Bills of Exchange and Promissory Notes-Part 3/6

CPT Section A Fundamentals of Accountancy Chapter 7 Unit 3

CA. Ajay Lunawat

ACCOUNTING TREATMENT - Basics

Accounting Entries for Seller

Debtor A/c Dr. To Sales A/c At the time of credit sales

Bank A/c Dr. To Debtor A/c

At the time of receipt of payment

Accounting Entries for Buyer

Purchase A/c Dr. To Creditor A/c

At the time of credit

purchase

Creditor A/c Dr. To Bank A/c

At the time of making the

payment

Accounting Treatment

In the Books of DRAWER

In the Books of DRAWEE

Drawers Situation

Receives a Promissory Note or Receives an accepted Bill of Exchange

Treatment : A new asset : BILLS RECEIVABLE

Drawees Situation

Makes a Promissory Note or Accepts a Bill of Exchange

Treatment : A new liability : BILLS PAYABLE

ACCOUNTING TREATMENT In the Books of Drawer

In the Books of Drawer

Bill Receivable A/c Dr. To Debtor A/c

At the time of Acceptance of Bill

A accepts a Bill of exchange drawn on him by B. In the books of B the entry will be

Bills Receivable A/c Dr. To As A/c

Example 1

A sends to B the acceptance of D. In this case also, the entry in the books of B will be

Bills Receivable A/c Dr. To As A/c

Example 2

DRAWER has 3 Options

Hold till Maturity Endorse

Discount with Bank

Held Till Maturity

Drawer retains the bill till the date of maturity

No transaction to be recorded till the date of maturity

On the date of maturity, either the bill is

Honored Dishonored

Accounting for DRAWER

Held Till Maturity On Honour

Bank/Cash A/c Dr. To Bills Receivable A/C

Endorsement of Bill

Drawer has a liability towards some third party, say, creditor

He endorses the bill to the third party

The Bill Receivable, which is an asset, is thus used to settle another liability

Accounting for DRAWER At the time of Endorsement

Endorsee/Creditor A/c Dr. To Bills Receivable A/c

B draws a bill on A for Rs. 3,000. B has to pay C Rs. 3,000. He endorses this bill to C. What are the entries to be passed

Bills Receivable A/c Dr. 3,000 To As A/c 3,000

Cs A/c Dr. 3,000 To Bills Receivable A/c 3,000

Example 3

Accounting for DRAWER

Endorsement Honour of Bill

No Entry in the books of DRAWER

Discounting with Bank

Drawer is urgently in need of money

He approaches a bank, hands over the B/R to bank, and gets cash

The bank deducts sum amount called as DISCOUNT in the form of finance charges

Accounting for DRAWER

Discounts with Bank

Bank/Cash A/C Dr. Discount A/c Dr. To Bills Receivable A/C

Calculation of Discount

Discount is based on three factors Amount of Bill (A) Rate of Interest / Discount (R) Balance Duration (T) = Maturity Date

Discounting Date

Discount = A * R/100 * (T)/ 12 or 365

Example 3 Ram gets Ghoshs acceptance for Rs. 12,000 discounted at 2 months at 12% p.a. The amount of discount will be calculated as :

Amount of Bill (A) = Rs. 12,000

Rate of Interest (R) = 12 % p.a.

Balance Duration of Bill (T) = 2 months

Discount = Rs.12,000 X 12/100 X 2 /12 = Rs. 240

Example 4

On 1.1.2011, X draws a bill on Y for Rs. 50,000 for 3 months. X got the bill discounted 4.2.2011 at 12% rate. The amount of discount on bill will be

Maturity Date = 4.4.2011

Amount of Bill (A) = Rs. 50,000

Rate of Interest (R) = 12 %

Balance Duration of Bill = 4.4.2011 4.2.2011 = 2 months

Discount = Rs. 50,000 X (12/100) X (2/12) = Rs. 1,000

ACCOUNTING TREATMENT In the Books of Drawee

In the Books of Drawee

Drawer/Creditor A/c Dr. To Bills Payable A/c

At the time of Acceptance of Bill

DRAWEE has 3 Modes of Settlement

Hold till Maturity Endorse

Discount with Bank

Accounting for DRAWEE Held Till Maturity On Honour

Bills Payable A/c Dr. To Cash / Bank A/c

Accounting for DRAWEE Endorsement On Honour

Bills Payable A/c Dr. To Cash / Bank A/c

Accounting for DRAWEE

Discounts with Bank On Honour

Bills Payable A/c Dr. To Cash / Bank A/c

Who can be the PAYEE

In case of held till maturity

In case of Endorsement

In case of Discounting with Bank

DRAWER ENDORSEE BANK

Payee is the party to whom the payments is made

Question No 1

Under which circumstances drawer and payee is same person:

Answer (c)

(a) When drawer discounted the bill with banker

(b) When drawer endorse the bill to the third party

(c) When drawer held the bill till maturity

(d) When drawee rejects to accept the bill

Question No 2

X draws a bill on Y. X endorsed the bill to Z. The payee of the bill will be

Answer (c)

(a) X (b) Y

(c) Z (d) None

Question No 3 Kuntal draws a bill on Shyam for Rs 3,000. Kuntal endorsed it to Ram. Ram endorsed it to Rahim. The payee of the bill will be:

Answer (d)

a) Kuntal

b) Ram

c) Shyam

d) Rahim

Question 4 Katraks acceptance to P. Patel for Rs. 5,000 discharged by P. Modys acceptance to Katrak for a similar amount. Which is correct entry a. Bills Payable A/c Dr. 5,000 To Bills Receivable A/c 5,000 b. Bills Receivable A/c Dr. 5,000 To Bills Payable A/c 5,000 c. P.Patels A/c Dr. 5,000 To M.Modys A/c 5,000 d. M.. Modys A/c Dr. 5,000 To P. Patels A/c 5,000

Answer (a)

THANK YOU

Bills of Exchange and Promissory Notes-Part 3/6ACCOUNTING TREATMENT - BasicsAccounting Entries for SellerAccounting Entries for BuyerAccounting TreatmentDrawers SituationDrawees SituationACCOUNTING TREATMENT In the Books of DrawerIn the Books of DrawerExample 1Example 2DRAWER has 3 OptionsHeld Till MaturityAccounting for DRAWER Held Till Maturity On HonourEndorsement of BillAccounting for DRAWER At the time of EndorsementExample 3Accounting for DRAWER Endorsement Honour of BillDiscounting with BankAccounting for DRAWER Discounts with BankCalculation of DiscountExample 3Example 4ACCOUNTING TREATMENT In the Books of DraweeIn the Books of DraweeDRAWEE has 3 Modes of SettlementAccounting for DRAWEE Held Till Maturity On HonourAccounting for DRAWEE Endorsement On HonourAccounting for DRAWEE Discounts with Bank On HonourWho can be the PAYEEQuestion No 1Question No 2Question No 3Question 4THANK YOU