Bills of Exchange | CMA Inter Syllabus

1. Accounting for Bills of Exchange
2. Exercise

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Accounting for Bills of Exchange

Definition  of Negotiable Instrument

As per legal terminology, the word ‘negotiable’ means transferable from one person to another and the word ‘instrument’ means any written document by which a right is created in favour of some person. Therefore ’negotiable instrument’ means any document which entitles a person to a certain sum of money and which is transferable from one person to another by delivery or by indorsement and delivery in accordance with the provisions of the Negotiable Instruments Act, 1881.

According to section13(1) of the Act, “A negotiable instrument means a promissory note or bill of exchange or cheque, payable either to order or to the bearer”.

Note: The Negotiable Instruments Act, 1881, is an act to define and amend the law relating to promissory notes, bills of exchange and cheques.

Definition of Bills of Exchange

According to Section 5 of the Negotiable Instrument Act, 1881, ‘A bill of exchange is an instrument in writing 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.’

• A promise or order to pay is not conditional, within the meaning of this Section and section 4, by reason of the time for payment of the amount or any instalment thereof being expressed to be on the lapse of a certain period after the occurrence of a specified event which, according to the ordinary expectation of mankind, is certain to happen, although the time of its happening may be uncertain.
• The sum payable may be certain, within the meaning of this Section and Section 4, although it includes future interest or is payable at an indicated rate of exchange, or is according to the course of exchange, and although the instrument provides that, on default of payment of an instalment, the balance unpaid shall become due.
• The person to whom it is clear that the direction is given or that payment is to be made may be a certain person, within the meaning of this Section and section 4, although he is mis-named or designated by description only.

Essential Elements of a Bills of Exchange

Following are the essential elements of a Bill of Exchange

1. It must be in writing and may be in any language and in any form
2. It must be drawn on a particular date
3. There are three parties to a Bill of Exchange – Drawer / Maker, Drawee and Payee
4. It must be signed by the Drawer / Maker
5. It must contain an unconditional and imperative order to pay
6.  The order to pay must be directed to a certain person
7.  The order must be to pay a certain sum of money only
8.  It must be accompanied with proper stamp as per the requirement of the law

Parties to a Bills of Exchange

A Bill of Exchange transaction often includes the following three parties:

Drawer: Drawer is the party that issues a Bill of Exchange - Creditor, Lender or Seller. He is the maker of the bill and his signature is necessary.

Drawee: Drawee is the party to which the order to pay is sent – Debtor, Lendee or Purchaser. The drawee becomes the acceptor of the bill when he/she/it has written the acceptance on the bill of exchange.

Payee: Payee or the beneficiary is the party to which the bill of exchange is payable – May be Drawer or Other Party 

Classification of Bills of Exchange

• Documentary Bill - In this, the bill of exchange is supported by the relevant documents that confirm the genuineness of sale or transaction that took place between the seller and buyer.
• Demand Bill - This bill is payable when it demanded. The bill does not have a fixed date of payment, therefore, the bill has to be cleared whenever presented.
• Usance Bill - It is a time-bound bill which means the payment has to be made within the given time period and time.
• Inland Bill - An Inland bill is payable only in one country and not in any other foreign country. This bill is opposite to the foreign bill.
• Clean Bill - This bill does not have any proof of a document, so the interest is comparatively higher than the other bills.
• Foreign Bill - A bill that can be paid outside India is termed as a foreign bill. Two examples of a foreign bill are an export bill and import bill.
• Accommodation Bill - A bill that is sponsored, drawn, accepted without any condition is known as an accommodation bill.
• Trade Bill - This kind of bill is specially related only to trade.
• Supply Bill - The bill that is withdrawn by the supplier or contractor from the government department is known as the supply bill.

Difference between Trade Bill and Accommodation Bill

	Trade Bill	Accommodation Bill
Objectives	Consideration	These bills are drawn to help someone in need of financial assistance.
Consideration	There is a definite consideration for which the bill is accepted.	These bills are drawn without consideration.
Extension of Credit	Trade bills are a form of credit extension.	These bills are not a form of credit extension.
Proceeds	When trade bills are discounted, the proceeds remain with the holder.	When these bills are discounted, the proceeds may be shared by two parties in an agreed ratio.
Recovery	If trade bills are dishonoured, the amount may be recovered easily through the court.	When these bills are discounted, the proceeds may be shared by two parties in an agreed ratio.

