Renewal of a Bill of Exchange
Renewal of a Bill of Exchange:
Learning Objectives:
- Make journal entries in the books of drawer and acceptor when the original bill is cancelled and a new bill is drawn on the acceptor.
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. The acceptor has to pay interest for the extension of time. The new bill therefore, includes not only the amount of the original bill but also interest etc. Journal entries in this case are:
Creditor’s Books:
In this case first of all entries recording the original bill will to be cancelled. Next entry for interest would be passed. A further entry will be passed for a new bill of exchange.
(a) When the old bill is cancelled: |
Personal account of the acceptor [Dr.] |
To Bill receivable account [Cr.] |
(b) When interest is charged by the drawer: |
Personal account of the acceptor [Dr.] |
To Interest account [Cr.] |
(c) When acceptance on new bill is received: |
Bill receivable account [Dr.] |
To Acceptor’s personal account [Cr.] |
Debtor’s Books:
Debtor will make the following entries in his books:
(a) When the old bill is cancelled: |
Bill payable account [Dr] |
To Drawer’s account [Cr] |
(b) When interest is charged by the drawer: |
Interest account [Dr] |
To Drawer’s account [Cr] |
(c) When a fresh bill is accepted: |
Drawer’s account [Dr] |
To bill payable account [Cr] |
Example 1:
P draws a bill for $2,000 on Q who accepts and returns it to P. When the bill was about to mature, Q expressed has inability to meet it and request to P to renew it. P agrees but adds $10 to the new bill for interest. Give necessary journal entries in the books of P and Q when the bill is renewed.
Solution:
Journal Entries in the Books of P
Bills receivable account | 2,000 | ||
To Q | 2,000 | ||
(Acceptance received) | |||
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Q | 2,000 | ||
To Bills receivable account | 2,000 | ||
(bill dishonored) | |||
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Q | 10 | ||
To Interest account | 10 | ||
(Being the interest charged for renewal of a bill) | |||
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Bills receivable account | 2,010 | ||
To Q | 2,010 | ||
(Being the new bill accepted.) |
Journal Entries in the Books of Q
P | 2,000 | ||
To Bills payable | 2,000 | ||
(Acceptance given) | |||
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Bill payable | 2,000 | ||
To P | 2,000 | ||
(bill dishonored – cancelled) | |||
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Interest account | 10 | ||
To P | 10 | ||
(Being the interest charged for renewal of a bill) | |||
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P | 2,010 | ||
To Bill payable | 2,010 | ||
(Acceptance given.) |
Example 2:
X having accepted a bill for $450 is unable to meet the same. Before the due date, he requests Y, the drawer of the bill, to receive $310 in cash ($10 being for interest) and to draw on him a new bill for a period of 3 months for $150 and cancel the old bill which is about to due. Y agrees to this proposal.
Show the journal entries in the books of X and Y.
Journal Entries in the Books of Y
X | 450 | ||
To Bills receivable account | 450 | ||
(old bill cancelled) | |||
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Cash account | 310 | ||
To X | 300 | ||
To Interest account | 10 | ||
(Being the amount received from X including interest) | |||
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Bills receivable account | 150 | ||
To Q | 150 | ||
(Acceptance received) |
Journal Entries in the Books of X
Bill payable account | 450 | ||
To Y | 450 | ||
(old bill cancelled) | |||
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Y | 300 | ||
Interest account | 10 | ||
To Cash account | 310 | ||
(Being the amount received from X including interest) | |||
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Y | 150 | ||
To Bill payable | 150 | ||
(Acceptance given) |
You may also be interested in other articles from “accounting for bills of exchange page” chapter:
- Definition and Explanation of Bill of Exchange
- Advantages of a Bills of Exchange
- How a Bill of Exchange Functions
- Promissory Note
- Difference between Bill of Exchange and Promissory Note
- Difference Between Bill of Exchange and Cheque/Check
- Recording Transactions of Bill of Exchange
- Drawing, Acceptance, and Payment of Bill of Exchange
- Discounting of Bill of Exchange
- Bills of Exchange for Collection
- Endorsement of a Bill of Exchange
- Dishonour of a Bill of Exchange
- Renewal of a Bill of Exchange
- Retiring of a Bill of Exchange
- Accommodation Bill of Exchange
- Insolvency of the Acceptor in a Bill of Exchange
Other Related Accounting Articles:
- Endorsement of Bill of Exchange
- Drawing, Acceptance, and Payment of Bills of Exchange
- Retiring of a Bill of Exchange
- Discounting a Bill of Exchange
- Dishonour of a Bill of Exchange
- Bill of Exchange for Collection
- Accommodation Bills of Exchange
- Recording Transactions of Bill of Exchange
- Insolvency of Acceptor in Bills of Exchange
- Definition and Explanation of Bill of Exchange
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