Accounting for Bills of Exchange: Journal Entries for Various Transactions

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Accounting For Bills Of Exchange: Journal Entries for Bills of Exchange

In this article I will be discussing the Journal entries for Bills of Exchange.

Also read: An Introduction to Bills of Exchange

Bills Receivable and Bills Payable

For convenience of accounting, we need to classify Bills of Exchange into two classes:

  1. Bills Receivable: When we draw a Bill on a debtor or receive a Bill via endorsement from a debtor, that Bill of Exchange is a Bill Receivable for us as we are supposed to receive the money mentioned in the Bill.
  2. Bills Payable: When we accept a Bill drawn by a creditor it is a Bill Payable for us as we are supposed to pay the amount mentioned in that bill.

Thus the same bill is both a Bill Receivable and a Bill Payable – receivable from the point of view of the creditor and payable from the point of view of the debtor.

A Holder of a Bill of Exchange can deal with it in 3 different ways:

  1. Hold the bill till maturity and present it for payment to the drawee; or
  2. Endorse the bill to a creditor for discharging a debt; or
  3. Discount the bill, ie. Sell it to a Discounting House or Bank before the expiry of its tenure and obtain cash by paying a small discounting charge to the Discounting House or Bank.

Journal Entries for Bills of Exchange

Below we have reproduced the Bill of Exchange accounting entries. Have a look.

Transaction: Bill Drawn
Date of Entry : N.A
In the Books of DrawerIn the Books of Drawee
No EntryNo Entry
Remarks: Bills of Exchange come into existence only when it is accepted by the drawee. So there would be no entry for drawing of bill until it is accepted by the drawee.
Transaction: Bill Accepted by Drawee
Date of Entry : Date of Acceptance
In the Books of DrawerIn the Books of Drawee
Bills Receivable A/c—– Dr.
To Drawee (Debtor) A/c
Drawer (Creditor) A/c—– Dr.
To Bills Payable A/c
Transaction: Bill Retained till Maturity and Payment Received
Date of Entry : Date of Maturity
In the Books of DrawerIn the Books of Drawee
Bank A/c—– Dr.
To Bills Receivable A/c
Bills Payable A/c—- Dr.
To Bank A/c
Transaction: Bill Discounted with Bank
Date of Entry : Date of Discounting
In the Books of DrawerIn the Books of Drawee
Bank A/c—– Dr.
Discount on Bill A/c—Dr.
To Bills Receivable A/c
No entry
Transaction: Bill Endorsed
Date of Entry : Date of Endorsement
In the Books of DrawerIn the Books of Drawee
Endorsee A/c—Dr.
To Bills Receivable A/c
No entry

 

Transaction: Bill Dishonoured on Maturity
Date of Entry : Date of Maturity
In the Books of DrawerIn the Books of Drawee
If the Bill was retained till maturity

Drawee A/c——Dr.
[Amt of Bill + Noting Charge, if any]
To Bills Receivable A/c
To Bank A/c [For Noting Charge, if any]

In all cases

Bills Payable A/c—– Dr.
Noting Charges A/c—–Dr. [If any]
To Drawer A/c

If the Bill was discounted with Bank

Drawee A/c——Dr.
[Amt of Bill + Noting Charge, if any]
To Bank A/c

If the Bill was endorsed

Drawee A/c——Dr.
[Amt of Bill + Noting Charge, if any]
To Endorsee A/c

 

That is all. I have covered the most common journal entries relating to bills of exchange above. However, some special entries particularly regarding dishonour, noting charges, renewal of bill etc may creep up under different circumstances. Students are advised to practice different types of illustrations from textbooks to obtain a deep understanding.

Suggested Read: Rectification of Errors in Accounting

Did this article help you in understanding the Journal Entries related to Bills of Exchange? Do you have any suggestions for improvement or want to add something to the above? Please share your feedback through the comments section below. Also do visit our YouTube Channel for more Hindi videos on the topic. Hope to see you again in some other post.

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