Simple transactions (No dishonour/retiring/renewal) MCQs Quiz | Class 10

Understanding Bills of Exchange: Simple Transactions

A Bill of Exchange is a written instrument containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument. It is a crucial negotiable instrument used in credit transactions, especially when goods are sold on credit. This section clarifies the basic parties involved and their simple accounting treatments.

Key Parties in a Bill of Exchange:

1. Drawer: The person who makes or draws the bill. This is usually the creditor (seller) who is to receive money.
2. Drawee: The person on whom the bill is drawn. This is usually the debtor (buyer) who is to pay the money. Once the drawee accepts the bill, they become the ‘Acceptor’.
3. Payee: The person to whom the payment is to be made. The drawer can be the payee, or they can name another person (e.g., their bank, or another creditor).

Simple Transactions and Journal Entries:

Let’s understand the basic scenarios for a Bill of Exchange, assuming no dishonour, renewal, or retiring before maturity.

Scenario 1: Bill Drawn and Accepted

• Drawer’s Books (Seller): The seller draws the bill on the buyer. Upon acceptance, the seller gets a Bills Receivable (an asset).
  • Entry: Bills Receivable A/c Dr. (Asset increases)
           To Drawee A/c (Debtor decreases)
  • Narration: Being bill drawn on [Drawee’s Name] for [period] and accepted.
• Drawee’s Books (Buyer): The buyer accepts the bill, acknowledging their liability. They issue a Bills Payable (a liability).
  • Entry: Drawer A/c Dr. (Creditor decreases)
           To Bills Payable A/c (Liability increases)
  • Narration: Being bill accepted in favour of [Drawer’s Name] for [period].

Scenario 2: Bill Held Till Maturity and Honoured

If the drawer holds the bill until its maturity date and the drawee pays the amount.

• Drawer’s Books (Seller): At maturity, cash is received, and the Bills Receivable asset is extinguished.
  • Entry: Cash/Bank A/c Dr. (Asset increases)
           To Bills Receivable A/c (Asset decreases)
  • Narration: Being payment received on maturity of Bill No. [Bill Number].
• Drawee’s Books (Buyer): At maturity, cash is paid, and the Bills Payable liability is extinguished.
  • Entry: Bills Payable A/c Dr. (Liability decreases)
           To Cash/Bank A/c (Asset decreases)
  • Narration: Being payment made for Bill No. [Bill Number] on maturity.

Scenario 3: Bill Discounted with Bank

The drawer may need cash before the maturity date. They can discount the bill with their bank. The bank deducts a small amount (discounting charges) and pays the remaining sum immediately.

• Drawer’s Books (Seller): Cash is received from the bank, discount is an expense, and the Bills Receivable asset is transferred to the bank.
  • Entry: Bank A/c Dr. (Amount received)
           Discount A/c Dr. (Discount charges – expense)
           To Bills Receivable A/c (Face value of bill – asset decreases)
  • Narration: Being bill discounted with bank at [discount rate/amount].
• Drawee’s Books (Buyer): The drawee’s position does not change. They are still liable to pay the bill at maturity. They will pay the bank (who is now the holder of the bill) at maturity, making the same entry as in Scenario 2.

Summary of Journal Entries (Drawer’s Books for Different Disposals)

Quick Revision Points:

• A Bill of Exchange is an unconditional order.
• The Drawer (creditor) draws the bill on the Drawee (debtor).
• Bills Receivable is an asset for the Drawer.
• Bills Payable is a liability for the Drawee.
• Discounting a bill means selling it to the bank for immediate cash, incurring a discount charge (expense).
• In simple transactions, the Drawee is unaffected by the Drawer’s decision to hold, discount, or endorse the bill until maturity. Their only concern is paying the bill’s holder at maturity.

Extra Practice Questions:

1. What is the primary purpose of a Bill of Exchange in commercial transactions?
2. Who typically becomes the acceptor of a Bill of Exchange?
3. If a Drawer discounts a bill, what is the impact on their cash flow?
4. In the Drawee’s books, when a bill is accepted, which account is credited?
5. What is the main difference between a Bills Receivable and a Bills Payable from the perspective of the business?