Retiring of a Bill of Exchange
Retiring of a Bill of Exchange:
Learning Objectives:
- Make journal entries in the books of drawer and drawee when a bill of exchange is retired before it maturity.
Definition and Explanation:
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. Such a rebate or discount is an expense to the party receiving the payment and gain to the party making the payment.
Journal entries:
Creditor’s Books:
Cash account (actual amount received) [Dr] |
Rebate account (rebate granted) [Dr] |
To Bill receivable account [Cr] |
Debtor’s Books:
Bill payable account [Dr] |
To cash account [Cr] |
To Rebate account [Cr] |
Example:
A sells goods for $1,000 to B and draw a bill at three months for the amount. B accepts it and returns to A. B retires his acceptance under a rebate of $10.
Record the transactions in the books of A and B.
Solution:
Journal Entries in the Books of A
B | 1,000 | ||
To sales account | 1,000 | ||
(Goods sold on credit) | |||
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Bills receivable account | 1,000 | ||
To B | 1,000 | ||
(Acceptance received) | |||
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Cash account | 990 | ||
rebate account | 10 | 1,000 | |
To Bills receivable account | |||
(Amount of the bill received and rebate allowed) |
Journal Entries in the Books of B
Purchases account | 1,000 | ||
To A | 1,000 | ||
(Goods purchased on credit) | |||
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A | 1,000 | ||
To Bills payable | 1,000 | ||
(Acceptance received) | |||
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Bills payable account | 1,000 | ||
To Cash account | 990 | ||
To rebate account | 10 | ||
(Acceptance retired under rebate) |
Example 2:
A bill for $600 is drawn by B & Co. on C and accepted by the latter payable at his bank. Show what entries should be passed in the books of B & Co. under each of the following circumstances:
- If they retain the bill till the due date and then realized it on the maturity.
- If they discounted it with their bank for $580
- If they endorsed it over to their creditors M & Co. in settlement of their debt.
- If they sent the same to their bank for collection.
State what further entries would be passed in the books of B & Co. in each of the above cases if the bill was dishonored on the due date.
Solution:
Journal Entries in the Books of B & Co.
1 | Bill receivable account | 600 | ||
To C | 600 | |||
(Acceptance received) | ||||
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Cash account | 600 | |||
To bill receivable account | 600 | |||
(Payment of the bill received) | ||||
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2 | Bills receivable account | 600 | ||
To C | 600 | |||
(Acceptance received) | ||||
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Bank account | 580 | |||
Discount account | 20 | |||
To Bills receivable account | 600 | |||
(Bill discounted) | ||||
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3 | Bills receivable account | 600 | ||
To C | 600 | |||
(Acceptance received) | ||||
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M & Co | 600 | |||
To Bills receivable account | 600 | |||
(Bill endorsed) | ||||
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4 | Bill receivable account | 600 | ||
To C | 600 | |||
(Acceptance received) | ||||
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Bank for collection account | 600 | |||
To Bill receivable account | 600 | |||
(Bill sent for collection) |
When the bill is dishonoured the following further entries would be passed in each of the circumstances:
1 | C | 600 | ||
To Bills receivable account | 600 | |||
(Bill dishonoured) | ||||
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2 | C | 600 | ||
To Bank account | 600 | |||
(Bill dishonoured) | ||||
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3 | C | 600 | ||
To M & Co. | 600 | |||
(Bill dishonoured) | ||||
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4 | C | 600 | ||
To Bank for collection | 600 | |||
(Bill dishonoured) | ||||
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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:
- Dishonour of a Bill of Exchange
- Bill of Exchange for Collection
- Endorsement of Bill of Exchange
- Discounting a Bill of Exchange
- Drawing, Acceptance, and Payment of Bills of Exchange
- Renewal of a Bill of Exchange
- Insolvency of Acceptor in Bills of Exchange
- Accommodation Bills of Exchange
- Recording Transactions of Bill of Exchange
- Accounting For Bills of Exchange
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