 Maturity / Due Date of a Bill of Exchange and Days of Grace

Due Date
Maturity date in case of On Demand Bill / At Sight Bill / On Presentation Bill	● The bill at sight becomes due for payment, as soon as it is presented for payment. ● In case of ‘Instrument payable on demand’, No time for payment is mentioned. ● Such Bills are not entitled to the Days of Grace.
Maturity date in case of After Date Bill	● In the case of ‘Bill after date,’ the time for payment is mentioned. ● Three Days of Grace is allowed on such a bill
Maturity date in case of After Sight Bill	● In case of ‘Bill after Sight, payable at a fixed period ‘after sight’. ● The period begins from the date of accepting the bill. ● Three Days of Grace is allowed on such a bill

Grace Date
When the Period of Bill is Given in Months	● In this case, the maturity date is calculated according to calendar months. ● Ignoring the number of days in a month. ● 3 days of the Grace period are added. For example: – if a bill dated 4th May, 2022 is payable 3 months after date: = Then the maturity date will be 4th August 2022 + 3 Days of Grace  = 7th August 2022
When the Period of Bill is Given in Days	● The maturity date will be calculated in days, ● This excludes the date of transaction but includes the date of payment. ● 3 days of the Grace period are added in this case also. For example: - if a bill dated 5th June 2022 is payable after 65 days, then thematurity date will be: =25 Days of June + 31 Days of July + 9 Days of August + 3 Days of Grace =12th August 2022
When Maturity Date Falls on a National Holiday	● If the due date of the bill is on the national holiday ● Then the maturity day of the bill shall be the preceding business day. Example:- If due date of the bill falls on 26th January (Republic Day), then its due date will be 25th January. ● If the due date is 15th August (Independence Day), then the due date will be 14th August.
When the Maturity Date Has Been Declared as Emergency Holiday	● If the due date of the bill is declared as an emergency holiday, ● Then the due date of the bill shall be after 1 day from the date of maturity. Example:- if the due date of a bill is 25th July and it is declared as an emergency holiday, then the due date will be 26th July.

 Concept of Bills Receivable and Bills Payable

Bills Receivable or B/R	● For the person who draws the bill of exchange and is entitled to receive its payment is known as Bill Receivable. ● The drawer of the bill will show B/R on the assets side of the Balance Sheet.
Bills Payable or B/P	● For the person who accepts the bill, and is liable to make its payment, is known as Bills Payable. ● The Drawee of the bill will show B/P on the liabilities side of the Balance Sheet.

Journal Entries for Trade Bills
Sl. No	Transactions	In the Books of Drawer (X)	In the books of Drawee (Y)
1	If a bill is received by X from Y after acceptance	Bills Receivable A/c                    Dr.	Drawer / X A/c                       Dr.
		To, Drawee / Y A/c	To, Bills Payable A/c
2	If the bill is retained by X till due date	No entry                                       Dr.	No entry
3	If the bill is discounted with a Bank	Bank / Cash A/c                           Dr.	No entry
		Discount A/c                                Dr.
		To, Bills Receivables A/c
4	If the bill is endorsed to a Creditor (Z)	Creditor / Z A/c                            Dr.	No entry
		Discount Allowed A/c (if any)   Dr.
		To, Bills Receivables A/c
		To, Discount Receivables A/c (if any)
5	If the bill is sent to the Bank for collection	Bills for Collection A/c               Dr.	No Entry
		To, Bills Receivables A/c
6	If the bill is retired before maturity	Cash / Bank A/c                          Dr.	Bills Payable A/c                          Dr.
		Rebate Allowed A/c                  Dr.	To, Cash / Bank A/c
		To, Bills Receivables A/c	To, Rebate Received A/c
		To, Bills for Collection A/c (if already sent to Bank for collection)
7	If the bill is honoured / paid on the due date Previously retained by X	Cash / Bank A/c                         Dr.	Bills Payable A/c                         Dr.
		To, Bills Receivables A/	To, Cash / Bank A/c
8	If the bill is honoured / paid on the due date Previously discounted with a Bank	No Entry	Bills Payable A/c                         Dr.
			To, Cash / Bank A/c
9	If the bill is honoured / paid on the due date Previously sent to the Bank for collection	Bank A/c                                     Dr.	Bills Payable A/c                         Dr.
		To, Bills for Collection A/c	To, Cash / Bank A/c
10	If the bill is honoured / paid on the due date Previously endorsed to Z	No entry	Bills Payable A/c                         Dr.
			To, Cash / Bank A/c
11	If the bill is dishonoured / unpaid on due date Previously retained by X	Drawee / Y A/c                          Dr.	Bills Payable A/c                         Dr.
		To, Bills Receivables A/c	Noting / Sundry Carges A/c (if any)       Dr.
		To, Cash / Bank A/c (For Noting charges if any)	To, Drawer / X A/c
12	If the bill is dishonoured / unpaid on due date Previously discounted with a Bank	Drawee / Y A/c                         Dr.	Bills Payable A/c                        Dr.
		To, Bank A/c	Noting / Sundry Carges A/c (if any)      Dr.
		To, Cash / Bank A/c (For Noting charges if any)	To, Drawer / X A/c
13	If the bill is dishonoured / unpaid on due date Previously sent to the Bank for collection	Drawee / Y A/c                         Dr.	Bills Payable A/c                        Dr.
		To, Bills for Collection A/c	Noting / Sundry Carges A/c (if any)     Dr.
		To, Cash / Bank A/c (For Noting charges if any)	To, Drawer / X A/c
14	If the bill is dishonoured / unpaid on due date Previously endorsed to Z	Drawee / Y A/c                        Dr.	Bills Payable A/c                       Dr.
		To, Creditor / Z A/c (Bill value + Noting Charges if any)	Noting / Sundry Carges A/c (if any)    Dr.
			To, Drawer / X A/c
15	If the bill is renewed on due date For old bill cancelled	Drawee / Y A/c                       Dr.	Bills Payable A/c                      Dr.
		To, Bills Receivables A/c	To, Drawer / X A/c
16	If the bill is renewed on due date For interest charged for delayed paymen	Drawee / Y A/c                       Dr.	Interest (Allowed) A/c             Dr.
		To,  Interest (Received) A/c	To, Drawer / X A/c
17	If the bill is renewed on due date For part payment made in cash	Cash / Bank A/c                     Dr.	Drawer / X A/c                          Dr.
		To, Drawee / Y A/c	To, Cash / Bank A/c
18	If the bill is renewed on due date For a new bill drawn and accepted	Bills Receivable A/c              Dr.	Drawer / X A/c                          Dr.
		To, Drawee / Y A/c	To, Bills Payable A/c

