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Accounting For Bills of Exchange:

Learning Objectives:

  1. Define and explain bills of exchange.

  2. What are its advantages?

  3. How does a bill differ from a promissory note?

  4. How a bill of exchange functions?

  5. What are the accounting treatments of drawing, accepting, discounting, and paying a bill.

Our present day business transactions are mostly conducted on credit basis. It means that the buyer of goods pays the price of goods purchased within a fixed time after the date of the transaction.

On the other hand the seller has to wait for his money. In many cases the seller cannot afford to do so. He desires payment at the time of selling the goods; but the buyer is not in a position to pay. Then how the matter can be settled so that both the buyer and seller are satisfied? The bill of exchange is one of the means of doing this.

Definition and Explanation of Bill of Exchange:

A bill of exchange has been defined as 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 time, a certain sum in money to or to the order of a specified person or to bearer. Click here to read full article.

Advantages of a Bills of Exchange

How a Bill of Exchange Functions

In order to fully grasp the transactions relating to bill of exchange we thoroughly learn the procedure. Click here to read full article.

Promissory Note

Difference between Bill of Exchange and Promissory Note

Difference Between Bill of Exchange and Cheque/Check

Recording Transactions of Bill of Exchange:

For the purpose of accounting, bills are classified under two heads, Bills receivable and Bills payable Click here to read full article.

Drawing, Acceptance, and Payment of Bill of Exchange:

When a bill is written it is known as "drawing" a bill. The person who draws it is the creditor and the person to whom it is addressed is the debtor. The creditor and the debtor are also known as the drawer and the drawee respectively. Click here to read full article.

Discounting of Bill of Exchange:

If the holder of a bill is need of money before the due date of the bill he may sell it to the bank. The bank (buyer) will give cash fir it in consideration of a small charge. This is called discounting the bill. The amount deducted by bank of the bill from the face value of the bill is called "discount". Click here to read full article.

Bills of Exchange for Collection:

When a person receives a bill, he may keep it till the date of maturity in order to receive the full amount. But in order to ensure safety, he may send it to his bank with the instructions that the bill should be retained till maturity and should be realised on that date. This does not mean discounting of bill. Click here to read full article.

Endorsement of a Bill of Exchange:

When a bill of exchange is negotiated i.e., transferred from one person to another person so as to constitute the transferee the holder of a bill, each person through whose hands it passes, must write his name on the back of the bill. This is know as the "endorsement of a bill of exchange". Click here to to read full article.

Dishonour of a Bill of Exchange:

A bill of exchange is said to be dishonoured when the drawee refuses to accept or make payment on the bill. A bill may be dishonoured by non-acceptance or non-payment. Click here to read full article.

Renewal of a Bill of Exchange:

When the acceptor of a bill finds himself unable to make payment of the bill on the due date; he may request the drawer of the bill, before it is due, to cancel the original bill and draw on him a new bill for an extended period. This is called renewing a bill of exchange. Click here to read full article.

Retiring of a Bill of Exchange:

Retiring a bill means making payment before the date of maturity. When the acceptor of a bill is prepared to make the payment of the bill before the due date, he may ask the holder to accept the payment, provided he receives some rebate or discount for the unexpired period. Click here to read full article.

Accommodation Bill of Exchange:

An accommodation bill of exchange is a bill of exchange which has been drawn for the mutual financial accommodation of the parties involved. Generally it is drawn not for value received. In order to oblige friends, many times bills are drawn, accepted and endorsed by businessmen without any consideration. Click here to read full article.

Insolvency of the Acceptor in a Bill of Exchange:

Insolvency of a person means that he is unable to pay his liabilities. This will mean that bill accepted by him will be dishonoured. Therefore, when it is known that a person has become insolvent, entry for dishonour of his acceptance should be passed, Later something may be received from his estate. Click here to read full article.


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