Bill of exchange

Bill of exchange                                                                    Chapter no 2

Define bill of exchange?

“A bill of exchange is an instrument in writing containing an unconditional order by one person (seller) to another person (purchaser) signed by the both parties having fixed amount payable after fixed future Time.”

How many parties involves in bill of exchange?

There are three parties involve in bill of exchange

• Drawer
• Drawee
• Payee

Define drawer, drawee and payee?

• Drawer: the person who writes/draw the bill of exchange. He is the seller/Debtor.
• Drawee: the person to whom the bill is drawn
• Payee: the person who receives the amount of bill is called payee. He may be drawer, bank or endorsee.

Difference between inland bill and foreign bill

Inland bill are drawn in a country upon person same country.

Foreign bill is drawn in a drawn in one country and payable in another country.

Define promissory notes?

An instrument in writing containing an unconditional promise by the maker (purchaser) to pay a certain sum of money only to other person (seller) after fixed future time period.

How many parties involves in promissory notes?

They are two parties to a promissory note.

• The maker (purchaser)
• The payee (seller)

Tenor

Tenor is period of time after which a bill becomes payable, also called duration of bill.

How many kind of acceptance?

There are two types of acceptance

General acceptance when accept the bill without any condition.      

Qualified acceptance when accept is accept with condition/qualification (time, place).

Define bill receivable and bill payable?

When a bill is written then a bill from the view of drawer is bill receivable

When a bill is written then a bill form the view of drawee is called bill payable

Define grace days

It is customary to allow three days of grace to the drawee to pay the amount in the case of a term bill.

Holder of the Bill

Holder of a bill means that Drawer, Endorsee and bank whole is entitled to receive the payment on due date.

Define discounting a bill

If the holder of a bill is in need of money before the due date of bill he may sell it to the bank. The bank will give cash after deduction of some charges.

e.g A draw the bill on B, A is drawer and B is drawee. When A Discount the Bill form Bank is Called discounting of Bill.

Define the endorsement of a bill

Endorsement of the bill means when drawer transfer the bill to his creditor for settlement of debts.

A draw the bill on B, A is drawer and B is drawee. When A endorsee Bill to C. C is Endorsee.

When a bill become dishonored

When Drawee fail/refuse to make the payment on the due date is called dishonour of bill

e.g A draw the bill on B, A is drawer and B is drawee. When B Fail to Make the Payment is called Dishonoured of Bill.

Notary Public

Notary Public is an officer who maintains record of then Dishonour Bills.

Define noting charges

In case of bill dishonored the notary pubic will charge a small fee from the holder of the bill This fee is known as noting charges.

What is meant by retiring of a bill

Retiring a bill means making payment before of maturity of the bill

e.g A draw the bill on B, A is drawer and B is drawee. When B make the payment before date.

Define Trade Bill

Trade bill is drawn and accept on Credit purchase and sale of goods.

Define accommodation bill.

accommodation bill drawn to help or to accommodate someone for certain period.

Insolvency

Insolvency mean the on the due date of the bill, the person is unable to pay the whole the bill.

Renewal of bill

Drawee request the drawer to issue new bill with condition to cancel the old bill before due date by paying some interest.

Drawer/Creditor/Seller                                                         Drawee account/Debtor/Purchaser

·         This process start from credit sales

Sales account                          XXX                                       Purchases account       XXX

            Drawee account                      XXX                                   Drawer account               XXX

·         Now draw a bill

Bill receivable                         XXX                                       Drawer account             XXX

            Drawee account                      XXX                                       Bill Payable                             XXX

Here drawer has four options

1. Retain the bill till due date
2. Discounting the bill from bank
3. Bank for collection
4. Endorsement

1.Retain the bill till due date

Drawer/Creditor/Seller                                                         Drawee account/Debtor/Purchaser

Cash account                                                                                       Bill payable

            Bill receivable                                                                                     Cash account

2.Discounting the bill from bank

Here make sure of  two things that first transaction is between bank and drawer because drawer discounted the bill from bank and then between bank and drawee