 Illustration 1

Calculate the due dates of the bills in the following cases 

Sl.    No.	Date of Bill	Tenure (Period)
1	1st January 2021	4 months
2	23rd November 2021	2 months

Solution:

Sl. No.	Particulars	Calculation of Due Date
1	Date of drawing of bill	01.01.2021
	Period / Tenure (month)	4
		01.05.2021
	Days of grace	3
	Due date / Maturity date	04.05.2021<>/a?
2	Date of drawing of bill	23.11.2021
	Period / Tenure (month)	2
		23.01.2022
	Days of grace	3
	Due date / Maturity date	26.01.2022
	But 26.01.2022 is a National Holiday. So due date would be one day before i.e. 25.01.2022

Illustration 2

X sold goods for ₹ 20,000 to Y on credit on January 01, 2022. X drew a bill of exchange upon Y for the same amount for three months. Y accepted the bill and returned it to X. Y met his acceptance on maturity. Record the necessary journal entries under the following circumstances:

(i) X retained the bill till the date of its maturity and collected directly

(ii) X discounted the bill @ 12% p.a. from his bank

(iii) X endorsed the bill to his creditor Z

(iv) X retained the bill and on March 31, 2021 X sent the bill for collection to its bank. On April 05, 2021 bank advice was received. 

Solution:

In the Books of X

Journal

(i) When the bill is retained till its maturity

Date	Particulars	L.F.	Dr. (₹ )	Cr. (₹ )
2021
January 1	Y’s A/c                                                                                                                                                                                                                                              DR.		20,000
	To, Sales A/c			20,000
	(Being goods sold to Y’s on credit)
January 1	Bills Receivable A/c                                                                                                                                                                                                                          DR.		20,000
	To, Y’s A/c			20,000
	(Being received Y’s acceptance payable after three months)
April 5	Bank A/c                                                                                                                                                                                                                                           DR.		20,000
	To, Bills Receivable A/c			20,000
	(Being Y met his acceptance on maturity)

(ii) When the bill was discounted from the book

Date	Particulars	L.F.	Dr. (₹ )	Cr. (₹ )
2022
January 1	Y’s A/c                                                                                                                                                                                                                                              DR.		20,000
	To, Sales A/c			20,000
	(Sold goods to Y’s)
January 1	Bills Receivable A/c                                                                                                                                                                                                                           DR.		20,000
	To, Y’s A/c			20,000
	(Received Y’s acceptance three months)
January 1	Bank A/c                                                                                                                                                                                                                                           DR.		19,400
	Discount A/c  ( ₹ 20,000 12%  3/12 )                                                                                                                                                                                                 DR.		600
	To, Bills Receivable A/c			20,000
	(Y’s acceptance discounted with the bank)

(iii) When X endorsed the bill in favour of his creditor Z

Date	Particulars	L.F.	Dr. (₹ )	Cr. (₹ )
2022
January 1	Y’s A/c                                                                                                                                                                                                                                              DR.		20,000
	To, Sales A/c			20,000
	(Sold goods to Y’s on credit)
January 1	Bills Receivable A/c                                                                                                                                                                                                                           DR.		20,000
	To, Y’s A/c			20,000
	(Received Y’s acceptance for three months)
January 1	Z’s A/c                                                                                                                                                                                                                                               DR.		20,000
	To, Bills Receivable A/c			20,000
	(Y acceptance endorsed in favour of Z)

(iv) When the bill was sent for collection by X to the bank

Date	Particulars	L.F.	Dr. (₹ )	Cr. (₹ )
2022
Jan. 01	Y’s A/c                                                                                                                                                                                                                                                DR.		20,000
	To, Sales A/c			20,000
	(Sold goods to Y’s on credit)
Jan. 01	Bills Receivable A/c                                                                                                                                                                                                                            DR.		20,000
	To, Y’s A/c			20,000
	(Received Y’s acceptance payable after three months)
Mar. 31	Bills Sent for Collection A/c                                                                                                                                                                                                               DR.		20,000
	To, Bills Receivable A/c			20,000
	(Bills sent for collection)
Apr. 05	Bank A/c                                                                                                                                                                                                                                             DR.		20,000
	To, Bills sent for collection A/c			20,000
	(Bills sent for collection collected by the bank)

