Accounting/Notes For Bills Of Exchange and Promissiory Notes

Accounting/Notes For Bills Of Exchange  and Promissiory Notes

Meanings

A Bill of Exchange has been defined as  an  “instrument  in  writing containing an unconditional order signed  by  the  maker  directing  a certain person to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument”. When such an order is accepted in writing on the face of the order itself, it becomes a valid bill of exchange.

NOTES

The following points should be noted:
1.   A Bill of Exchange must be in writing.
2.   It must be dated.
3.   It must contain an order to pay a certain sum of money.
4.  The money must be payable to a definite person or to his order to the bearer.
5.   The  draft  must  be  accepted  for payment by the party whom the order is made

PROMISSORY NOTE

A promissory note is an instrument in writing, not being a bank note or currency  note  containing  an unconditional undertaking signed by the maker to pay a certain sum of money only to or to the order of a certain person. Under Section 31(2) of the Reserve Bank of India Act a promissory note cannot be made payable to bearer. A promissory note has the following characteristics.

Characteristics- Promissory Note

1.   It must be in writing.

2.   It must contain a clear promise to pay.  Mere  acknowledgement  of  a debt is not a promissory note.

3. The promise to pay must be unconditional “I promise to pay Rs. 500  as  soon  as  I  can”  is  not  an unconditional promise.

4.   The promiser or maker must sign the promissory note.

5. The maker must be a certain person.

6. The payee (the person to whom the payment is promised) must also be certain.

7. The sum payable must be certain. “I promise to pay Rs. 500 plus all fine” is not certain.

8. Payment must be in legal currency of the country.

9. It should not be made payable to the bearer.

10. It should be Properly stamped.        

Accounting Entries

On receipt of Bill :

Bills   Receivable A/c              ….Dr.
To Party A/c

The person who receives the bill has three options. These are :

 

(i)     He  can  hold  the  bill  till  maturity. (Naturally in this case no further entry is necessary until the date of maturity arrives).

(ii)    The bill can be endorsed in favour of another party. In the case the entry will be   to   debit  the   party   which   now receives the bill and to credit the Bills Receivable Account.

A                                          ….Dr.
To Bills Receivable Account


(iii) The Bill of Exchange can be discounted with bank. The bank will deduct.   A small sum of money as discount and pay the rest of the money.

Bank Account           Dr. (with the amount actually received)
Discount Account     Dr. (with the amount of loss or discount)
To Bills Receivable Account

On the date of maturity there will be two possibilities. The first is that the bill will be paid, that is to say, met or honoured. The entries for this will depend upon what was done  to  the  bill  during  the  period     of maturity. If the bill was kept, the

Cash Account                   …..Dr.
To Bills Receivable Account

But if he has already endorsed the bill in favour of his creditor or if the bill has been discounted with the bank he will not  get  the  amount;  it  will  be  the creditor or the bank wich will receive the money. Therefore, in these two cases, no entry will be made in the books of the party which originally received the bill.

The second possibility is that the bill will be dishonoured, that is to say, the bill will   not   be   paid.   If   the   bill   is dishonoured, the bill becomes useless and the party from whom the bill was received will be liable to pay the amount (as also the expenses incurred by the party).

Therefore, the following entires will be made :

1. If the bill was kept till maturity then :

Party (giving the bill)        DR
To Bills Receivable Account

2. If the bill was endorsed in favour of a creditor, the entry is : 

Party (giving the bill)       DR
To Creditors

3. If the bill was discounted with the bank : 

Party (giving the bill)
To Bank A/c

Thus it will be seen that in case of dishonour, the party which gave the bill has to be debited (because he has become liable to pay the amount). The credit   entry   is   in   Bills   Receivable Account (if it was retained) or the Creditor or the bank (if it was endorsed in their favour).

 

HOW TO CALCULATE DUE DATE OF A BILL

The due date of each bills is calculated as follows:

Case                           Due Date

(a)  When the bill is made payable on a specific date.: That specific date will be the due date.

(b)  When the bill is made payable at a stated number of month(s) after date.: That date on which the term of the bill shall expire will be the due date

Note: The term shall expire on that day of the month which corresponds with the day on which the bill is dated. If the month in which the period terminates has no corresponding day, the period shall be deemed to expire on the last day of the month.

(c) When the bill is made payable at a stated number of days after date.: That date which comes after adding stated number of days to the date of bill, shall be the due date.

Note: The date of Bill is excluded.

(d) When the due date is a public holiday.:  The preceding business day will be the due date

(e) When the due date is an emergency/ unforeseen holiday.: The       next following day will be the due date.

Note:  The  term  of  a  Bill  after  sight commences from the date of acceptance of  the bill whereas the term of a Bill after date of drawing a bill commences from the dateFundoamfendtalrs aOf wAcciounntging:Boillsf bill.

 

 

BILLS FOR COLLECTIONS

When a person received a bill of exchange he may decide to receive the total amount by keeping it till the date of  maturity.  But  in  order  to  ensure safety, he may sent it to bank with instructions that the bill should be retained till maturity and should be realised  on  that  date.  This  does  not mean discounting because the bank will not credit the client until the amount is actually realised. If the bill

Entries

Is sent to the bank with such instructions it is known as “Bill sent for collection”. It is better to make a record of this also in books by passing following entry :

Bills for Collection Account                        Dr.
To Bills Receivable Account

When the amount is realised the entry will be

Bank Account                              Dr.
To Bills for Collection Account

When the amount is not honoured, the entry will be  

Party (from whom the bills was received)                      Dr.
To Bills for collection A/c


RETIREMENT OF BILLS OF EXCHANGE

We have seen that renewal of a bill of exchange is made when a person does not have sufficient funds to pay for the bill of exchange on the due date and he requires a further period of credit. Many a time instances do arise when the acceptor has spare funds much before the   maturity date of the bill of exchange accepted by him. In such circumstances he approaches the payee of the bill of  exchange and asks him whether the payee is prepared to accept cash before the maturity date. In such cases the acceptor gets a certain rebate or interest or discount for premature payment. The interest becomes the income of the acceptor and expense of the payee. It is a consideration of premature payment.
 


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