Drawer/Creditor/Seller         Drawee account/Debtor/Purchaser                         Bank

Bank account                                                                                                   Bill receivable

Discount account                                                                                                         Cash a/c                      Bill receivable                                                                                              Discount a/c

                                                            Bill Payable                                         Cash account

                                                                        Cash account                                      Bill receivable

3.Bank for collection

Here case is different because you people are just giving the bill to bank for collection but not giving the possession of bill so following entries is passing

Drawer/Creditor/Seller         Drawee account/Debtor/Purchaser                         Bank

Bank for collection                                                                                                  No entry

                        Bill receivable                                                                                    

When bank collect the bill just bank charges from that money

Bank account                                                  Bill payable                             Cash account

Bank charges                                                               Cash account                     Drawer account                 Bank for collection                                                                                         Bank charges

4.Endorsement         

Drawer/Creditor/Seller         Drawee account/Debtor/Purchaser                         Endorsee

Endrosee a/c                                                                                        Bill receivable

            Bill receivable                                                                                                 Drawer a/c

                                                           

Bill payable account                          Cash account

                                                                        Cash account                                    Bill receivable

Journal entries for dishonored of bills

·         Retain the bill till due date

Drawer/Creditor/Seller                                                         Drawee account/Debtor/Purchaser

Drawee account                                                                                  Bill payable

            Bill receivable                                                                                     Drawer account

·         Discounting the bill from bank

Drawer/Creditor/Seller         Drawee account/Debtor/Purchaser                         Bank

Drawee account                                  Bill payable                                         Drawer account                       Bank account                                                Drawer account                                Bill receivable

·         Bank for collection

Drawer/Creditor/Seller         Drawee account/Debtor/Purchaser                         Bank

Drawee account                                  Bill payable

Bank for collection                                   Drawer account                                   No entry

·         Endorsement      

Drawer/Creditor/Seller         Drawee account/Debtor/Purchaser                         Endorsee

Drawee account                                  Bill payable                                         Drawer account           Endorsee account                                    Drawer account                                 Bill receivable

When noting charges are paid then only cash is shown in the accounts of party which has paid these charges so these entries in aspects of noting charges are as follow but these charges are received by drawee in future and drawee gives the name of trade expenses.

·         Retain the bill till due date

Here cash is paid by self because bill has been retained by drawer himself

Drawer/Creditor/Seller                                                         Drawee account/Debtor/Purchaser

Drawee account                                                                                  Bill payable

Bill receivable                                                                         Trade Expenses     

Cash account                                                                                       Drawer account

·         Discounting the bill from bank

Here charges are paid by bank so

Drawer/Creditor/Seller         Drawee account/Debtor/Purchaser                         Bank

Drawee account                                  Bill payable                                         Drawer account

Bank account                                      Trade expenses                                    Bill receivable

 Drawer account                                  Cash account

Bank for collection

Drawer/Creditor/Seller         Drawee account/Debtor/Purchaser                         Bank

Drawee account                                  Bill payable

Bank for collection                                   Drawer account                                   No entry

·         Endorsement      

Drawer/Creditor/Seller         Drawee account/Debtor/Purchaser                         Endorsee

Drawee account                                  Bill payable                                         Drawer account           Endorsee accont                                    Drawer account                                 Bill receivable

When first time bill is drawn

Drawer/Creditor/Seller                                                         Drawee account/Debtor/Purchaser

Drawee account                                                                                  Bill payable

            Bill receivable                                                                                     Drawer account

On request of drawee a new bill is drawn

Pass the journal entry for interest

            Drawee account                                                                      Interest or cash account

                        Interest or cash account                                                          Drawer account

Then pass here a simple journal entry as above

Drawee account                                                                                  Bill payable

            Bill receivable                                                                                     Drawer account

·         Retain the bill till due date

Drawer/Creditor/Seller                                                         Drawee account/Debtor/Purchaser

Cash account                                                                                       Bill payable

Rebate account                                                                                               Cash account

            Bill receivable                                                                                     Rebate account