The following journal entries will be made in the books of Y under all the four circumstances

In the Books of Y

Journal

Date	Particulars	L.F.	Dr. (₹ )	Cr. (₹ )
2022
Jan. 01	Purchases A/c                                                                                                                                                                                                                                     DR.		20,000
	To, X’s A/c			20,000
	(Purchases goods from X on credit)
Jan. 01	X’s A/c                                                                                                                                                                                                                                                 DR.		20,000
	To, Bill’s Payable A/c			20,000
	(Accepted bill drawn by X payable after three months)
Apr. 04	Bills payable A/c                                                                                                                                                                                                                                 DR.		20,000
	To, Bank A/c			20,000
	(Met acceptance maturity)

Dishonour of Bills

Dishonour of Bill	A bill of exchange can be dishonoured either by non-acceptance or by non-payment.
Dishonour by non-acceptance	A bill of exchange is said to be dishonoured by non-acceptance when the drawee, or one of several drawees not being partners,makes default in acceptance upon being duly required to accept the bill, or where presentment is excused and the bill is not accepted. When a bill of entry dishonoured by non-acceptance, no accounting is required to be done in the books of any party.
Dishonour by non-payment	When a bill of entry is not honoured by payment i.e. payment is not made by the drawee to the holder on the date of maturity it is referred to as dishonour by non payment. In such an event, accounting entries are required to be passed in the books of drawer, drawee and endorsee (if any).
Noting of a Bill	The recording of the fact of dishonour of bill by a Notary Public is referred to as Noting of a Bill. For this purpose, a fee, called the Noting Fee or Noting Charge , is required to be paid. It is an expense for the holder of the bill and is recovered from the party is responsible for the such dishonour.
Dishonour due to insolvency	When a bill of exchange is dishonoured due to insolvency of the drawee or acceptor of the bill, either nothing is recovered from the drawee or acceptor, or a partial amount is recovered (referred to as Final Dividend) in full and final settlement of the claim. In the books of the drawer, the amount is debited to Bad Debts Account, while in the books of the drawee it is transferred to Deficiency Account.

 Illustration 3

Mr. X sold goods for ₹ 15,000 to Mr. Y and immediately drew a bill upon him on Jan. 01, 2022 payable after 3 months. On maturity the bill was dishonoured and ₹ 50 were paid by the holder of the bill as noting charges. The journal entries will be recorded in the books of Mr. X and Mr. Y as given below under the following circumstances:

(i) When the bill was kept by Mr. X till maturity.

(ii) When the bill was discounted by Mr. X with his bank immediately @ 12% p.a.

(iii) When the bill was endorsed by Mr. X in favour of his creditor Miss. Z.

Solution:

In the Books of X
Journal

(i) When the bill was retained till its maturity

Date	Particulars	L.F.	Dr. (₹ )	Cr. (₹ )
2022
Jan. 01	Y’s A/c                                                                                                                                                                                                                                                        DR.		15,000
	To, Sales A/c			15,000
	(Sold goods to Y)
Jan. 01	Bills Receivable A/c                                                                                                                                                                                                                                    DR.		15,000
	To, Y’s A/c			15,000
	(Received Y’s acceptance)
Apr. 04	Y’s A/c                                                                                                                                                                                                                                                        DR.		15,050
	To, Bills Receivable A/c			15,000
	To, Cash A/c			50
	(Y dishonoured his acceptance and paid ₹ 50 as noting charges)

(ii) When the bill was discounted with the bank

Date	Particulars	L.F.	Dr. (₹ )	Cr. (₹ )
2022
Jan. 01	Y’s A/c                                                                                                                                                                                                                                                    DR.		15,000
	To, Sales A/c			15,000
	(Sold goods to Y)
Jan. 01	Bills Receivable A/c                                                                                                                                                                                                                                DR.		15,000
	To, Y’s A/c			15,000
	(Received Y’s acceptance payable after three months)
Jan. 01	Bank A/c                                                                                                                                                                                                                                                 DR.		14,550
	Discount A/c                                                                                                                                                                                                                                           DR.		450
	To, Bills Receivable A/c			15,000
	(Y’s acceptance discounted)
Apr. 04	Y’s A/c                                                                                                                                                                                                                                                     DR.		15,050
	To, Bank A/c			15,050
	(Y dishonoured his acceptance on maturity and bank paid noting charges of ₹50 )

(iii) When the bill was endorsed to Z

Date	Particulars	L.F.	Dr. (₹ )	Cr. (₹ )
2022
Jan. 01	Y’s A/c                                                                                                                                                                                                                                                     DR.		15,000
	To, Sales A/c			15,000
	(Sold goods to Y)
Jan. 01	Bill’s Receivable A/c                                                                                                                                                                                                                                DR.		15,000
	To, Y’s A/c			15,000
	(Received Y’s acceptance)
Jan. 01	Z’s A/c                                                                                                                                                                                                                                                     DR.		15,000
	To, Bills Receivable A/c			15,000
	(Y’s acceptance endorsed in favour of Z)
Apr. 04	Y’s A/c                                                                                                                                                                                                                                                     DR.		15,050
	To, Z’s A/c			15,050
	(Y dishonoured his acceptance on maturity and Z paid ₹ 50 as noting charges)

The following journal entries will be made in the books of Y in all the three cases.

