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
⏳ Chronology of Events
Goods Sold on Credit
Ramesh sold goods worth ₹10,000 to Suresh on credit.
Bill of Exchange Drawn
Ramesh draws a bill on Suresh for ₹10,000, payable after 3 months. Suresh accepts it.
Bill Honored
Suresh pays ₹10,000 to Ramesh on the due date. Bill settled.
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
| Account | Nature | Appears In |
|---|---|---|
| Bills Receivable | Asset (Current) | Balance Sheet - Assets side |
| Bills Payable | Liability (Current) | Balance Sheet - Liabilities side |
| Discount on Bills | Expense (Financial) | P&L Account - Dr. side |
| Interest on Renewal | Income/Expense | P&L Account |
| Noting Charges | Expense | Charged to party who caused dishonor |
Important Points
Remember:
- Bills Receivable = Asset for holder
- Bills Payable = Liability for acceptor
- Discount = Expense (for getting early cash)
- Noting Charges = Charged to drawee if bill dishonored
- Renewal = Old bill cancelled, new bill drawn with interest
- Endorsement = Transferring bill to third party
Quiz: Accounting for Bills
Test Your Knowledge
Question 1 of 5
1. Bills Receivable is a: