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Accounting Treatment of Bills

"From drawer to drawee - tracking the bill journey."

After understanding what bills are, let's learn how to record them in books of accounts.

Basic Accounting Entries

In the Books of Drawer (Creditor)

When Bill is Drawn and Accepted:

Bills Receivable A/c            Dr.    ₹10,000
    To Debtor's A/c                        ₹10,000
(Being bill drawn and accepted by debtor)

On Maturity (Payment Received):

Cash/Bank A/c                   Dr.    ₹10,000
    To Bills Receivable A/c                ₹10,000
(Being bill honored on due date)

In the Books of Drawee (Debtor)

When Bill is Accepted:

Creditor's A/c                  Dr.    ₹10,000
    To Bills Payable A/c                   ₹10,000
(Being bill accepted)

On Maturity (Payment Made):

Bills Payable A/c               Dr.    ₹10,000
    To Cash/Bank A/c                       ₹10,000
(Being bill paid on due date)

Transaction Timeline

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Discounting of Bill

When Drawer needs immediate cash:

In Books of Drawer

Discounting with Bank:

Bank A/c                        Dr.    ₹9,700
Discount A/c (Expense)          Dr.      ₹300
    To Bills Receivable A/c                ₹10,000
(Being bill discounted with bank @ 12% for 3 months)

On Maturity:

  • No entry in drawer's books (bank collects from drawee directly)

If Bill Dishonored:

Drawee's A/c                    Dr.    ₹10,000
Noting Charges A/c              Dr.        ₹50
    To Bank A/c                            ₹10,050
(Being bill dishonored, bank debited our account)

Endorsement of Bill

When Drawer endorses bill to settle his own debt:

In Books of Original Drawer

Creditor's A/c (to whom endorsed)  Dr.  ₹10,000
    To Bills Receivable A/c                ₹10,000
(Being bill endorsed to clear our debt)

In Books of Endorsee (New Holder)

Bills Receivable A/c            Dr.    ₹10,000
    To Debtor's A/c                        ₹10,000
(Being bill received by endorsement)

Renewal of Bill

When Drawee cannot pay on due date:

Entries for Renewal

In Books of Drawer:

Cancel Old Bill:

Drawee's A/c                    Dr.    ₹10,000
    To Bills Receivable A/c                ₹10,000
(Being old bill cancelled)

Draw New Bill (with interest):

Bills Receivable A/c            Dr.    ₹10,500
    To Drawee's A/c                        ₹10,000
    To Interest Received A/c                  ₹500
(Being new bill for 3 months drawn with ₹500 interest)

In Books of Drawee:

Cancel Old Bill:

Bills Payable A/c               Dr.    ₹10,000
    To Drawer's A/c                        ₹10,000

Accept New Bill:

Drawer's A/c                    Dr.    ₹10,500
    To Bills Payable A/c                   ₹10,000
    To Interest Paid A/c                      ₹500

Dishonor of Bill

When Drawee fails/refuses to pay on maturity:

If Bill was with Drawer

In Books of Drawer:

Drawee's A/c                    Dr.    ₹10,000
    To Bills Receivable A/c                ₹10,000
(Being bill dishonored)

If Bill was Discounted

In Books of Drawer:

Drawee's A/c                    Dr.    ₹10,050
    To Bank A/c                            ₹10,000
    To Noting Charges A/c                      ₹50
(Being bill dishonored, bank recovered amount with noting charges)

In Books of Drawee:

Bills Payable A/c               Dr.    ₹10,000
Noting Charges A/c              Dr.        ₹50
    To Drawer's A/c                        ₹10,050
(Being bill dishonored, noting charges payable)

Summary of Accounts

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Important Points

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Quiz: Accounting for Bills

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