In the Books of Y 
Journal

Date	Particulars	L.F.	Dr. (₹ )	Cr. (₹ )
2022
Jan.01	Purchases A/c                                                                                                                                                                                                                                        DR.		15,000
	To, X’s A/c			15,000
	(Purchase goods from X)
Jan.01	X’s A/c                                                                                                                                                                                                                                                   DR.		15,000
	To, Bills Payable A/c			15,000
	(Accepted X’s draft)
Jan.01	Bills Payable A/c                                                                                                                                                                                                                                    DR.		15,000
	Noting charges A/c                                                                                                                                                                                                                               DR.		50
	To, X’s A/c			15,050
	(Acceptance in favour of X dishonoured)

Renewal of Bills

Renewal of a Bill

●When the holder of a bill is not in a position to meet the bill on its due date, Drawee approaches the Drawer with a request of extension of time for payment. ● If Drawer agrees, the old bill is cancelled, and a fresh bill with the new terms of payment is drawn and duly accepted and delivered. This is called Renewal of the Bill. ● The new bill is drawn for an extended time period and as such interest is charged for the extended period.

 Illustration 4

On February 01, 2022 X sold goods to Y for ₹ 18,000; ₹ 3,000 were paid by Y immediately and for the balance he accepted three months bill drawn upon him by X. On the date of maturity of the bill Y requested X to cancel the 
old bill and a new bill upon him for a period of 2 months. He further agreed to pay interest in cash to X @ 12% p.a. X agreed to Y’s request and cancelled the old bill and drew a new bill. The new bill was met on maturity by Y.

Pass necessary journal entries in the books of drawer and drawee.

Solution:

In the Books of X

Journal

Date	Particulars	L.F.	Dr. (₹ )	Cr. (₹ )
2022
Feb. 01	Y’s A/c                                                                                                                                                                                                                                             DR.		18,000
	To, Sales A/c			18,000
	(Sold goods to Y)
Feb. 01	Cash A/c                                                                                                                                                                                                                                          DR.		3,000
	Bills Receivable A/c                                                                                                                                                                                                                         DR.		15,000
	To, Y’s A/c			18,000
	(Received ₹ 3,000 in cash from X and an acceptance for the balance)
May 01	Y’s Account                                                                                                                                                                                                                                     DR.		15,300
	To, Bills Receivable A/c			15,000
	To, Interest A/c  [ ₹ 15,000 12%  2 / 12]			300
	(Cancelled old bill on renewal ₹ 300 as interest)
May 04	Bill’s Receivable A/c                                                                                                                                                                                                                        DR.		15,000
	Cash A/c                                                                                                                                                                                                                                          DR.		300
	To, Y’s A/c			15,300
	(Received new acceptance from Y)
Jul. 07	Bank A/c                                                                                                                                                                                                                                          DR.		15,000
	To, Bills Receivable A/c			15,000
	(Y met his new acceptance)

In the Books of Y

Journal

 

Date	Particulars	L.F.	Dr. (₹ )	Cr. (₹ )
2022
Feb. 01	Purchases A/c                                                                                                                                                                                                                                  DR.		18,000
	To, X A/c			18,000
	(Purchased goods from X)
Feb. 01	X’s A/c                                                                                                                                                                                                                                             DR.		18,000
	To, Cash’s A/c			3,000
	To, Bills Payable A/c			15,000
	(Received cash from X and his acceptance)
May 04	Bill Payable A/c                                                                                                                                                                                                                                DR.		15,000
	Interest A/c                                                                                                                                                                                                                                      DR.		300
	To, X A/c			15,300
	(Old bill cancelled on renewal, ₹ 300 charged as interest)
May 04	X’s A/c                                                                                                                                                                                                                                              DR.		15,300
	To, Bills Payable A/c			15,000
	To, Cash A/c			300
	(Accepted new bill and paid cash for interest)
Jul. 07	Bill Payable A/c                                                                                                                                                                                                                                DR.		15,000
	To, Bank A/c			15,000
	(Met acceptance of the new bill on maturity)

 Retirement of a Bill 

Retirement of a Bill	●When the Drawee pays the bill before its due date, it is termed as the retirement of a bill. ● It happens with the mutual understanding between the Drawer and the Drawee.
Rebate on Bill	● In case of such retirement, interest is payable for the unexpired period of the bill (i.e. time period between date of payment of bill and date of maturity) by the holder of the bill to the payee at an agreed rate of interest. This amount of interest is referred to as Rebate on Bill. This rebate happens to be an income for the drawee and an expense for the payee.

 Illustration 5

X sold goods ₹ 10,000 to Y on January 01, 2022 and immediately drew a bill on Y for three months for the same amount, Y accepted the bill and returned it to X. On March 04, 2022 Y retired her acceptance under rebate of 6% 
per annum. You are required to:

(a) Pass the journal entries to record the above transactions in the books of X and Y;

(b) Prepare Y A/c and Bill Receivable A/c in the books of X; and

(c) Prepare X A/c and Bill Payable A/c in the books of Y.

