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
| Type | Meaning | Example |
|---|---|---|
| Dishonor by Non-Acceptance | Drawee refuses to accept the bill | Bill sent for acceptance, drawee returns without accepting |
| Dishonor by Non-Payment | Drawee fails to pay on maturity despite accepting | Bill accepted but payment not made on due date |
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
| Basis | Dishonor | Retirement |
|---|---|---|
| Timing | On due date (failed payment) | Before due date (early payment) |
| Payment | Not made | Made (less rebate) |
| Charges | Noting charges (penalty) | Rebate (benefit) |
| Who Benefits | No one (legal action may follow) | Both parties (goodwill) |
| Entry | Bill cancelled, debt revived | Bill cancelled, cash paid |
Consequences of Dishonor
What Happens After Dishonor:
- Noting: Bill sent to notary for noting (proof of dishonor)
- Liability Revived: Drawee again becomes debtor
- Legal Action: Drawer can sue for recovery
- Credit Rating: Drawee's creditworthiness affected
- Future Transactions: Drawer may refuse credit in future
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
Test Your Knowledge
Question 1 of 5
1. Noting charges on dishonor of bill are borne by: