Bills Of Exchange Flashcards
Bills of Exchange
Parties of Bills of Exchange
A bill of exchange is a binding agreement by one party to pay a fixed amount of cash to another party as of a predetermined date or on demand.
● There are three parties that may be involved with a bill of exchange transaction. They are:
● Drawee. This party pays the amount stated on the bill of exchange to the payee.
● Drawer. This party requires the drawee to pay a third party (or the drawer can be paid by the drawee).
● Payee. This party is paid the amount specified on the bill of exchange by the drawee.
Let me break it down in a simpler way. Think of a bill of exchange like a written promise where one person asks another person to pay money to someone.
Here’s how the three parties work in a real-life example:
Example:
Imagine Ali sells goods to Bilal on credit, meaning Bilal will pay later. Ali wants to make sure Bilal pays, so he writes a bill of exchange and asks Bilal to accept it.
1. Drawer (Ali) → The person who creates the bill and tells someone to pay.
2. Drawee (Bilal) → The person who is supposed to pay the money.
3. Payee → The person who receives the money (can be Ali or someone else).
Two Possible Situations:
1. If Ali wants to get paid himself:
• Ali (Drawer) writes a bill asking Bilal (Drawee) to pay Ali (Payee).
2. If Ali wants someone else to get the money:
• Ali (Drawer) writes a bill asking Bilal (Drawee) to pay a supplier or bank (Payee).
Does this make more sense?
Information Contained in Bills of Exchange
A bill of exchange normally includes the following information:
● Title. The term “bill of exchange” is noted on the face of the document.
● Amount. The amount to be paid, expressed both numerically and written in text.
● As of. The date on which the amount is to be paid. Can be stated as a certain number of days after an event, such as a shipment or receipt of a delivery.
● Payee. States the name (and possibly the address) of the party to be paid.
● Identification number. The bill should contain a unique identifying number.
● Signature. The bill is signed by a person authorized to commit the drawee to pay the designated amount of funds.
● Issuers of bills of exchange use their own formats, so there is some variation from the information just noted, as well as in the layout of the document.
Endorsement
● A bill of exchange is transferable, so the drawee may find itself paying an entirely different party than it initially agreed to pay. The payee can transfer the bill to another party by endorsing the back of the document.
Accounting treatment of Bills of Exchange
Options with the Acceptor
Discounting of Bill of Exchange.
Endorsement
The drawer can treat the bill in the following ways:
● Retain it till maturity
● Discount it with the bank
● Endorse it in favor of another person
● Bill sent to the bank for collection
In the same way every acceptor has the four possibilities.
● He may pay the amount of bill on presentation
● He may refuse to honour the bill
● He may request the drawer to renew the bill of exchange.
● He may get the bill retired means pay his obligation before the due date.
When the acceptor of bill is a reputable person the bill is as good as money and any bank will discount it. If the drawer of the bill does not want to wait till the due date and he is in the need of money he may sell his bill to a bank at a certain rate of discount the bill will be endorsed by the drawer with the signed and dated order to pay the bank. The bank will become then the holder and owner of the bill. After getting the bill, the bank will pay cash to the drawer equal to the face value less interest or discount at an agreed rate for the number of days it has to run. This process is known as discounting of bill.
The drawer or holder of a bill may endorse ( transfer) the bill in favour of his creditor for the clearance of his own debts. A bill of exchange is a negotiable instrument that is a document which is transferable by delivery without notice to the party liable (drawee).
If the holder of the bill put his signature on the back of the bill with a view to transfer the property contained and it (right to receive money from the acceptor), then he becomes Endorser and the person to whom the bill is transferred will become endorsee. This procedure by which a bill is transferred from one person to another person for the settlement of that is called endorsement.
Bill send to the bank for collection
Dishonour of a bill of exchange
Noting charges
Renewal of a bill
Insolvency of one party
Retiring a Bill under Rebate
If a businessman has numerous bill that he got for various debtors he may send these bills to his banker for collection purposes. It should be remembered that, this is not discounting of Bill the bills are sent for safety and collection purposes. The bank keeps the bill in its custody till the due dates, the bank will present the bills to various acceptors. After collecting the amount the bank transfers the amount to the account of its customer by giving credit to his account. The bank charges some nominal fee from the customer for services he rendered. This is an expense for the customer and revenue for the bank.