Solution:

In the books of X

Journal

(A)

Date	Particulars	L.F.	Dr. (₹)	Cr. (₹)
2022
January 1	Y’s A/c                                                                                                                                                                                                                                                                 DR.		10,000
	To, Sales A/c			10,000
	(Sold goods to Y)
January 1	Bills Receivable A/c                                                                                                                                                                                                                                             DR.		10,000
	To, Y’s A/c			10,000
	(Received Y’s acceptance for three months)
March 4	Bank A/c                                                                                                                                                                                                                                                             DR.		9,950
	Rebate on bills A/c ( ₹ 10,000 6 %  1/ 12)                                                                                                                                                                                                           DR.		50
	To, Bills Receivable A/c			10,000
	(Y retired her acceptance and rebate allowed to him)

(B) The recorded entries will be posted to the following ledger accounts: 

Y’s Account

Date	Particulars	J.F.	(₹)	Date	Particulars	J.F.	(₹)
2022				2022
Jan. 01	To, Sales A/c		10,000	Jan. 01	By, Bills Receivable A/c		10,000
			10,000				10,000

Bill Receivable Account

Date	Particulars	J.F.	(₹)	Date	Particulars	J.F.	(₹)
2022				2022
Jan. 01	To, Y A/c		10,000	Mar 04	By, Cash A/c		9,950
					By, Rebate on Bill A/c		50
			10,000				10,000

In the Books of Y 
Journal

Date	Particulars	L.F.	Dr. (₹ )	Cr. (₹ )
2022
January 1	Purchases A/c                                                                                                                                                                                                                                                                DR.		10,000
	To X A/c			10,000
	(Purchased goods from X)
January 1	X’s A/c                                                                                                                                                                                                                                                                            DR.		10,000
	To Bills Payable A/c			10,000
	(Accepted X’s draft payable after three months)
March 4	Bill Payable A/c                                                                                                                                                                                                                                                              DR.		10,000
	To Cash A/c			9,950
	To Rebate on bills A/c			50
	(Acceptance in favour of X retired and rebate received)

X’s Account

Date	Particulars	J.F.	(₹)	Date	Particulars	J.F.	(₹)
2022				2022
Jan. 01	To, Bills Payable A/c		10,000	Jan. 04	By, Purchases A/c		10,000
			10,000				10,000

Bills Payable Account 

 

Date	Particulars	J.F.	(₹)	Date	Particulars	J.F.	(₹)
2022				2022
Jan. 01	To, Cash A/c		9,950	Jan. 01	By, X A/c		10,000
	To, Rebate on bills A/c		50
			10,000				10,000

Accommodation Bill

Ordinarybills are drawn for some consideration – known as ‘Trade Bills’. However, Accommodation Bills are those which are drawn and accepted without any consideration. When two or more persons, not being in the relationship of debtors and creditors or without any value passing between them, draws bills on each other with the intention of discounting the bill after acceptance, appropriating the proceeds by one or all by agreed proportion and providing money in the same proportion for honouring the bills at maturity, such bill may be called Accommodation Bill.

Accommodation Bill is also referred to as the Kite Bill.

 Illustration 6

For mutual accommodation of himself and Y, X drew upon Y a bill of ₹ 6,000 at 3 months on 01.04.2021. Y accepted the bill and returned to X who discounted it immediately @ 6% p.a. According to agreement, X and Y shared the proceeds as 2:1. On the date of maturity X remitted his share to Y who honoured the bill by payment.

Show journal entries in the books of X and Y.

Solution:

In the books of X 
Journal

 

Date	Particulars	L.F.	Dr. (₹ )	Cr. (₹ )
01.04.2022	Bills Receivable A/c                                                                                                                                                                                                                               DR.		6,000
	To, Y A/c			6,000
	(Accommodation bill drawn and acceptance received)
	Bank A/c                                                                                                                                                                                                                                                DR.		5,910
	Discount on Bills A/c  ( ₹ 6,000 × 6 % × 3 / 12 )                                                                                                                                                                                   DR.		90
	To, Bills Receivable A/c			6,000
	(The bill discounted with the bank @ 6%)
	Y A/c                                                                                                                                                                                                                                                      DR.		2,000
	To, Bank A/c			1,970
	To, Discount on Bills A/c			30
	(1/3rd of the proceeds remitted and proportionate discount charged)
04.07.2022	Y A/c  ( ₹ 6,000 × 2 /3 )                                                                                                                                                                                                                         DR.		4,000
	To, Bank A/c			4,000
	(Own share of the accommodation bill remitted to Y)

In the books of Y 
Journal

Date	Particulars	L.F.	Dr. (₹ )	Cr. (₹ )
01.04.2022	X A/c                                                                                                                                                                                                                                                     DR.		6,000
	To, Bills Payable A/c			6,000
	(Acceptance give to the Accommodation bill)
	Bank A/c                                                                                                                                                                                                                                               DR.		1,970
	Discount A/c                                                                                                                                                                                                                                         DR.		30
	To, X A/c			2,000
	(1/3rd of the proceed received and proportionate discount allowed)
04.07.2022	Bank A/c                                                                                                                                                                                                                                               DR.		4,000
	To, X A/c			4,000
	(X’s share received)
	Bills Payable A/c                                                                                                                                                                                                                                    DR.		6,000
	To, Bank A/c			6,000
	(The bill honoured by payment)

