TREATMENT OF BILL BY THE HOLDER AND ITS ACCOUNTING

 5.4 TREATMENT OF BILL BY THE HOLDER AND ITS ACCOUNTING

As pointed out earher no distinction is made between a bill of exchange and a promissory note for accounting purposes. When a bill or a promissory note is received by the person who is entitled to receive its.payrnent, he becomes a holder of the bill. It is a bill receivable for him. He will pass the followingjournal entry in his books at the time of receiving the bill or the promissory note drawn in his favour.

Bills Receivable A/c Dr. 

 TO Drawee

 (Being .acceptance received from the drawee) 

The llolder of the bill can deal with it in the following three ways :

i) He may retain it till the date of maturity. 

ii) He may discount it with his banker and receive the amount less discount, immediately. 

iii) He may endorse it in favour of his own creditor.

Let us now study what journal entries are to be passed in each case.

5.4.1 Retaining the Bill

when the holder of the bill decides to retain the bill till the date of maturity no further entry is required till that date. If oti the date of maturity the bill is honoured he will pass the following entry.

 Bank A/c Dr. 

 To Bills Receivable A/c 

 (Being payment received) 

5.4.2 Discounting the Bill

If the holder of the bill needs funds he can i~pproach the bank for encashment of the bill before dui'date. The bank will make the payment of the bill after deducting some interest. The pl.ocess of encashing the bill with the bank before the date of maturity is called 'discounting a bill' and the interest charged by bank is called 'discount'.

'hen a bill is discounted the holder of the bill (drawer) will pass the following journal entry tis books.  

 

Bank A/c Dr.  Discount A/c Dr.

 To Bills Receivable A/c 

 (Being bill discounted) 

On the date of maturity, payment of a discounted bill will be received hy the bank and not by the drawer.

Hence, at the time of payment, the drawer will not pass any entry in his books.

5.4.3 Endorsing the Bill

When the holder of the bill edorses the bill to a third party, the bill is said to be endorsed. He is called the endorser and the party to whom it is endorsed is called endorsee. At the time 'of endorsement, the following journal entries will be passed in the books of the endorser and the endorsee.

On the date of maturity, ;he payment will be received by the endorsee. Hence, at the time of payment, the endorser will not pass any entry in his books. However endorsee will pass the following entry in his books. 

Bank A/c Dr. To

 Bills Receivable A/c

( Being Paumant received)