A bill of exchange is said to be dishonoured when its acceptor refuses to pay the amount of the bill to the holder of the bill on its maturity. The bill then becomes useless and the party from whom it has been received will be liable to pay for the amount.
When a bill is Dishonored, the holder of the bill in order to make a strong ground for drawing legal proceedings against acceptor may get the official recognition that the bill has been dishonored. He goes to an official called notary public, and gives the bill to him. It is now strong evidence against the acceptor, in case, if the case is filed in the court. For this service, the notary public will charge a small fee obviously from the holder of the bill. This fee is known as Noting charges and is always recoverable from the party which is responsible for Dishonour
Generally who pays Noting charges
1. if the bill is retained by the drawer the drawer will pay.
2. If the bill has been discounted the bank will pay
3. If the bill has been endorsed to the endorsee the endorsee will pay. If the endorse has endorsed the bill to his creditor (a new endorsee) the new endorsee will pay.
Sometimes the acceptor of a bill finds himself unable to meet his acceptance on the due date. So he may approach the drawer of the bill before the maturity date arrives to cancel the old bill and draw a new bill with the extended date. the acceptor in this case, of course, have to pay interest for the extended period. This is called renewal of Bill.
Insolvency of one party when a person or party is declared by a court as in solvent or bankrupt he is considered to be unable to pay his liabilities. It means, the bills accepted by him will be naturally dishonored. Therefore, when it is known that a person has become insolvent entry for dishonour of the bill should be passed both in the books of the drawer and the acceptor( insolvent party).
Sometimes, the acceptor of a bill desires to meet the bill before its maturity. If he has sufficient funds at his disposal full stop he may ask the holder of the bill to accept the payment before that due date. If the holder agrees to his proposal, he will withdraw the bill. Such a withdrawal is called retirement of a bill. The holder generally allows the acceptor a Rebate or discount for the unexpired period of the bill full stop This rebate discount is an expense for the holder and a revenue for the acceptor of the bill. The accounting treatment is similar to cash discount.
Trade Bill of Exchange
Accommodation Bills
Following me is the difference between the trade and accommodation bills trade bills
Generally a bill of exchange is drawn by a creditor on his debtot to settle a set up a trade debt. A Creditor is a person who has sold good credit basis and debtor is a person who has purchase goods on credit basis. Thus, a bill which is drawn by a creditor and accepted by debtor is known as a trade bill of exchange.
A bill of exchange which is drawn to oblige a friend or to give him a temporary assistance or to provide him alone or to accommodate one or more parties is called an accommodation bill. Such a bill is drawn and accepted without any sale or purchase of goods. As the bill is drawn to fulfill the temporary need of money so there is no question of retaining this bill by the drawer until the due date. The bill will be discounted and cash will be received immediately. The drawer before maturity date is required to provide acceptor with funds, so that he may need his acceptance on the due date.
What is the difference between trade bill and Accommodation bill.
Trade Bill Accommodation Bill
These bills are drawn by creditor and accepted by creditor. These bills are not drawn by creditor.
These are drawn against proper consideration These are drawn without any consideration.
Trade bill is proof of debt Accommodation bill is not proof of debt.
when an accommodation bill is drawn for the benefit of both the parties
In this case, one person draws a bill on other person and after receiving acceptance discounts it and the proceeds (the amount received from the bank) are shared equally or according to mutual agreement. On maturity, the remaining amount is sent by the drawer to the acceptor to meet the bill. The discount is also borne by 2 parties in the same ratio in which they share the proceeds of the bill. Such a bill , which is drawn for the benefit of both the parties , is known as mutual accommodation of bill.
Mutual accommodation when bills are drawn on each other
Effect of insolvency
Under this case for the mutual benefit of both a parties, each draws a bill on other for the same amount and term. So on maturity none is to remit any amount and each is to meet his own acceptance.
