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Hey! Welcome back. As promised here I’m to explain you about the Accounting treatment of Bill of Exchange in case when the bill is honoured on the due date along with four methods opted by the drawer while treating a bill. Well, before we begin let us recall the actual accounting process; you know first step of accounting is Recording into journal Right! Next posting into ledger and then preparing final accounts. So for bill of exchange as well we will first record these transactions into Journal.
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. All four bills are duly met on the maturity date. Pass necessary journal entries in the books of all parties.
EXPLANATION: Let me first 👩🏫explain the above problem. In the above example you can observe that X sold goods to Y on credit so X is a seller and Y is a purchaser of those goods. You must understand as X is selling goods on credit means he is going to receive money in future and as Y is purchasing goods on Credit means he is liable to pay in the future. For that purpose, X draws four bills on Y and Y accepts it and return to X so here X is the drawer of Bill Receivable and Y is the drawee (acceptor) of the Bill Payable. Now remember total of all bills is worth of the goods sold by X, but X has treated all four bills differently and all these four bills are for different time period means there maturity date is different too. So you have to follow the sequence of the transaction, first record for sale or purchase, then pass combined entry for all four bill receivable or bill payable, next as X treated all four bills differently so pass entries in his book and here you can observe the third party Endorsee (‘Z’) of bill of exchange and lastly close the transaction on its maturity in the books of all three parties.
In the books of Drawer
1st entry sold goods to Y on credit.
2nd entry combined entry for all four bill receivable drawn which are accepted by Y
3rd entry as the second bill is discounted with bank
4th entry as the third bill is endorsed to his Creditor “Z”
5th entry as the fourth bill is sent for collection.
6th entry as first bill is honoured on its maturity.
7th entry as fourth bill is honoured on its maturity. Here we didn’t pass entries for second and third bill because second bill was discounted with bank and third bill was endorsed to Z so it will be recorded in their books as they are going to receive the money on the maturity.
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
2nd entry for accepting all four bills drawn by X
3rd entry for making payment of first bill on its maturity
4th entry for making payment of second bill on its maturity
5th entry for making payment of third bill on its maturity
6th entry for making payment of fourth bill on its maturity.
Lastly in the books of Endorsee
1st entry for receiving bill from X
2nd entry for payment received on its due date.
Pass the journal entries in both the parties under each of the following situations:
a) If the bill is retained till the due date and realized it on maturity.
b) If the bill is discounted with the banker @6% per annum
c) If the bill is endorsed to creditor C.
d) If the bill is sent to bank for collection.
So here I’m giving you a chart consisting of some important journal entries for Bill of Exchange for all three parties i.e. Drawer, Drawee and Endorsee (Payee).
Based on the above chart of Journal entries; let me give you ☝️one example problem and show you how to pass entries for bill of exchange in case when the bill is honoured on the due date.
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. All four bills are duly met on the maturity date. Pass necessary journal entries in the books of all parties.
EXPLANATION: Let me first 👩🏫explain the above problem. In the above example you can observe that X sold goods to Y on credit so X is a seller and Y is a purchaser of those goods. You must understand as X is selling goods on credit means he is going to receive money in future and as Y is purchasing goods on Credit means he is liable to pay in the future. For that purpose, X draws four bills on Y and Y accepts it and return to X so here X is the drawer of Bill Receivable and Y is the drawee (acceptor) of the Bill Payable. Now remember total of all bills is worth of the goods sold by X, but X has treated all four bills differently and all these four bills are for different time period means there maturity date is different too. So you have to follow the sequence of the transaction, first record for sale or purchase, then pass combined entry for all four bill receivable or bill payable, next as X treated all four bills differently so pass entries in his book and here you can observe the third party Endorsee (‘Z’) of bill of exchange and lastly close the transaction on its maturity in the books of all three parties.
In the books of Drawer
1st entry sold goods to Y on credit.
2nd entry combined entry for all four bill receivable drawn which are accepted by Y
3rd entry as the second bill is discounted with bank
4th entry as the third bill is endorsed to his Creditor “Z”
5th entry as the fourth bill is sent for collection.
6th entry as first bill is honoured on its maturity.
7th entry as fourth bill is honoured on its maturity. Here we didn’t pass entries for second and third bill because second bill was discounted with bank and third bill was endorsed to Z so it will be recorded in their books as they are going to receive the money on the maturity.
SOLUTION: Here’s how the journal entries will be like💁♀️:
1st entry for purchasing goods from X on credit
2nd entry for accepting all four bills drawn by X
3rd entry for making payment of first bill on its maturity
4th entry for making payment of second bill on its maturity
5th entry for making payment of third bill on its maturity
6th entry for making payment of fourth bill on its maturity.
1st entry for receiving bill from X
2nd entry for payment received on its due date.
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. A purchase goods from B worth Rs 6000, B drawn a bill on A for 3 months which A accepted and return to B.Pass the journal entries in both the parties under each of the following situations:
a) If the bill is retained till the due date and realized it on maturity.
b) If the bill is discounted with the banker @6% per annum
c) If the bill is endorsed to creditor C.
d) If the bill is sent to bank for collection.
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