Archive for the ‘Bill Of Exchange’ Category

Accounting For Bill Of Exchange-Bills Payable(Part3)

Monday, October 29th, 2007

In earlier article Part 2, the accounting for Bills Receivable have been dealt with.

This article looks at the accounting for Bills Payable.

Bills Payable
As explained in Part 1 &2, 1. The bill of exchange after it is accepted is known as bill receivable to the drawer and PAYABLE TO THE ACCEPTOR [ When a drawee accepts the bill and signs he/she is known as the acceptor. The acceptor is primarily liable on a bill to the drawer so long as the drawer retains the bill. When the bill is negotiated and transferred to a payee, the drawer than become liable on the bill as well as the acceptor.] Refer below for the Accounting entries for Bills Payable and a simple illustration to demonstrate how to pick up Bills Payable in the Ledger Accounts.
Accounting Entries For Bills Payable

DR CR
Face value of bill of exchange accepted for payment to a creditor:
Creditor’s account XX
Bills Payable account XX
Face value of bill paid on maturity:
Bills Payable account XX
Bank account XX
Face value of bill returned:
Bills Payable account XX
Creditor’s account XX
Interest charged by customer due to return of old bill and re-issue new one:
Interest Payable account XX
Creditor’s account XX
Face value of new bill issued being face value of old one plus interest charged
Creditor’s account XX
Bills Payable XX

Illustration: On 1/1/200X, A sold goods to B for $50,000 and drew a bill on B at four months in settlement. B accepted the bill. On 30/1/0X, A discounted the bill with the bank at 6% per annum. At maturity, B failed to meet his bill and the holder had recourse against A. On 1/5/0X, A drew and B accepted a new bill at three months for the amount of the original bill, plus interest at 12% per annum.

Question: Show the ledger accounts in B’s books.

Solution: In B’s Books:

Bills Payable Account

$ $
30/4 A’s account- Bills dishonored 50,000 1/1 A’s account-Bills accepted 50,000
1/5 A’s account 51,500

A’s Account

$ $
1/1 Bills Payable a/c- bill accepted 50,000 1/1 Purchases 50,000
1/5 Bills Payable Face value- $50,000 plus interest charged 51,500 30/4 Bills Payable a/c-Bills dishonored 50,000
1/5 Interest payable 1,500

Interest Payable Account

$ $
1/5 A’s a/c-interest charged 1,500

Note:On maturity, the bank will present the bill to B. On its dishonor, the bank will hand the bill back to A and will debit A’s bank account with the face value of the bill. In A’s book, the amount is debited back to B’s account to show that B is still in debt.

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Accounting For Bill Of Exchange-Bills Receivable(Part2)

Monday, October 29th, 2007

In Part 1, the common terms used in Bill Of Exchange have been explained.

This article deals with the accounting for Bills Receivable which are defined as:

Bills Receivable
As explained in Part 1,  1.     The bill of exchange after it is accepted is known as bill receivable to the drawer and bill payable to the acceptor           [ When a drawee accepts the bill and signs he/she  is known as the acceptor. The acceptor is primarily liable on a bill to the drawer so long as the drawer retains the bill. When the bill is negotiated and transferred to a payee, the drawer than become liable on the bill as well as the acceptor.] 

Below shows the accounting entries of Bills Receivable and an illustration on how to pick up the Bills Receivable in the Ledger Accounts.
Accounting Entries For Bills Receivable

  DR CR
When the bill of exchange is received from the customer:    
Bills Receivable account XX  
Customer’s account   XX
     
Bill paid on maturity by customer:    
Bank account XX  
Bills Receivable account   XX
     
Where the bill has been discounted:    
Discount Charges account XX  
Bills Receivable account   XX
     
Bill endorsed over to creditor    
Creditor’s account XX  
Bills Receivable account   XX
     
Face value of bills dishonored where it has not been discounted or endorsed:    
Customer’s account XX  
Bills Receivable account   XX
     