In the accommodation bills when any person becomes insolvent, he is considered to be unable to pay his liabilities. It means that the bills accepted by him will be naturally dishonoured. Thus, when it is known that a person has become insolvent entry for dishonor of his acceptance should be passed both in the books of acceptor as well as in the books of the drawer.
Then ledger account of the insolvent person should be prepared in the books of the drawer. His account will show them the amount due from him. If any amount is received from his private estate cash account will be debited and his personal account will be credited in the books of the drawer. The remaining amount being irrecoverable should be written off as bad debts.
Bills Receivable Books and Bills Payable Books
Recording the transactions in General journal is very convenient if the transactions are a few , but where numerous bills are drawn and accepted by a business person , then it is advisable for him to record them in special journals known as bills receivable account and bills payable account. the bills drawn are received are recorded in Bills Receivable Book and bills accepted in Bills Payable Book.
Case Study 1
Afan sells goods to Azan for Rs. 10,000 on 1s April 2022, He draws on him a bill for three month which Azan accepts, at maturity the bill is honoured.
Give journal entries in the books of Afan and Azan.
Case Study 2
A Draws a bill for Rs. 2,000 on B, who accepts and returns it to A on the same date. A discounted the bill with his banker for Rs. 1,950, the bill is finally honored by B.
Show the entries in the books of A, B & bank.
Case Study 3
Arif sold goods to Hanif for Rs. 20,000 on credit on 1st March 2022. Arif drew and Hanif accepted a bill for Rs. 20,000 at three months on the same date. Haseeb was creditor of Arif for Rs.20,000. Arif settled his account by endorsing the bill to Haseeb on March 3, 2022. On maturity Hanif honoured his acceptance.
Give journal entries in the books of Arif, Hanif and Haseeb.
Case Study 4
A sold goods to B for Rs. 4 500 on credit on 1st Jan. 2022. A drew a bill on B for Rs. 4,500 on the same date at ‘3’ months. On 2nd Jan. 2022, A sent the bill to the bank for collection. On the due date B met his acceptance and bank received Rs. 20 as collection charges.
Give journal entries in the books of A and Bank account.
Case Study 5
On Ist September, 2022 A owes B sum of Rs. 3,000. He gives him two acceptances one for Rs. 2,200 at 2 months and 2nd for Rs. 800 at 3 months. B endorses the Ist bill in the favour of his creditor C and sent the 2nd bill to his bank for collection. Both the bills are honoured by ‘A’ on the due date. The bank charges Rs. 20 as collection charges.
Give entries in the books of A and B.
Case Study 5
On Ist September, 2022 A owes B sum of Rs. 3,000. He gives him two acceptances one for Rs. 2,200 at 2 months and 2nd for Rs. 800 at 3 months. B endorses the Ist bill in the favour of his creditor C and sent the 2nd bill to his bank for collection. Both the bills are honoured by ‘A’ on the due date. The bank charges Rs. 20 as collection charges.
Give entries in the books of A and B.
Case Study 6
B & Co. sells goods to P for Rs. 6,000 and draws a bill for four months, P accepts the bill and returns it to B & Co. Show what entries should be passed in the books of B & Co.
a) If they retained the bill till the due date and then realized on maturity.
b) If they discounted the bill with their banker for Rs. 5,880.
c) If they endorsed the bill to their creditor M & Co. in settlement of debt.
d) If they sent the bill to the Bank for collection.
Case Study 7
Rehman sells goods to Imran for Rs. 30,000 and draws a bill for two months, Imran accepts the bill and returns it to Rehman. Pass the journal entries in the books of Rehman and Imran. If it is dishonored at maturity.
Case Study 8
Yaold pede to l fan returned in al. On hida rade discus diSonoure abil par four months,
noting charges.
Pass Journal entries in the books of X & Y.
Case Study 9
X draws a bill for Rs. 10,000 on Y, who accepts and returns it to X on the same date for three months.
