A Bill of Exchange is a written and unconditional order made by one person directing another person to pay a specified amount of money to a specified person, either on demand or at a fixed or determinable future date.
Bills of exchange are commonly used in credit transactions to provide a formal written commitment for payment.
A sells goods worth ₹50,000 to B on credit.
A draws a bill on B for ₹50,000 payable after 3 months.
B accepts the bill.
Now B has a formal obligation to pay ₹50,000 to A on the due date.
There are generally three important parties:
The Drawer is the person who makes or draws the bill.
Usually, the seller or creditor is the drawer.
The Drawee is the person on whom the bill is drawn and who is ordered to make the payment.
Usually, the buyer or debtor is the drawee.
The Payee is the person who is entitled to receive the payment.
The drawer and payee can sometimes be the same person.
Acceptance is the drawee’s agreement to pay the amount mentioned in the bill according to its terms.
Once the drawee accepts the bill, the drawee becomes responsible for payment on the due date.
A draws a bill on B for ₹20,000.
B accepts the bill.
Now:
A = Drawer
B = Acceptor/Drawee
B is required to pay the amount according to the bill’s terms.
A bill of exchange generally contains:
The bill should comply with the applicable legal requirements.
The Amount of the Bill is the amount that the drawee is required to pay according to the bill.
Goods sold = ₹80,000
Bill drawn = ₹80,000
Therefore:
Bill Amount = ₹80,000
The Term refers to the period for which the bill is drawn.
A bill is drawn for 3 months.
If the bill is dated 1 January, the basic period ends around 1 April, subject to the applicable rules for calculating the maturity date.
The Date of Maturity is the date on which the bill becomes payable.
For bills payable after a period, the maturity date is calculated according to the applicable rules.
For example, a bill may be payable three months after date.
Students should remember that statutory rules regarding maturity and grace days may apply.
Traditionally, Days of Grace refer to additional days allowed after the nominal due date of certain bills before payment becomes due.
In Indian accounting textbooks, bills payable after a specified period are commonly taught with three days of grace, subject to applicable law.
Nominal due date = 10 June
Three days of grace = 11, 12 and 13 June
Maturity date = 13 June
Students should follow the rules applicable to the type of instrument being studied.
A Bill Receivable represents a bill accepted by a customer or debtor that is receivable by the business.
From the seller’s point of view, the bill is an asset because the business expects to receive money in the future.
A sells goods to B for ₹30,000 on credit.
A draws a bill on B.
B accepts the bill.
For A:
Bill = Bill Receivable
A Bill Payable represents a bill accepted by the business in favour of a supplier or creditor.
From the business’s point of view, it represents an obligation to pay money in the future.
A purchases goods from B for ₹40,000 on credit.
A accepts a bill drawn by B.
For A:
Bill = Bill Payable
| Bills Receivable | Bills Payable |
|---|---|
| Amount to be received | Amount to be paid |
| Asset for the holder | Liability for the acceptor |
| Usually arises from credit sales | Usually arises from credit purchases |
| Creditor holds the bill | Debtor accepts the bill |
| Example: Customer’s accepted bill | Example: Supplier’s accepted bill |
Receivable = Money Coming In
Payable = Money Going Out
Discounting of a bill means obtaining money from a bank before the bill’s maturity date.
The bank pays the holder an amount after deducting a discount or applicable charges.
Bill Amount = ₹50,000
Bank Discount = ₹1,000
Amount received from bank:
₹50,000 − ₹1,000 = ₹49,000
The bill is then held by the bank for collection on maturity.
Endorsement means transferring the rights in a bill to another person by signing and delivering the instrument, subject to applicable law.
A has a bill receivable from B for ₹20,000.
A owes ₹20,000 to C.
A may endorse the bill to C.
Now C becomes entitled to receive the payment according to the terms of the bill.
Retirement of a bill means payment of the bill before its maturity date.
If the holder agrees to receive payment early, a rebate may be allowed depending on the terms of the transaction.
Bill Amount = ₹50,000
Rebate for early payment = ₹500
Amount paid:
₹50,000 − ₹500 = ₹49,500
A bill is said to be dishonoured when the drawee fails to make payment on the maturity date.
Bill Amount = ₹30,000
The customer does not pay on maturity.
The bill is therefore dishonoured.
The appropriate accounting entries depend on the circumstances and any additional charges.
Noting Charges are charges paid to a notary public for formally recording the dishonour of a bill.
