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Dishonor and Retirement of Bills

"When bills don't go as planned - handling dishonor and early retirement."

Not all bills are paid on maturity. Sometimes they're dishonored, and sometimes they're retired early.

Dishonor of Bills

Meaning: When the drawee fails or refuses to make payment on the due date.

Reasons for Dishonor:

  • Insufficient funds in drawee's account
  • Drawee's refusal to pay
  • Drawee's bankruptcy/insolvency
  • Technical errors in the bill

Types of Dishonor

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Accounting for Dishonor

Scenario 1: Bill with Drawer (Not Discounted/Endorsed)

In Books of Drawer:

Drawee's Personal A/c           Dr.    ₹10,000
Noting Charges A/c              Dr.        ₹50
    To Bills Receivable A/c                ₹10,000
    To Bank A/c                                ₹50

In Books of Drawee:

Bills Payable A/c               Dr.    ₹10,000
Noting Charges A/c              Dr.        ₹50
    To Drawer's A/c                        ₹10,050

Scenario 2: Bill Discounted with Bank

In Books of Drawer:

Drawee's Personal A/c           Dr.    ₹10,050
    To Bank A/c                            ₹10,000
    To Noting Charges A/c                      ₹50

Bank debits the drawer's account for the bill amount plus noting charges

Scenario 3: Bill Endorsed to Third Party

In Books of Original Drawer:

Endorsee's A/c                  Dr.    ₹10,050
    To Drawee's A/c                        ₹10,050

Drawer becomes liable to endorsee

In Books of Endorsee:

Drawer's A/c                    Dr.    ₹10,050
    To Bills Receivable A/c                ₹10,000
    To Noting Charges A/c                      ₹50

Noting Charges

What are Noting Charges?

  • Fees charged by notary public/bank for certifying dishonor
  • Legal evidence that bill was dishonored
  • Borne by drawee (who caused dishonor)

Typical Amount: ₹50 to ₹200 (varies)

Retirement of Bill

Meaning: Payment of bill before the due date at a discount.

Why Retire Early?

  • Drawee has surplus cash
  • Drawer needs early payment
  • Good business relations

Rebate: Discount given for early payment (interest for remaining period)

Accounting for Retirement

Journal Entries for Retirement

In Books of Drawer:

Bank A/c                        Dr.     ₹9,902
Rebate on Bills A/c (Expense)   Dr.        ₹98
    To Bills Receivable A/c                ₹10,000

In Books of Drawee:

Bills Payable A/c               Dr.    ₹10,000
    To Bank A/c                             ₹9,902
    To Rebate on Bills A/c (Income)           ₹98

Comparison: Dishonor vs Retirement

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Consequences of Dishonor

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Insolvency of Drawee

If drawee becomes insolvent after accepting bill:

Partial Recovery Example:

  • Bill amount: ₹10,000
  • Drawee insolvent, pays 60 paise per rupee
  • Recovery: ₹10,000 × 0.60 = ₹6,000
  • Bad Debt: ₹4,000

In Books of Drawer:

Cash A/c                        Dr.     ₹6,000
Bad Debts A/c                   Dr.     ₹4,000
    To Bills Receivable A/c                ₹10,000

Accom modation Bills

Meaning: Bills drawn for mutual help without genuine trade transaction.

Purpose:

  • Help friend raise cash from bank
  • Both parties endorse each other's bills
  • Risky if either party defaults

Not Recommended: Can lead to legal complications

Real-World Implications

Credit Rating Impact:

  • Dishonored bills reported to credit bureaus
  • Affects future borrowing capacity
  • Banks check bill payment history

Business Relationships:

  • Frequent dishonors damage reputation
  • Suppliers may demand advance payment
  • Loss of trade credit facility

Quiz: Dishonor and Retirement

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