X discounted the bill with his banker at 9% p.a. On the due date the bill was dishonored by Y.
Give journal entries in the books of X, Y and bank.
Case Study 10
On 1s September, 2022 A owes B a sum of Rs. 2000. He gave him acceptance for Rs. 2,000 at 2months. B endorses the bill in the favour of his creditor C. Bill is dishonoured by A on the due date.
Give entries in the books of A, B and C.
Case Study 11
On lst January, 2022 A owes B a sum of Rs.2000. He gives him acceptance for Rs. 2,000 at 3 months. B sent the bill to his bank for collection. Bill dishonoured on due date by A and bank paid Rs. 20 as noting charges.
Give journal entries in the books of B, A and Bank.
Case Study 12
B &Co. sells goods to P for Rs. 6000 and draws a bill for four months P accepts the bill and returns it to B& Co. Show what entries should be passed in the books of B & Co. if the bill is dishonoured in the following cases: .
If they retained the bill till the due date.
If they discounted the bill with their banker for Rs. 5,880. .
If they endorsed the bill their creditor M& Co. in settlement of debt.
If they sent the bill the bank for collection.
Case Study 13
A receives a bill of exchange from B for Rs. 100 and discounts with his bankers for Rs. 96.
On the bill becoming due, B requests A to renew it which A does, adding Rs. 2 to the new bill for interest.
On the due date of second bill ‘B’ met his acceptance.
Make the necessary Journal entries to record these transactions in A’s journal.
Case Study 14
On 1st January 2023 Sohail sold goods to Zaheer for Rs. 5,000 and drew a bill for 4 months on him. Zaheer accepted the bill and returned it to Sohail. Sohail got it discounted by his bank at 15 percent p.a. On maturity Zaheer was not in a position to meet his acceptance. He approached Sohail and requested him to cancel the old bill and draw on him a new bill for the amount of old bill plus interest at the rate of 12 percent p.a. at 3 months. Sohail agreed to the proposal. On the due date of the new bill. Zaheer honoured his acceptance. Give journal entries in books of Sohail and Zaheer.
Case Study 15
A owes B a sum, of Rs. 1500 on 1st January, 2023, he accepts a bill for the amount for 3 months drawn on him by B. B gets it discounted with his banker for Rs. 1450. On the due date the bill is dishonoured and the bank pays Rs. 20 as noting charges. A pays Rs. 400 in cash and accepts another bill for the balance together with interest of Rs. 30 for two months. On the due date the bill is honoured by the acceptor A.
Pass the journal entries in the books of B and A.
Case Study 16
A drew on B a bill for Rs. 15,000 at 3 months. A got the bill discounted by his bank at 12% p.a. On maturity the bill is dishonoured and bank pays Rs. 30 for noting charges.
Pass entries in the books of A, B and the bank.
Case Study 17
On lst January 2023, Hassan sells goods to Taimoor for Rs. 5,000. Hassan draws a bill on Taimoor for Rs. 5,000 for two months. .
The bill is discounted at bank on 4th January for Rs. 4,850. The bill is dishonoured and the bank pays Rs. 20 for noting charges. On Taimoor’s request, Hassan draws a second bill on Taimoor for Rs. 5,050 including Rs. 30 as interest at two months. On maturity. the second bill is honoured:
Show the entries in the books of Hassan.
Case Study 18
Journalize the following transactions in the books of Asif:
a) Saleem’s acceptance to Asif for Rs. 2,000 which Asif endorsed in favour of Rauf was dishonoured. Rauf paid Rs. 20 as noting charges. Asif paid Rs. 20 to Rauf by a cheque and received a new acceptance from Saleem for the amount due plus interest Rs. 40.
b) Asif renewed his acceptance to Amir for Rs. 1,000 by a cheque of Rs. 400 and a new bill at 3 months at I0% p.a. interest.
