Explained: Accounting Entries to be passed for bills of exchange transactions

Accounting for bills of exchange starts when the drawer draws a bill and the drawee accepts it. The drawer receives back the bill after the drawee accepts the bill and returns it to the drawer. The drawer becomes the holder of the bill accepted by the drawee. Once the drawer is the holder of the bill, they can use the bill in several ways:

By holding the bill till the due date

By discounting the bill

By endorsing the bill

By sending the bill to the bank for collection

Accounting for bills of exchange involves making journal entries and preparing ledger accounts in the books of the drawer and drawee.

Here are some accounting entries for bills of exchange:

When the bill is drawn and accepted: Debit the debtor account and credit the bills receivable account.

When the bill is endorsed to a creditor: Credit the creditor account and debit the bills receivable account.

When the bill is discounted with the bank: Debit the bank account and credit the bills receivable account. Further, debit the discount on the bills account and credit the bank account.

When the bill is sent to the bank for collection: Debit the bills for the collection account and credit the bills receivable account.

When the bill is collected: Debit the bank account and credit the bills for collection account.

Accounting for bills of exchange involves making journal entries and preparing ledger accounts in the books of the drawer and drawee.

Entries in drawer’s book:

1. The Bill was drawn, accepted by drawee

Date	Particulars	Amount (Debit)	Amount (credit
	Bills Receivable a/c	xxxxx
	Drawee’s a/c		Xxxxx

• When Bill is retained by the drawer till maturity:

Date	Particulars	Amount (Debit)	Amount (credit

• When bill being retained by the drawer and payment received:

Date	Particulars	Amount (Debit)	Amount (credit
	Cash/Bank a/c	xxxxx
	Bills receivable a/c		xxxxx

• When Bill was dishonoured:

Date	Particulars	Amount (Debit)	Amount (credit
	Drawee’s a/c Bills	xxxxx
	Receivable a/c		xxxxx

• When the bill was discounted with the bank

Date	Particulars	Amount (Debit)	Amount (credit
	Bank a/c (amount actually received after discount	Xxxxx
	Discount account	xxxxx
	Bill Receivable a/c		Xxxxx

• When the bill is discounted with the bank being honoured:

Date	Particulars	Amount (Debit)	Amount (credit
	No entry

• When the bill is discounted with the bank being dishonoured:

Date	Particulars	Amount (Debit)	Amount (credit
	Drawee’s a/c	Xxxxx
	Bank a/c		Xxxxx

 * When the bill receivable is endorsed to the creditor

Date	Particulars	Amount (Debit)	Amount (credit
	Creditor’s/ Endorsee’s A/c	Xxxxx
	Bills Receivable A/c		Xxxxx

• When the  bill receivable endorsed to the creditor is honoured:

Date	Particulars	Amount (Debit)	Amount (credit
–	No entry	–	–

   * When the bill receivable endorsed to the creditor is dishonoured:

Date	Particulars	Amount (Debit)	Amount (credit
	Drawee’s a/c	Xxxxx
	Creditor’s a/c		Xxxxx

Drawee’s or the Payer’s Books

A bill payable refers to the bills that one has to pay on the due dates.

Any bill of exchange is treated like a bill receivable only by the one who is entitled to receive the total sum that is due to it. When one draws a bill that is received by the debtors, the bill receivable is on maturity and it is held up to a specific period.

Drawee’s books: The bill becomes a liability for the drawee, and is recorded as a bill payable in the drawee’s accounts payable account.

When a bill is drawn and accepted:

Date	Particulars	Amount (Debit)	Amount (credit
	Drawer’s a/c	Xxxxx
	Bills payable		Xxxxx

The journal entry for discharge of bill in the drawee’s or payer’s books is:

Date	Particulars	Amount (Debit)	Amount (credit
	Bills payable	Xxxxx
	Cash/Bank a/c		Xxxxx

The journal entry for dishonoring a bill in the payer’s books is to credit the bills receivable account and debit the drawee’s account.

Date	Particulars	Amount (Debit)	Amount (credit
	Drawee’s a/c	Xxxxx
	Receivable a/c		Xxxxx

The journal entry for the books of in holder/endorsee

Date	Particulars	Amount (Debit)	Amount (credit
	Creditors’/Endorsee’s a/c	Xxxxx
	Bills Receivable a/c		Xxxxx

 (Being bill endorsed in favor of creditor)

When a bill is honored, the journal entry for the endorsee or holder is:

Date	Particulars	Amount (Debit)	Amount (credit
	Cash or Bank a/c	Xxxxx
	Bills Receivable a/c		Xxxxx

The journal entry for a dishonored bill in the books of the endorsee is:

Date	Particulars	Amount (Debit)	Amount (credit
	Bills Payable A/c	Xxxxx
	Drawer’s A/c		Xxxxx

In case of dishonor, they note the reasons for dishonor and give the bill back to the drawer. They charge fees for this, known as noting charges. The person responsible for the dishonor bears the noting charges.

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