Bills of Exchange and Promissory Notes-Part 6/6

CPT Section A Fundamentals of Accountancy Chapter 7 Unit 3

CA. Ajay Lunawat

RENEWAL OF BILLS

Renewal of Bill

I request you to please give me extension on

the Bill

Ok, but we need to make a fresh bill now

Sure, please make it for 2 months period

But, I will charge you interest @ 12 % p.a. on this period of 2 months

I am ready to accept the new bill of the

principle plus interest amount

Accounting Treatment

•New Bill Receivable A/c Dr. To Old Bill Receivable A/c To Interest A/c

In the books of Drawer

•Old Bill Payable A/c Dr. Interest on Renewal of Bill A/c Dr. To New Bill Payable A/c

In the books of Drawee

Example

Mohan sold goods to Gupta on 1st September, 2011 for Rs. 1,600. Gupta immediately accepted a three months bill. On due date Gupta requested that the bill be renewed for a fresh period of two months. Mohan agrees provided interest at 9% was paid immediately in cash. To this Gupta was agreeable. The second bill was met on due date. Give Journal entries in the books of Mohan.

Solution Date Particulars Debit Credit

2011

Sept 1 Gupta A/c Dr. 1,600

To Sales A/c 1,600

Bills Receivable A/c Dr. 1,600

To Gupta A/c 1,600

Solution Date Particulars Debit Credit 2011 Dec 14 Gupta A/c Dr 1,600

To Bills Receivable A/c 1,600

Gupta A/c Dr. 24 To Interest A/c 24

Bills Receivable A/c Dr. 1,600 Cash A/c Dr. 24 To Gupta 1,624

Solution Date Particulars Debit Credit 2012 Feb 7 Cash A/c Dr 1,600

To Bills Receivable A/c 1,600

INSOLVENCY

Insolvency

Insolvency of a person means that he is unable to pay his liabilities. This means that bills accepted by him will be dishonoured.

Insolvency – Accounting

• Drawee A/c Dr.

To Bills Receivable a/c At the time of

dishonour

• Cash/Bank A/c Dr. Bad Debts A/c Dr. To Drawee A/c

Final Settlement

Question No 1 Mr. Max accepted a bill drawn by Mr. Rabin. Rabin endorsed the bill to Mr Shekar. On the due date, the bill is dishonoured as Mr Max became insolvent. To record the dishonour of the bill in the books of Mr. Rabin, which of the following accounts should be credited?

Answer (c)

(a) Mr. Max’s account

(b) Bills Receivable

account

(c) Mr Shekar’s account

(d) Bills payable account

Question No 2 On 1.1.2011, X draws a bill on Y for Rs. 50,000. At maturity, the bill returned dishonoured as Y become insolvent and 40 paise per rupee is recovered from his estate. The amount recovered is:

Answer (a)

(a) Rs. 20,000 (b) Nil (c) Rs. 30,000 (d) 40 paise

BILLS FOR COLLECTION

Bills of Collection

Bills is send to bank with instructions that the bill should be retained till maturity and should be realised on that date.

Bills of Collection - Accounting

• Bills for Collection A/c Dr. To Bills Receivable

When bill is sent to bank

• Bank A/c Dr. To Bills for Collection

When amount is realised

• Drawee A/c Dr. To Bills for Collection

When bill is dishnoured

RETIREMENT OF BILLS

Retirement of Bills

Drawee intends to pay the bill before maturity date

He gets a rebate or interest or discount for premature payment

This interest is income for the drawee

This interest is an expense for the drawer

Retirement of Bills - Accounting

Cash A/c Dr. Discount / Interest A/c Dr. To Bills Receivable A/c

In the Books of Drawer

Bills Payable A/c Dr. To Cash A/c To Discount / Interest A/c

In the Books of Drawee

Example

On 1st January, 2011, 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, 2011, B retires his acceptance under rebate of 12% per annum. Record these transactions in the journals of A and B

Solution – In the Books of A

Date Particulars Debit Credit

2011

Jan 1 B’s A/c Dr. 10,000

To Sales A/c 10,000

Bills Receivable A/c Dr. 10,000

To B’s A/c 10,000

Solution – In the books of A

Date Particulars Debit Credit

2011

Mar 1 Bank A/c Dr. 9,900

Rebate on Bills A/c Dr. 100

To Bills Receivable A/c 10,000

Solution – In the Books of B

Date Particulars Debit Credit

2011

Jan 1 Purchases A/c Dr. 10,000

To A’s A/c 10,000

A’s A/c Dr. 10,000

To Bills Payable A/c 10,000

Solution – In the books of B

Date Particulars Debit Credit

2011

Mar 1 Bills Payable A/c Dr. 10,000

To Bank A/c 9,900

To Rebate on Bills A/c 100

Question No 2 On 1.1.2011 Vikas draws a bill of exchange for10,000 due for payment after 3 months on Ekta. Ekta accepts to this bill of exchange. On 4.3.2011, Ekta retires the bill of exchange at a discount of 12% p.a. Which of the discount is correct for premature payment in the books ofEkta?

Answer (b)

(a) 120 (b) 100 (c) 140 (d)160

BILLS RECEIVABLE AND

BILLS PAYABLE BOOKS

Bills Receivable and Bills Payable Book

Bills receivable and bills payable books are journals (Day Books) to record in a chronological order the details of bills receivable and bills payable.

Postings to individual debtors or creditors accounts are made from the Day Books.

Totals of bills received or accepted are posted periodically to Bills Receivable Account and Bills Payable Account respectively.

FOREIGN BILLS

FOREIGN BILLS

Drawn in India On Person Outside India

Payable Outside India

FOREIGN BILLS

Drawn Outside India

On Person Outside India

FOREIGN BILLS

Drawn Outside India

Payable In India

FOREIGN BILLS

Drawn Outside India

Payable Outside India

Question No 3

Which of the following is not a foreign bill:

Answer (D)

(a) A bill drawn in India, on a person resident outside India and made payable outside India.

(b) A bill drawn outside India, on a person resident outside India

(c) A bill drawn outside India, made payable in India

(d) A bill drawn on a person resident in India made payable in India

Lesson Summary

Basics of Bills of Exchange and Promissory Notes

Terms of Bills • Bills at Sight – Date from acceptance • Bills after date – Date from drawing

For Drawer – Bills Receivable – Asset

For Drawee – Bills Payable – Liability

Drawer can • Hold the bill till maturity • Endorse to Creditor • Discount with the Bank

On Maturity Date • Bills is Honoured • Bills is Dishonoured • Bill is Renewed

Accommodation Bill

Other aspects • Retirement of Bill • Foreign Bills • Bills Receivable and Bills Payable Books

Lesson Summary

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