HOW TO RECORD TRANSACTIONS WHEN THE BILL IS DISHONOURED?

Hi! In my last post I have taught you about accounting treatment in case when the bill is honoured on the due date. Today, I’m going to teach you how to record transaction when the bill of exchange gets dishonoured.
Take a look at the below chart of important journal entries.

Based on the above chart of Journal entries; let me give you an example problem, well here I’m going to use the same example problem which I explained when bill gets honoured and show you how to pass journal entries when that bill is dishonoured on the due date.

EXAMPLE PROBLEM
1. On January 1 2018, X sold goods worth of 10,000  to Y and draws four bills on him:
i) First bill amounting 4,000 for one month.
ii) Second bill amounting 3,000 for two months.
iii) Third bill amounting 2,000 for three months
iv) Fourth bill amounting 1,000 for four months.
Y accepts and returns all four bills to X.
The first bill is retained by X till the date of the maturity. On 3rd January, the second bill is discounted with his banker for 2,750 (i.e. @ 2.5% per annum). On 4th January the third bill is endorsed by X to his creditor Z. On 6th January fourth bill is sent to the bank for collection. But all four bills are dishonoured on the due date and 50, 60, 70, and 80 rupees respectively paid as noting charges. Pass necessary journal entries in the books of all parties.

EXPLANATION: Let me first explain the above problem. It is same as we learned earlier but excluding the entry for honoured.

In the books of Drawer

1st entry sold goods to Y on credit. (Y is receiving goods and X sales is going out)
2nd entry combined entry for all four bill receivable drawn which are accepted by Y (Bill is received by X as Y acceptor and giver)
3rd entry as the second bill is discounted with bank. (X receive cash but barred discount and bill is going out from X)
4th entry as the third bill is endorsed to his Creditor “Z”. (Bill is received by Z and bill is going out from X)
5th entry as the fourth bill is sent for collection. (Bill is received by bank and bill is going out from X)
6th entry as first bill is dishonoured on its maturity. (Bill was retained so X directly returned the bill after paying noting charges to drawee by reversing the bill drawn entry including noting charges)
7th entry as second bill is dishonoured on its maturity. (Bill was discounted with bank so first bank will pay the noting charges and return the bill to drawer(X) and later drawer (X) return the bill including noting charges to drawee(Y).
8th entry as third bill is dishonoured on its maturity. (Bill was endorse to Z, so first Z will pay the noting charges and return the bill including noting charges to drawer (X) and later drawer (X) return to drawee (Y)).
9th entry as fourth bill is dishonoured on its maturity. (Bill was sent to bank for collection, so first bank will pay the noting charges and return the bill including noting charges to drawer (X) and later drawer (X) return to drawee (Y).
SOLUTION: Here’s how the journal entries will be like:

Next in the books of Drawee

1st entry for purchasing goods from X on credit. (Y purchase goods and X is the giver of the goods)
2nd entry for accepting all four bills drawn by X. (X received the bill payable and Y is the giver)
3rd entry as first bill is dishonoured on its maturity (Y receive the bill along with noting charges and X is the giver of the bill)
4th entry as second bill is dishonoured on its maturity(Y receive the bill along with noting charges and X is the giver of the bill)
5th entry as third bill is dishonoured on its maturity (Y receive the bill along with noting charges and X is the giver of the bill)
6th entry as fourth bill is dishonoured on its maturity(Y receive the bill along with noting charges and X is the giver of the bill)

Lastly in the books of Endorsee

1st entry for receiving bill from X (Z receive the bill and X is the giver of the bill)
2nd entry as bill is dishonoured on its due date (X receive the bill back and Z is the giver of the bill including noting charges paid by him.)

You must have observed that from the chart above in the beginning, I didn’t take the green color entry as it is for when the bill is honoured.  I have taken red colored entries as it for when the bill is dishonoured.

Now let me give you one☝️ (DIY) for your practice✍ let’s see how you will do! Well practice makes us perfect, right! Well I have shared my knowledge with you 👩‍🏫let’s see did you gained that knowledge?😊

 DO IT YOURSELF (DIY):

1. On 1-7-2016, X sells goods to Y for Rs 4,200 and draws three bills on him: the first for 700 for one month, the second bill for Rs 1500 for 2 months and the third bill for 2,000 for 3 months. Y accepts and returns these bills to X.
The first bill is retained by X till the date of maturity. The second bill is endorsed by X to his creditor Z on 3rd July, 2016 the third bill is sent to the bank for collection on 4th July 2016. On maturity, first bill is honoured but second and third bills were dishonoured and noting charges paid were Rs15 and Rs 20 respectively.

Next time, inshallah I will teach 👩‍🏫you the accounting treatment for renewal of bill. Till then take care.

If you find this Article useful, 💁‍♀️please mark your reaction below 👇and don’t forget to share with others who is in need, 🤗because sharing knowledge means gaining knowledge, also subscribe to my newsletters 📩with your email id 📧to get latest updates  in your inbox. If you have any queries regarding this article please feel free to use comment section👇 or just send me an e-mail,📧 I would love to hear from you. 😄