Journalising bill transactions (debtor and creditor) MCQs Quiz | Class 10

Understanding Journal Entries for Bills of Exchange

Bills of Exchange are vital negotiable instruments in commercial transactions, facilitating credit sales and purchases. They provide security for the seller (drawer) and time for the buyer (drawee) to make payment. This section will elaborate on the key aspects and journal entries required in the books of both the drawer and the drawee for various bill transactions.

Key Concepts of Bills of Exchange:

• Drawer: The person who draws the bill (the seller/creditor).
• Drawee: The person on whom the bill is drawn (the buyer/debtor), who accepts the bill.
• Payee: The person to whom payment is to be made. This can be the drawer himself or a third party (endorsee).
• Tenor: The period for which the bill is drawn.
• Acceptance: The drawee’s unconditional agreement to pay the bill.
• Discounting: The process where the drawer gets the bill encashed from a bank before its maturity date by paying a discount charge.
• Endorsement: Transferring the ownership of a bill to a third party by signing on its back.
• Renewal: Cancelling an old bill and drawing a new one, often with interest, when the drawee cannot pay on time.
• Retirement: Paying a bill before its maturity date, often for a rebate (discount).
• Dishonor: When the drawee fails to pay the bill on its maturity date.
• Noting Charges: Fees paid to a Notary Public for officially attesting to the dishonor of a bill.

Journal Entries in the Books of the Drawer:

1. Drawing and Acceptance of Bill:
   • Bills Receivable A/c Dr.
   •     To Debtor’s A/c
   • (Being bill drawn on and accepted by the debtor)
2. Bill Discounted with Bank:
   • Bank A/c Dr.
   • Discount A/c Dr.
   •     To Bills Receivable A/c
   • (Being bill discounted with bank)
3. Bill Endorsed to a Creditor:
   • Creditor’s A/c Dr.
   •     To Bills Receivable A/c
   • (Being bill endorsed to a creditor in full/partial settlement)
4. Bill Sent for Collection:
   • Bills Sent for Collection A/c Dr.
   •     To Bills Receivable A/c
   • (Being bill sent to bank for collection)
   • Upon collection: Bank A/c Dr. To Bills Sent for Collection A/c
5. Honour of Bill (Drawer holds the bill till maturity):
   • Bank/Cash A/c Dr.
   •     To Bills Receivable A/c
   • (Being cash/cheque received on maturity of the bill)
6. Dishonour of Bill (When drawer holds the bill):
   • Drawee’s A/c Dr.
   •     To Bills Receivable A/c
   •     To Cash/Bank A/c (for noting charges, if paid by drawer)
   • (Being bill dishonoured and noting charges paid)
7. Dishonour of Discounted Bill:
   • Drawee’s A/c Dr.
   •     To Bank A/c (Includes noting charges if paid by bank)
   • (Being discounted bill dishonoured and bank charged the amount back)
8. Dishonour of Endorsed Bill:
   • Drawee’s A/c Dr.
   •     To Endorsee’s A/c (Includes noting charges if paid by endorsee)
   • (Being endorsed bill dishonoured)
9. Renewal of Bill (Old bill cancelled, Interest charged, New bill drawn):
   • For interest charged: Drawee’s A/c Dr. To Interest A/c
   • For cash received for interest (if any): Cash/Bank A/c Dr. To Drawee’s A/c
   • For drawing new bill: Bills Receivable A/c Dr. To Drawee’s A/c
10. Retirement of Bill (under rebate):
    • Bank/Cash A/c Dr.
    • Rebate on Bills A/c Dr.
    •     To Bills Receivable A/c
    • (Being bill retired before maturity at a rebate)

Journal Entries in the Books of the Drawee (Acceptor):

1. Acceptance of Bill:
   • Creditor’s A/c Dr.
   •     To Bills Payable A/c
   • (Being bill accepted)
2. Honour of Bill on Due Date:
   • Bills Payable A/c Dr.
   •     To Cash/Bank A/c
   • (Being payment made for the bill on maturity)
3. Dishonour of Bill:
   • Bills Payable A/c Dr.
   • Noting Charges A/c Dr.
   •     To Drawer’s A/c
   • (Being bill dishonoured and noting charges payable to drawer)
4. Renewal of Bill (Old bill cancelled, Interest payable, New bill accepted):
   • For cancellation of old bill: Bills Payable A/c Dr. To Drawer’s A/c
   • For interest payable: Interest A/c Dr. To Drawer’s A/c
   • For cash paid for interest (if any): Drawer’s A/c Dr. To Cash/Bank A/c
   • For accepting new bill: Drawer’s A/c Dr. To Bills Payable A/c
5. Retirement of Bill (under rebate):
   • Bills Payable A/c Dr.
   •     To Cash/Bank A/c
   •     To Rebate on Bills A/c
   • (Being bill retired before maturity and rebate received)

Summary Table of Key Journal Entries:

Quick Revision Points:

• Bills Receivable is an asset for the Drawer.
• Bills Payable is a liability for the Drawee.
• Noting Charges are ultimately borne by the Drawee in case of dishonor.
• Discount is an expense for the Drawer.
• Rebate is an income for the Drawee and an expense for the Drawer.
• Always identify whether the transaction is from the Drawer’s or Drawee’s perspective before passing the entry.

Practice Questions:

1. A sells goods to B for Rs. 10,000 and draws a bill on B for 3 months. B accepts it. What is the entry in A’s books when the bill is drawn?
   1. Bills Receivable A/c Dr. 10,000 to B’s A/c 10,000
   2. B’s A/c Dr. 10,000 to Bills Receivable A/c 10,000
   3. Sales A/c Dr. 10,000 to Bills Receivable A/c 10,000
   4. Cash A/c Dr. 10,000 to B’s A/c 10,000
2. Continuing from Q1, what is the entry in B’s books when he accepts the bill?
   1. A’s A/c Dr. 10,000 to Bills Payable A/c 10,000
   2. Bills Payable A/c Dr. 10,000 to A’s A/c 10,000
   3. Purchase A/c Dr. 10,000 to Bills Payable A/c 10,000
   4. Bills Receivable A/c Dr. 10,000 to A’s A/c 10,000
3. The bill from Q1 is discounted by A with his bank for Rs. 9,800. What is the entry in A’s books for discounting?
   1. Bank A/c Dr. 9,800, Discount A/c Dr. 200 to Bills Receivable A/c 10,000
   2. Bills Receivable A/c Dr. 10,000 to Bank A/c 9,800, Discount A/c 200
   3. Bank A/c Dr. 9,800 to Bills Receivable A/c 9,800
   4. Discount A/c Dr. 200 to Bank A/c 200
4. If the bill in Q1 is dishonored and A pays noting charges of Rs. 50. What is the entry in A’s books for dishonor?
   1. B’s A/c Dr. 10,050 to Bills Receivable A/c 10,000, to Cash A/c 50
   2. Bills Receivable A/c Dr. 10,000 to B’s A/c 10,000
   3. B’s A/c Dr. 10,000 to Bills Receivable A/c 10,000
   4. Noting Charges A/c Dr. 50 to Cash A/c 50
5. If B (from Q1) pays the bill before maturity, receiving a rebate of Rs. 100. What is the entry in B’s books?
   1. Bills Payable A/c Dr. 10,000 to Cash A/c 9,900, to Rebate A/c 100
   2. Cash A/c Dr. 9,900, Rebate A/c Dr. 100 to Bills Payable A/c 10,000
   3. Drawer’s A/c Dr. 10,000 to Bills Payable A/c 10,000
   4. Bills Payable A/c Dr. 10,000 to Drawer’s A/c 10,000