400
	(Acceptance given)

Feb. 4	Cash account	197
	Discount account	3
	To B		200
	(Half the proceeds received)

April 4	B	1,000
	To Bank account		1,000
	(Bill dishonoured)

	Bills payable account	400
	To Cash account		400
	(Bill met)

	B	15
	To Interest account		15
	(Interested charged)

	Bill receivable account	1,015
	To B		1,015
	(A new bill drawn)

July 1	B	1,015
	To Bills receivable account		1,015
	(Bill dishonoured)

	Cash account	357.5
	Bad debts account	357.5
	To B		715
	(B became insolvent and only 50 cents in a dollar received)

B's Account

1991 Jan.4 Feb.1 April 4 July 1	To Bank To Discount To B/P To Bank To Interest To B/R	492.5 7 400 1,000 15 1015		By B/R By Cash By Discount By B/R By Cash By Bad Debts	1,000 197 3 1,015 357.5 357.5
1991 Jan.4 Feb.1 April 4 July 1	Total	2,930		Total	2,930