BILL OF EXCHANGE

MEANINGAccording to the Negotiable Instruments Act 1881, a bill of exchange is defined as an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person to the bearer of the instrument.

It means that the Bill of Exchange is drawn by a person directing another person to pay the specified sum of money to the bearer of the instrument or to a specified person on his/her order.

FEATURES• A Bill of Exchange is a written order.• It is drawn and signed by the maker, i.e., drawer of the bill.• It is an unconditional order to a person, i.e., drawee to pay the specified amount.• The specified amount is payable to the person named in the bill or to his order or to the bearer.• It specifies the date by which the amount should be paid.• it is accepted by the drawee.

IMPORTANT TERMSDRAWER : The person who makes or writes the bill of exchange.

DRAWEE : The person on whom the bill of exchange is drawn for acceptance.

Term of a Bill : The period intervening between the date on which a bill is drawn and that on which it becomes due.

Days of Grace: These are the three extra days added to the period of bill. It is a custom to do so.

Due Date : It is the date on which the payment of the bill is due.

Date of Maturity : The date which comes after adding the days of grace to the due date of a bill.

ACCOUNTING TREATMENT

OF BILLSOF EXCHANGE

In the Books of DRAWERTransactions Where the B/E is

retainedWhere the B/E is Discounted

Where the B/E is Endorsed

Where the B/E is Sent to Bank for Collection

1. Sale of Goods on credit

Debtor’s A/c Dr. To Sales A/c

Debtor’s A/c Dr. To Sales A/c

Debtor’s A/c Dr. To Sales A/c

Debtor’s A/c Dr. To Sales A/c

2. Drawing of B/E NO ENTRY

3. Acceptance of Bill

B/R A/c Dr. To Debtor’s A/c

B/R A/c Dr. To Debtor’s A/c

B/R A/c Dr. To Debtor’s A/c

B/R A/c Dr. To Debtor’s A/c

4. Treatment of Bills

No Entry Bank A/c Dr.Dis. Charges A/c Dr To B/R A/c

Endorsee’s A/c Dr. To B/R A/c

Bills Sent for Collection A/c Dr. To B/R A/c

5. Honour of a Bill Cash/Bank A/c Dr. To B/R A/c

No Entry No Entry Bank A/C Dr. To Bills Sent for Collection A/c

6. Dishonour of a Bill

Debtors A/c Dr. (By B.R. + Noting Charges) To B/R A/c To Cash A/c

Debtors A/c Dr. (By B.R. + N.C.) To Bank A/c

Debtors A/c Dr. (By B.R. + N.C.) To Endorsee’s A/c

Debtors A/c Dr. (By B.R. + N.C.) To Bills Sent for Collection A/c To Bank A/c

Transactions Where the B/E is retained

Where the B/E is Discounted

Where the B/E is Endorsed

Where the B/E is Sent to Bank for Collection

7. Renewal of Bill of Exchange a) Cancellation of old B/E

b) Part Payment by the Drawee

c) Interest Charged On Drawee

d) Acceptance of new B/E

Debtor’ A/c Dr. To B/R A/c

Cash A/c Dr. To B/R A/c

Debtor’s A/c Dr. To Interest A/c

B/R A/c Dr. To Debtor’s A/c

Debtor’ A/c Dr. To Bank A/c

Cash A/c Dr. To B/R A/c

Debtor’s A/c Dr. To Interest A/c

B/R A/c Dr. To Debtor’s A/c

Debtor’ A/c Dr. To Endorsee’s A/c

Cash A/c Dr. To B/R A/c

Debtor’s A/c Dr. To Interest A/c

B/R A/c Dr. To Debtor’s A/c

Debtor’ A/c Dr. To Bills Sent for Collection A/CCash A/c Dr. To B/R A/c

Debtor’s A/c Dr. To Interest A/c

B/R A/c Dr. To Debtor’s A/c

Cont..

Transactions Accounting Treatment

1. Sale of Goods on Credit Purchases A/c Dr. To Creditor’s A/c

2. Drawing of B/E No Entry

3. Acceptance of B/E Drawer’s A/c Dr. To B/P A/c

4. Treatment of Bills No Entry

5. Honour of a Bill B/P A/c Dr. To Cash/ Bank A/c

6. Dishonour of a B/E Bills Payable A/c Dr.Noting Charges A/c Dr. To Drawer’s A/c

7. Renewal of a B/E a) Cancellation of old B/E

b) Part Payment by the Drawee

c) Interest Charged On Drawee

d) Acceptance of new B/E

B/P A/c Dr. To Drawer’s A/cDrawer’s A/c Dr. To Cash A/cInterest A/c Dr. To Drawer’s A/cDrawer’s A/c Dr. To Bills Payable A/c

In the Books of DRAWEE