Bill Amount = ₹40,000
Noting Charges = ₹500
The holder may initially pay the ₹500 and later recover it from the responsible party according to the applicable arrangement.
Renewal of a bill occurs when the drawee cannot pay the bill on maturity and the parties agree to cancel the old bill and create a new bill.
Usually, the new arrangement may include:
Old Bill = ₹50,000
The customer cannot pay on maturity.
The parties agree to accept ₹10,000 immediately and draw a new bill for the remaining amount plus applicable interest.
An Accommodation Bill is a bill drawn and accepted without a genuine underlying sale or purchase transaction, generally to provide financial assistance to one or more parties.
It is used as a financing arrangement rather than as evidence of an ordinary trade transaction.
Students should distinguish it from a trade bill, which arises from a genuine business transaction.
A Trade Bill arises from a genuine credit transaction involving the sale or purchase of goods or services.
A sells goods worth ₹1,00,000 to B on credit.
A draws a bill on B.
B accepts the bill.
This is a Trade Bill because it is based on a genuine business transaction.
| Trade Bill | Accommodation Bill |
|---|---|
| Based on a genuine trade transaction | Not based on a genuine sale/purchase |
| Used in normal credit sales/purchases | Used mainly for financial accommodation |
| Represents a trade debt | Used as a financing arrangement |
| Example: Credit sale followed by bill acceptance | Bill drawn to raise funds |
Understanding the basic accounting entries is important for accounting students.
A sells goods to B for ₹50,000 on credit.
B A/c Dr. ₹50,000
To Sales A/c ₹50,000
When B accepts the bill:
Bills Receivable A/c Dr. ₹50,000
To B A/c ₹50,000
The customer’s personal account is replaced by the bill receivable.
Suppose B pays the bill of ₹50,000 on maturity.
In A’s books:
Bank/Cash A/c Dr. ₹50,000
To Bills Receivable A/c ₹50,000
The bill receivable is settled.
Suppose the ₹50,000 bill is dishonoured.
In A’s books:
B A/c Dr. ₹50,000
To Bills Receivable A/c ₹50,000
If the holder has paid noting charges, the appropriate entry will also include the noting charges recoverable from the responsible party.
Suppose:
Bill Amount = ₹50,000
Bank Discount = ₹1,000
Amount received = ₹49,000
The basic entry is:
Bank A/c Dr. ₹49,000
Discount A/c Dr. ₹1,000
To Bills Receivable A/c ₹50,000
Suppose A endorses a bill of ₹20,000 to C.
The basic entry in A’s books is:
C A/c Dr. ₹20,000
To Bills Receivable A/c ₹20,000
The exact accounting treatment can depend on the circumstances and applicable accounting rules.
Suppose a bill of ₹50,000 is retired before maturity and the debtor receives a rebate of ₹500.
Amount received = ₹49,500.
The holder may record:
Cash/Bank A/c Dr. ₹49,500
Rebate Allowed A/c Dr. ₹500
To Bills Receivable A/c ₹50,000
Bills of exchange can be managed in Tally Prime using appropriate accounting configurations and voucher entries.
When recording a bill transaction, the accountant needs to correctly identify:
The exact workflow depends on the Tally Prime version and accounting setup.
ABC Traders sells goods worth ₹60,000 to XYZ Ltd. on credit.
ABC draws a 3-month bill on XYZ Ltd.
XYZ accepts the bill.
XYZ Ltd. A/c Dr. ₹60,000
To Sales A/c ₹60,000
Bills Receivable A/c Dr. ₹60,000
To XYZ Ltd. A/c ₹60,000
On maturity:
Bank A/c Dr. ₹60,000
To Bills Receivable A/c ₹60,000
The bill is now settled.
Students should avoid:
Drawer = Person who draws the bill
Drawee = Person who is ordered to pay
Receivable = Amount to be received
Payable = Amount to be paid
Always calculate the maturity date correctly according to applicable rules.
When a bill is dishonoured, the bill receivable/payable must be reversed appropriately and any relevant charges recorded.
Where applicable, noting charges should be recorded correctly.
Bills of Exchange are important because they help students understand credit transactions, negotiable instruments, receivables, payables, discounting, endorsement, dishonour, and renewal.
This topic is also useful for understanding practical accounting entries in businesses that conduct credit transactions.
Remember:
Credit Transaction → Bill Drawn → Acceptance → Bills Receivable/Payable → Discounting/Endorsement/Retirement → Maturity → Honour or Dishonour → Renewal if Required
Leave a Reply