Face value of bills dishonored where It has been discounted with a bank:    
Customer’s account XX  
Bank account   XX
     
Face value of bills dishonored where it has been endorsed over to a creditor:    
Customer’s account XX  
Creditor’s account   XX
     
Face value of Bill returned:    
Customer’s account XX  
Bills Receivable account   XX
     
Interest charged to customer as a result of returning old bill and issuing a new one:    
Customer’s account XX  
Interest Receivable account   XX
     
Record with new bill amount being face value of old one plus interest charged    
Bills Receivable account XX  
Customer’s account   XX

Illustration: On 1/1/200X, A sold goods to B for $50,000 and drew a bill on B at four months in settlement. B accepted the bill. On 30/1/0X, A discounted the bill with the bank at 6% per annum. At maturity, B failed to meet his bill and the holder had recourse against A. On 1/5/0X, A drew and B accepted a new bill at three months for the amount of the original bill, plus interest at 12% per annum. 

Question:  Show the ledger accounts in A’s books. 

Solution:  In A’s Books: 

                            Bills Receivable Account

    $     $
1/1 B’s account 50,000 30/1 Bank-bill discounted 49,250
1/5 B’s account 51,500   Discount charges a/c 750

                                   B’s Account

    $     $
1/1 Sales a/c 50,000 1/1 Bills Receivable a/c 50,000
30/4 Bank a/c 50,000 1/5 Bills Receivable a/c 51,150
1/5 Interest Receivable a/c 1,500      

                                   Bank Account

    $     $
30/1 Bills Receivable 49,250 30/4 B’s account -bill dishonored 50,000

                         Discount Charges Account

    $     $
30/1 B’s account 750      

                           Interest Receivable Account

          $
      1/5 B’s a/c 1,500

See next article Part 3 on Accounting for Bills Payable

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Terms Used In Accounting For Bill Of Exchange (Part1)

Monday, October 29th, 2007

Before we can do any accounting for bill of exchange,we at least need to understand cthe following commonly used terms.

Basics:
 1.   Definition of a Bill of exchange: 

  • “is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future date, a sum certain in money to or to the order of a specified person or bearer”

2.       Parties to a Bill of exchange: 

  • There are three (3) parties to a bill viz:

     (i)     Drawer - the party who draws the bill and signs it ( usually creditor)

     (ii)    Drawee - the party to whom the bill is addressed (usually debtor)

     (iii)  Payee – the party to whom the bill is expressed to be payable 3.       When a drawee accepts the bill and signs he/she  is known as the acceptor. The acceptor is primarily liable on a bill to the drawer so long as the drawer retains the bill. When the bill is negotiated and transferred to a payee, the drawer than become liable on the bill as well as the acceptor.

4.      The bill of exchange after it is accepted is known as bill receivable to the drawer and bill payable to the acceptor  5.   When a bill receivable is discounted, the bill is actually being sold to the discount house for cash. The difference between the amount stated in the bill and the cash received is known as discount. This discount is the consideration payable for obtaining the money in advance of maturity date. The discount house will then hold the bill until maturity when it will present it to the debtor for payment.
Further Related terms used :

Dishonored bill When a bill is not met by the acceptor on maturity
Noted dishonored bill When the bill is being dishonored, it is often noted which means that the bill is handed to a solicitor acting as a notary public who will record the reasons for it dishonor to avoid any future dispute. The expenses incurred by reason of the dishonor of the bill must be charged to the person who dishonored it.
Returned Bill  Where a bill is returned, the bill is actually being withdrawn by the acceptor to avoid dishonor. A new bill maturing at a later date is given in place of the old bill.
Rebated bill A bill that is met before the due date. Usually happens for the purpose of obtaining possession of goods or documents against which the bill was drawn and which cannot be released until the bill is discharged. A rebate representing the interest on the amount of the bill for the period unexpired is allowed.

Refer next article on Accounting & Example of Bill of Exchange

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