 Illustration 7

X draws a bill for ₹ 1,200 and Y accepts the same for mutual accommodation in the ratio of 4:2. X discounts the bill for ₹ 1,110 and remits 1/3rd of the proceeds to B. Before the due date, Y draws another bill for ₹ 1,800 on X in order to provide funds to meet the first bill. The second bill is discounted for ₹ 1,740 by Y and a sum of ₹ 360 is remitted to X after meeting the first bill. The second bill is duly met. Show journal entries in the books of both X and Y.

Solution:

In the books of X 
Journal

 

Date	Particulars	L.F.	Dr. (₹ )	Cr. (₹ )
	Bills Receivable A/c                                                                                                                                                                                                                         DR.		1,200
	To, Y A/c			1,200
	(Being on 1st bill drawn on Y for mutual accommodation)
	Bank A/c                                                                                                                                                                                                                                          DR.		1,110
	Discount on Bills A/c                                                                                                                                                                                                                       DR.		90
	To, Bills Receivable A/c			1,200
	(Being the bill discounted with the banker for 1110)
	Y A/c  (  ₹ 1,200 × 1/3 )                                                                                                                                                                                                                   DR.		400
	To, Bank A/c			370
	To, Discount on Bills A/c  ( ₹ 90  × 1/3 )			30
	(Being 1/3rd of the proceeds remitted to Y – the loss on discount shared proportionately)
	Y A/c                                                                                                                                                                                                                                               DR.		1,800
	To, Bills Payable A/c			1,800
	(Being the bill drawn on X by Y)
	Bank A/c                                                                                                                                                                                                                                          DR.		360
	Discount on Bills A/c                                                                                                                                                                                                                       DR.		40
	To, Y A/c  ( ₹ 1,200 × 1/3)			400
	(Being the net amount remitted to X by Y)
	Bank A/c                                                                                                                                                                                                                                          DR.		600
	To, Y A/c			600
	(Being the balance amount of the 2nd bill remitted by Y)
	Bills Payable A/c (₹1800 – ₹1,200)                                                                                                                                                                                                   DR.		1800
	To, Bank A/c			1800
	(Being the 2nd bill honoured at maturity)

In the books of Y 
Journal

 

Date	Particulars	L.F.	Dr. (₹ )	Cr. (₹ )
	X A/c                                                                                                                                                                                                                                                 DR.		1,200
	To, Bills Payable A/c			1,200
	(Being a bill drawn on Y by X for mutual accommodation)
	Bank A/c                                                                                                                                                                                                                                            DR.		370
	Discount on Bills A/c                                                                                                                                                                                                                         DR.		30
	To, X A/c			400
	(Being 1/3rd of the proceed received and the loss on discount shared proportionately)
	Bills Receivable A/c                                                                                                                                                                                                                            DR.		1,800
	To, X A/c			1,800
	(Being the bill drawn on X)
	Bank A/c                                                                                                                                                                                                                                            DR.		1,740
	Discount on Bills A/c (Bal. fig.)                                                                                                                                                                                                           DR.		60
	To, Bills Receivable A/c			1,800
	(Being the bill discounted with the banker for ₹ 1,740)
	X A/c                                                                                                                                                                                                                                                  DR.		400
	To, Bank A/c			360
	To, Discount on Bills A/c			40
	(Being 1/3rd of the proceeds remitted to X – the loss on discount shared proportionately)
	Bills Payable A/c                                                                                                                                                                                                                                 DR.		1,200
	To, Bank A/c			1,200
	(Being the 1st bill honoured at maturity)
	X A/c                                                                                                                                                                                                                                                   DR.		600
	To, Bank A/c			600
	(Being the balance amount of the 2nd bill remitted to X)

Note:    Before the due date of the 1st bill, X was to remit ₹ 800 to Y to enable him to honour the bill. But X was not in a position to remit the required amount. He accepted a bill of ₹ 1800 drawn by Y. Y discounted the bill for ₹ 1,740 and remitted to X ₹ 360 after adjusting ₹ 800 in respect of the 1st bill. Therefore, X enjoyed ₹ (360+800)  ₹ 1,160 out of ₹ 1,740. X’s share of discount will be: ₹ 60/1,740 × ₹1,160 = ₹ 40.

