Dishonour of a Bill of Exchange:

Learning Objectives:

1. Make journal entries when a bill of exchange is dishonoured by the drawee.

Definition and Explanation:

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.

1. If the drawee refuses to accept the bill when it is presented before him for acceptance, it is called dishonour by non-acceptance. When a bill is dishonoured by non-acceptance, an immediate right of recourse against the drawer and endorser accrues to the holder. In this case, presentment for payment is not necessary.

2. If the drawer has accepted the bill, but on the due date, he refuses to make payment of the bill, it is called dishonour by non-payment. In this case the holder has immediate right of recourse against each party to the bill.

Noting Charges: When a bill of exchange is dishonoured, the holder can get such fact noted on the bill by a notary public. The advantages of noting is that the evidence of dishonoured is secured. The noting is done by recording the fact of dishonoured, the date of dishonour, the reason of dishonour, if any. For doing all this the notary public charges his fees which is called noting charges.

Journal entries on the dishonour of the bill of exchange:

Creditor’s Books:

At the time a bill is dishonoured, it may be either with the drawer or with his banker with whom he has discounted it or with a creditor of whose favor he may have endorsed it:

Note: The amount will include the noting charges. No separate entry will be passed for noting charges as in case (a) above

It may be noted that in all four cases the drawer debits the acceptor’s credits that party’s account who presents the bill for payment.

Debtor’s Books:

When the bills payable is dishonoured the debtor has to pass the same journal entry in all the cases The journal entry is:

Example 1:

P draws a bill on Q for $2,000 who accepts and returns it to P on the same date. The bill is dishonoured by Q on the due date. P pays $30 as noting charges.

Record the above transactions in the books of P and Q.

Solution:

Journal Entries in the Books of P

Journal Entries in the Books of Q

Journal Entries in the Books of R

Example 2:

On 1st January, 1991 P draws on Q a three months bill for $2,000 who accepts and return it to P on the same date. On 4th January P discounts it with his bank at 6% per annum. The acceptance is dishonoured in the due date, and bank pays $30 as noting charges.

How these transactions should be recorded in the journal of P & Q.

Solution:

Journal Entries in the Books of P

Journal Entries in Books of Q

Example 3:

P draws a bill for $2,000 on Q who accepts and returns it to P on the same date. P sent the bill to his banker for collection. On the due date the bill is dishonoured by Q. Give journal entries in the books of P.

Solution:

You may also be interested in other articles from “accounting for bills of exchange page” chapter:

1. Definition and Explanation of Bill of Exchange
2. Advantages of a Bills of Exchange
3. How a Bill of Exchange Functions
4. Promissory Note
5. Difference between Bill of Exchange and Promissory Note
6. Difference Between Bill of Exchange and Cheque/Check
7. Recording Transactions of Bill of Exchange
8. Drawing, Acceptance, and Payment of Bill of Exchange
9. Discounting of Bill of Exchange
10. Bills of Exchange for Collection
11. Endorsement of a Bill of Exchange
12. Dishonour of a Bill of Exchange
13. Renewal of a Bill of Exchange
14. Retiring of a Bill of Exchange
15. Accommodation Bill of Exchange
16. Insolvency of the Acceptor in a Bill of Exchange

Other Related Accounting Articles:

• Retiring of a Bill of Exchange
• Endorsement of Bill of Exchange
• Bill of Exchange for Collection
• Renewal of a Bill of Exchange
• Drawing, Acceptance, and Payment of Bills of Exchange
• Discounting a Bill of Exchange
• Accommodation Bills of Exchange
• Insolvency of Acceptor in Bills of Exchange
• Recording Transactions of Bill of Exchange
• Definition and Explanation of Bill of Exchange