Case Study 19
Journalize the following transactions in the books of Asif:
i) Farid’s acceptance to Asif for Rs. 3,000 renewed for two months at 12% p.a. interest.
ii) Asif’s acc
iii) eptance to Haseeb for Rs. 5,000 was got retired one month before its maturity under a rebate of l2% p.a.
iv) Asif’s acceptance to Ansar for Rs. 1,000 was discharged by Javed’s acceptance to Asif for a similar amount.
v) Asif’s acceptance to Farooq for Rs. 5,000 was discharged by paying Rs,2000 in cash and accepting a new bill for the balance for two months. interest at 12% p.a. being paid in cash.
Case Study 20
Salman sold goods to Rizwan for Rs. 50,000 on 1st July 2023 and drew on him a bill for the amount payable after four months. Rizwan accepted the bill. Salman got it discounted by his bank at 12% p.a. On maturity Rizwan was in a position to pay only Rs. 20,000 in cash, therefore, he approached Salman for the renewal of the bill. Salman agreed and drew a new bill for Rs. 30000
along with an interest at 15% p.a. for 3 months.
Before the due date of the new bill Rizwan became insolvent and a first and final dividend of 50% was received from his estate.
Pass the entries in the books of Salman and Rizwan and also give Rizwan’s ledger account.
Case Study 21
Imran sells goods to Farooq for Rs. 8,000 and draws a bill for 4 months on him. Farooq accepts the bill and returns it to Imran
After three months Farooq gets the bill retired under a rebate of 12% p.a.
Journalize the transactions in the books of both parties.
ACCOMMODATION BILL
Case Study 22
For mutual accommodation, A draws a bill on B for Rs. 5,000 at two months which is accepted by B.
On the same date B draws a bill on A for a similar amount at two months. Bothe the parties get
their bills discounted by their respective banks at 12% p.a. On the due date the bills are honoured.
Give journal entries in the books of A and B.
Case Study 23
Waqas and Kashif are in need of funds. For their mutual accommodation Waqas draws a bill on Kashif for Rs. 6,000 at two months, which Kashif accepts. Waqas gets the bill discounted by his bank at 12% p.a. and sends half of the proceeds to Kashif. Before the due date Waqas sends the remaining amount due to Kashif, and Kashif pays the bill on the due date.
Pass journal entries in the books of Waqas and Kashif.
Case Study 24
On 1st October 2014, Amin drew a bill for Rs. 18,000 on Bilal payable after two months for their mutual accommodation to the extent of 3/4 and 1/4 respectively. The bill was duly accepted and returned by Bilal. Amin got it discounted by his bank at 10% p.a. and remitted 1/4 of the proceeds to Bilal, before the due date Amin sent him the balance but Bilal dishonoured the bill on the due date and Amin had to pay his banker the amount of the bill along with noting charges Rs. 60.
Pass the journal entries in the books of Amin.
Case Study 25
For their mutual accommodation, Fida accepted a bill on 1st March 2015, drawn on him by Aqeel for Rs. 6,000 at three months. The bill was got discounted at 10% p.a. and the proceeds were shared equally.
On 1st April 2015, Fida drew a bill for Rs. 9,000 on Aqeel at three months for the same purpose. Aqeel accepted the bill. Fida got the bill discounted at 10% p.a. and the proceeds were shared 2/3 to Fida and 1/3 to Aqeel. Before the due date of the first bill. Fida sent a cheque to Aqeel in full settlement of his account. On 15th June 2015, Aqeel became insolvent and his estate paid a
dividend of 50 paisa in a rupee.
Give journal entries and Aqeel’s account in the books of Fida.
Case Study 26
Ferooz for mutual accommodation draws a bill for Rs 15000 on Roshin at three months. Ferooz gets the bill discounted by his banker for Rs. 14625 and remits Rs. 4875 to Roshin. On maturity Ferooz is not able to send the amount due to Roshin, to enable him to meet the bill. He however, accepts a bill for Rs. 18,750 which is discounted by Roshin for Rs. 17625. Roshin meet his acceptance and remits Rs.9000 to Ferooz. Before the due date of the bill Ferooz becomes insolvent and a dividend of 60 Paisa is received from his estate.
Pass journal entries and show account of Ferooz in the books of Roshin.
