Journal Entries for Bills of Exchange in detail

What is Bill of Exchange ?

A bill of exchange is a negotiable instrument which contains an unconditional order requiring a certain person to pay a certain sum of money on a stipulated date. There are 3 parties that are involved in a Bill of Exchange namely, Drawee , Drawer & Payee.

JOURNAL ENTRIES FOR BILLS OF EXCHANGE

Journal entry for bill of exchange is posted differently in the books of both drawee and the drawer. These are as below –

  • When goods are sold and purchased:

DRAWER’S BOOKS

Drawee’s personal A/c Dr.      …….

To Sales A/c Cr.        …….

DRAWEE’S BOOKS

Purchase A/c Dr.      ……….

To Drawer’s personal A/c  Cr.   …………

  • When bill is drawn & accepted:

DRAWER’S BOOKS

Bill Receivable A/c Dr.   …….

To Drawee’s personal A/c   Cr.    …….

DRAWEE’S BOOKS

Drawer’s personal A/c Dr. …….

To Bills Payable A/c  Cr.         ……..

  • Bill retained till maturity and Payment received :

Sometimes drawer is not in immediate need of cash. He retains the bill with himself till due date and presents for payment. On due date, if bill is paid by the drawee, it is said that bill is honored.

DRAWER’S BOOKS

Bank A/c Dr.   …..

To Bills Receivable A/c  Cr.  …..

DRAWEE’S BOOKS

Bills Payable A/c Dr.  ……..

To Bank A/c  Cr.            …….

  • Bill Discounted with bank :

The act of selling bill of exchange to banker in consideration of small charges (discount) is called “Discounting of Bill of Exchange”.

DRAWER’S BOOKS

Bank A/c Dr.  …..

Discount on Bill A/c Dr.   …….

To Bills Receivable A/c   Cr.    ……

DRAWEE’S BOOKS

No entry to be passed

  • Bill Endorsed to third Party:

 The act of transferring bill from one person to another for the settlement of debts is called “Endorsement” of bill. The person who transfers or endorses the bill is called endorser and the person to whom bill is transferred or endorsed is called endorsee.

DRAWER’S BOOKS

Endorsee’s A/c Dr.   …..

To Bills Receivable A/c Cr.   …….

DRAWEE’S BOOKS

No Entry to be passed

  • Bill Dishonoured on Maturity :

A bill is said to be dishonoured when the drawee fails to make the payment on the date of maturity.

DRAWER’S BOOKS

  1. If bill is retained till maturity –

Drawee’s A/c Dr.  …..

To Bill Receivable A/c Cr.  ……

  1. If bill is discounted with bank –

Drawee’s A/c Dr.  …..

To Bank A/c Cr.      ……

  1. If the bill was endorsed –

Drawee’s A/c Dr.  …..

To Endorsee’s A/c Cr.   ……

DRAWEE’S BOOKS

Bills Payable A/c Dr. …..

Noting charges A/c Dr. …….

To Drawer’s A/c   Cr.          ……..

In case of dishonour of bill the same journal entry will be passed in the Drawee’s books.

Accounting & Finance for Banking

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