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Hi there! In my last post I have taught you about accounting treatment in case when the bill of exchange gets dishonoured on the due date. Well Today, I’m going to teach you how to record transaction when the bill is renewed before the due date or on the due date.
Meaning:
Well, the bill can be renewed, when the acceptor or drawee of the bill is unable to meet the bill on the maturity date, he makes a request of the acceptor, the old bill is cancelled and new bill for the amount of the old bill plus interest for the period of the new bill is drawn on the acceptor. Hence, cancellation of an old bill and drawing a new bill in its place to allow more time to the acceptor for the payment of the bill is known as renewal of bill.
Procedure:
A bill can be renewed by two ways. First, old bill is cancelled and a new bill is drawn in its for the amount of the old bill plus interest and
second, acceptor make a partial payment at the time of renewal of a bill, and the old bill is cancelled and the new bill is drawn for balance amount of the old bill plus interest for the period of the new bill.
In the 👩🏫above chart you can observe the orange colour entries as the journal entries for renewal of bill of exchange in both situation when the old bill is cancelled and new bill plus interest is drawn and when the partial payment of old bill is made and the new bill is drawn for the balancing amount plus interest.
EXAMPLE PROBLEM:
1. On 1st January, 2016, Arvind supplied goods to Vikram of the value of Rs 9,000 and settlement the account by means of three bills of Rs 3000 each, due after two, three and four months respectively.
A week later, Arvind discounted the first bill at the discount of Rs 60. The other two bills were held till maturity. The first two bills were duly met on maturity. On the maturity of the third bill, Vikram want to retire it by paying partial payment of Rs 1000 cash which was agreed by Arvind and accepting a fresh bill drawn by Arvind for four months to cover the balance together with 12% interest per annum.
Explanation: Let me first explain👩🏫 the above problem. Here in this problem you can see Arvind is the seller of goods and Drawer of the bill and Vikram is purchaser of goods and Drawee or acceptor of the bill. So let us analyze transactions for both the parties.
In the books of Drawer Arvind:
1st entry goods supplied to Vikram on credit. (Vikram is receiving goods and Arvind is the giver)
2nd entry combined entry for all three bill receivable drawn which are accepted by Vikram (Bill is received as Vikram accept it and return)
3rd entry as the first bill is discounted with bank. (Cash is received but barred discount and bill is going out)
4th entry as the second bill is honored on the due date. (Cash is received and bill receivable is going out)
5th entry for canceling the old bill. (Reversing the accepting entry, old bill is given back to Vikram)
6th entry for receiving partial payment. (cash is received and Vikram is the giver)
7th entry for new bill drawn for balance amount including interest. ( new bill is received as Vikram accept it and return)
SOLUTION: here the how you pass the journal entries in the books of Drawer Arvind
Next in the books of Drawee Vikram:
1st entry for purchasing goods from Arvind on credit. (purchase is coming in and Arvind is the giver)
2nd entry for accepting all four bills drawn by Arvind ((Arvind received the bill payable and Vikram is the giver)
3rd entry for making payment of first bill on its maturity ( bill payable is coming in and cash is going out)
4th entry for making payment of second bill on its maturity ( bill payable is coming in and cash is going out)
5th entry for canceling the third bill. (reversing the acceptance entry)
6th entry for paying partial payment. (Arvind is receiving the cash and cash is going out)
7th entry for new bill drawn for balance amount including interest. (new bill payable is accepted and return which include interest)
DO IT YOURSELF (DIY):
1. Rajeev accepted a bill for Rs. 5,000. He felt he would be unable to meet the bill on the due date, he requests the drawer rajesh to cancel original bill and drawn a new bill for two months which is agreed by Rajesh. Show the journal entries in the books of Rajesh if Rs 1,250 is paid in cash and the new bill is drawn for 4,000.
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.
Meaning:
Well, the bill can be renewed, when the acceptor or drawee of the bill is unable to meet the bill on the maturity date, he makes a request of the acceptor, the old bill is cancelled and new bill for the amount of the old bill plus interest for the period of the new bill is drawn on the acceptor. Hence, cancellation of an old bill and drawing a new bill in its place to allow more time to the acceptor for the payment of the bill is known as renewal of bill.
Procedure:
A bill can be renewed by two ways. First, old bill is cancelled and a new bill is drawn in its for the amount of the old bill plus interest and
second, acceptor make a partial payment at the time of renewal of a bill, and the old bill is cancelled and the new bill is drawn for balance amount of the old bill plus interest for the period of the new bill.
Now let’s take a look at the chart of important journal entries.
Now let me give you ☝️one example problem with explanation:
EXAMPLE PROBLEM:
1. On 1st January, 2016, Arvind supplied goods to Vikram of the value of Rs 9,000 and settlement the account by means of three bills of Rs 3000 each, due after two, three and four months respectively.
A week later, Arvind discounted the first bill at the discount of Rs 60. The other two bills were held till maturity. The first two bills were duly met on maturity. On the maturity of the third bill, Vikram want to retire it by paying partial payment of Rs 1000 cash which was agreed by Arvind and accepting a fresh bill drawn by Arvind for four months to cover the balance together with 12% interest per annum.
Explanation: Let me first explain👩🏫 the above problem. Here in this problem you can see Arvind is the seller of goods and Drawer of the bill and Vikram is purchaser of goods and Drawee or acceptor of the bill. So let us analyze transactions for both the parties.
In the books of Drawer Arvind:
1st entry goods supplied to Vikram on credit. (Vikram is receiving goods and Arvind is the giver)
2nd entry combined entry for all three bill receivable drawn which are accepted by Vikram (Bill is received as Vikram accept it and return)
3rd entry as the first bill is discounted with bank. (Cash is received but barred discount and bill is going out)
4th entry as the second bill is honored on the due date. (Cash is received and bill receivable is going out)
5th entry for canceling the old bill. (Reversing the accepting entry, old bill is given back to Vikram)
6th entry for receiving partial payment. (cash is received and Vikram is the giver)
7th entry for new bill drawn for balance amount including interest. ( new bill is received as Vikram accept it and return)
SOLUTION: here the how you pass the journal entries in the books of Drawer Arvind
Next in the books of Drawee Vikram:
1st entry for purchasing goods from Arvind on credit. (purchase is coming in and Arvind is the giver)
2nd entry for accepting all four bills drawn by Arvind ((Arvind received the bill payable and Vikram is the giver)
3rd entry for making payment of first bill on its maturity ( bill payable is coming in and cash is going out)
4th entry for making payment of second bill on its maturity ( bill payable is coming in and cash is going out)
5th entry for canceling the third bill. (reversing the acceptance entry)
6th entry for paying partial payment. (Arvind is receiving the cash and cash is going out)
7th entry for new bill drawn for balance amount including interest. (new bill payable is accepted and return which include interest)
I hope you have understood 💁♀️this lesson of renewal of bill. 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?
1. Rajeev accepted a bill for Rs. 5,000. He felt he would be unable to meet the bill on the due date, he requests the drawer rajesh to cancel original bill and drawn a new bill for two months which is agreed by Rajesh. Show the journal entries in the books of Rajesh if Rs 1,250 is paid in cash and the new bill is drawn for 4,000.
Next time, inshallah I will teach👩🏫 you the accounting treatment when the drawee want to retire the bill under rebate before the due date. 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.
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