Exercise

A. Theoretical Questions:

Multiple Choice Questions

1. On dishonor of a bill of exchange that has been discounted, noting charges are initially paid by _______.
   (a) Bank 
   (b) Drawer
   (c) Drawee
   (d) Acceptor
2. Shyam and Ramya are entered in the business of buy and sale of food grain for a period of one year and sharing the profit in the ratio of 2 :4 , this agreement is a:
   (a)  Partnership
   (b)  Consignment 
   (c)  Joint-venture
   (d)  Lease
3. If Kaveri’s acceptance which was endorsed by us in favour of Saleem is dishonoured, then the amount will be debited in our books to:
   (a)  Saleem
   (b)  Kaveri
   (c)  Bills Receivable Account 
   (d)  None of the above

Solution: 

1

a

2

c

3

b

B. Numerical Questions

Multiple Choice Questions

1. X draws a bill on Y for ₹ 1,80,000 for mutual accommodation in the ratio of 2:1. X got it discounted for ₹ 1,69,200 and remitted 1/3rd of the proceeds to Y. How much money should be remitted by X to Y at the time of maturity so as to enable Y to honour the bill?
   (a) ₹ 1,20,000
   (b) ₹ 1,15,200
   (c) ₹ 1,16,800 
   (d) ₹ 1,20,400
2. Raju draws a bill on Sampat on 25th October, 2021 for 90 days, the maturity date of the bill will be 
   (a)  27th January, 2022 
   (b)  26th January, 2022 
   (c)  25th January, 2022 
   (d)  28th January, 2022

Solution:

1

a

2

c

CMA book unsolved questions solution

1. On 1.1.2021, X sold goods to Y valuing ₹ 30,000. On 4.1.2021 X received from Y a cheque of ₹ 10,000 and drew a bill payable 3 months after date for the balance. On the same date, X endorsed the accepted bill to Z for full settlement of a debt of ₹ 21,000. On the due date, the bill was dishonoured and Y having become insolvent, met on 12.4.2021, 80% of his acceptance as full and final dividend. You are required to pass journal entries to record the above transactions.

Solution:

In the books of X

Journal

Date	Particulars		LF	Dr. (₹)	Cr. (₹)
1.1.2021	Y A/C	Dr.		30,000
	To Sales A/c				30,000
	(Being the goods sold to Y on Credit)
4.1.2021	Cash A/c	Dr.		10,000
	To Y A/C				10,000
	(Being the part payment of ₹ 10000 received from Y)
4.1.21	Bills Receivable A/c	Dr.		20,000
	To Y A/C				20,000
	Being a bill drawn on Rahim for 3 months for the amount due from him)
4.1.21	Z A/c	Dr.		21,000
	To Bills Receivable A/c				20,000
	To Discount Received A/c				1000
	(Being the bill endrosed in favour of Z in full settlement of a debt of ₹ 21000)
7.4.2021	Y A/C	Dr.		20,000
	Discount Received A/c	Dr.		1,000
	To Z A/c
	(Being the bill previously endrosed in favour of , now dishonoured)				21,000
12.4.2021	Bank A/c	Dr.		16,000
	Bad Debt A/c	Dr.		4,000	20,000
	To Y A/c
	Being 80% of the amount due from Y, received)

In the books of Y

Journal

Date	Particulars		LF	Dr. (₹)	Cr. (₹)
1.1.21	Purchase A/c	Dr.		30,000	30,000
	To X A/c
	(Being the Goods Purchased from Ram on Credit)
4.1.21	X A/c	Dr.		10,000	10,000
	To Cash A/c
	(Being the part payment of ₹ 10000 made to X)
4.1.21	X A/C	Dr.		20,000	20,000
	To Bills Payable A/c
	(Being the acceptance of a bill for 3 months for the amount due to him)
7.4.21	Bills payable A/C	Dr.		20,000	20,000
	To X A/c
	(Being the bill dishonoured at maturity)
12.4.21	X A/c	Dr.		20,000
	To Bank A/c				16,000
	To Deficiency A/c				4,000
	(Being the payment of 80% of dues)

2. On 1st July, 20X1 A drew a bill for ₹ 8,00,000 for 3 months on B for mutual accommodation. He accepts the bill of exchange. He purchased goods worth ₹ from C on the same date. A endrosed B’s acceptance to C in full settlement. On 1st September 20X1 C purchased goods worth 90,000 from B. C endrosed the bill of exchange received from A to B and paid 9,000 in full settlement of the amount due to B.

On 1st October 20X1 B purchased Goods worth ₹ 1,00,000 from A. He paid the amount due to A by Cheque.

Pass necessary journal entries in the books of B.

Solution:

In the books of B

Journal

Date	Particulars	LF	Dr. (₹)	Cr. (₹)
1.7.X1	A A/c		80,000
	To Bills payable A/c			80,000
	(Being the acceptance of a bill From A For mutual accommodation)
1.9.X1	C A/c		90,000
	To sales A/c			90,000
	(Being the goods sold on credit)
1.9.X1	Bills Receivable A/c		80,000
	Cash A/c		9,000
	Discount Allowed A/c		1,000
	To C A/c			90,000
	(Being a bill of ₹ 80,000 and cash ₹ 9,000 from c in full settlement)
1.9.X1	Bills payable A/c		80,000
	To Bills Receivable A/c			80,000
	(Being the mutual indebtedness canceled)
1.10.X1	Purchase A/c		10,000
	To A A/c			10,000
	(Being goods purchased on credit from A)
1.10.X1	A A/c (1,00,000 - 80,000)		20,000
	To Bank A/c			20,000
	(Being the amount due to paid off)