Unit 5: Some Special Transactions of Banks: Notes | Advanced Accounting for CA Intermediate PDF Download

 Page 1


  
8.70 ADVANCED ACCOUNTING 
 
LEARNING OUTCOMES 
UNIT 5: SOME SPECIAL TRANSACTIONS OF BANKS 
 
 
? Learn the concept of a rebate on bills discounted. Try to 
understand the technique of computing such rebate. 
? Understand the technique for considering acceptance and 
endorsement as assets as well as liability. 
 5.1 DISCOUNTING, COLLECTION & ACCEPTANCE 
OF BILLS 
With reference to Bills, a banking company performs the following functions: 
1. Discounting of bills 
2. Collection of bills 
3. Acceptances on behalf of customers 
5.1.1Discounting 
A bank may straight away purchase a Bill (Discounting). In this case after reducing 
discount charges, the balance amount is credited to the account of the customer. 
The total of both is debited to ‘Bills purchased and discounted account’. This 
account is an Asset. For example, a person holds a bill of exchange duly accepted 
by his customer for retirement after 90 days. He may either wait for 90 days or have 
the same bill discounted with his banker who will credit the amount under a bill 
after deducting the discounting charges, to his account with the bank. On due date 
the bank will retire the bill with the customer and get his payment.  
Rebate on Bills Discounted 
Banks discount hundreds of bills every day and when someone gets a bill 
discounted, the bank credits the discount account with the full amount of the 
discount, the bank will earn in respect of that bill. But in practice, it frequently 
happens that some of these bills will not mature by the close of the accounting 
Page 2


  
8.70 ADVANCED ACCOUNTING 
 
LEARNING OUTCOMES 
UNIT 5: SOME SPECIAL TRANSACTIONS OF BANKS 
 
 
? Learn the concept of a rebate on bills discounted. Try to 
understand the technique of computing such rebate. 
? Understand the technique for considering acceptance and 
endorsement as assets as well as liability. 
 5.1 DISCOUNTING, COLLECTION & ACCEPTANCE 
OF BILLS 
With reference to Bills, a banking company performs the following functions: 
1. Discounting of bills 
2. Collection of bills 
3. Acceptances on behalf of customers 
5.1.1Discounting 
A bank may straight away purchase a Bill (Discounting). In this case after reducing 
discount charges, the balance amount is credited to the account of the customer. 
The total of both is debited to ‘Bills purchased and discounted account’. This 
account is an Asset. For example, a person holds a bill of exchange duly accepted 
by his customer for retirement after 90 days. He may either wait for 90 days or have 
the same bill discounted with his banker who will credit the amount under a bill 
after deducting the discounting charges, to his account with the bank. On due date 
the bank will retire the bill with the customer and get his payment.  
Rebate on Bills Discounted 
Banks discount hundreds of bills every day and when someone gets a bill 
discounted, the bank credits the discount account with the full amount of the 
discount, the bank will earn in respect of that bill. But in practice, it frequently 
happens that some of these bills will not mature by the close of the accounting 
 
 
 8.71 
 
BANKING COMPANIES 
year. The portion of the discount which relates to the period falling after the close of 
the accounting period is called 'rebate on bills discounted', or 'unearned discount'. 
Example 
A customer discounted a four month's bill from bank on 1st March, 20X1 and bank 
charged ` 800 as discount. Accounts are closed on 31st March every Year. The date 
or maturity of the bill is 30
th
June, 20X1. In this transaction the bank must have 
credited the discount account with ` 800 on 1st March. But out of this, the discount 
for the months of April, May and June 20X1 is not actually earned. Unearned 
discount for these three months @ ` 200 per month amounts to ` 600. This is the 
income which is related to the next accounting period and is called 'income 
received but not earned. It is also termed as 'rebate on bills discounted' or 
'unexpired discount' or 'discount received in advance.' 
Since discount on bill discounted is an income for the bank and is shown in the 
Profit & Loss Account under schedule 13, the amount of unexpired discount, if 
given in the adjustments, is deducted from schedule 13 and is also shown on the 
liabilities side of the balance sheet in the item 'other liabilities and provisions' in 
schedule 15. Following entry is made for the adjustment: 
 Discount A/c        Dr. 
  To Rebate on Bills Discounted A/c 
 (For adjustment of unexpired discount) 
Note: However, if the account of unexpired discount is given inside the trial 
balance, it is shown only in the balance sheet. 
The Rebate A/c is shown on the liability side of the Balance Sheet as income 
received which has not accrued before the close of the year. Immediately on 
commencement of next financial year the Rebate A/c is closed by transfer to the 
credit of Discount A/c. 
Illustration 1 
The following is an extract from Trial Balance of overseas Bank as at 31st March, 20X1 
 ` ` 
Bills discounted 12,64,000 
Rebate on bills discounted not due 
on March 31st, 20X0  22,160 
Discount received  1,05,708 
Page 3


  
8.70 ADVANCED ACCOUNTING 
 
LEARNING OUTCOMES 
UNIT 5: SOME SPECIAL TRANSACTIONS OF BANKS 
 
 
? Learn the concept of a rebate on bills discounted. Try to 
understand the technique of computing such rebate. 
? Understand the technique for considering acceptance and 
endorsement as assets as well as liability. 
 5.1 DISCOUNTING, COLLECTION & ACCEPTANCE 
OF BILLS 
With reference to Bills, a banking company performs the following functions: 
1. Discounting of bills 
2. Collection of bills 
3. Acceptances on behalf of customers 
5.1.1Discounting 
A bank may straight away purchase a Bill (Discounting). In this case after reducing 
discount charges, the balance amount is credited to the account of the customer. 
The total of both is debited to ‘Bills purchased and discounted account’. This 
account is an Asset. For example, a person holds a bill of exchange duly accepted 
by his customer for retirement after 90 days. He may either wait for 90 days or have 
the same bill discounted with his banker who will credit the amount under a bill 
after deducting the discounting charges, to his account with the bank. On due date 
the bank will retire the bill with the customer and get his payment.  
Rebate on Bills Discounted 
Banks discount hundreds of bills every day and when someone gets a bill 
discounted, the bank credits the discount account with the full amount of the 
discount, the bank will earn in respect of that bill. But in practice, it frequently 
happens that some of these bills will not mature by the close of the accounting 
 
 
 8.71 
 
BANKING COMPANIES 
year. The portion of the discount which relates to the period falling after the close of 
the accounting period is called 'rebate on bills discounted', or 'unearned discount'. 
Example 
A customer discounted a four month's bill from bank on 1st March, 20X1 and bank 
charged ` 800 as discount. Accounts are closed on 31st March every Year. The date 
or maturity of the bill is 30
th
June, 20X1. In this transaction the bank must have 
credited the discount account with ` 800 on 1st March. But out of this, the discount 
for the months of April, May and June 20X1 is not actually earned. Unearned 
discount for these three months @ ` 200 per month amounts to ` 600. This is the 
income which is related to the next accounting period and is called 'income 
received but not earned. It is also termed as 'rebate on bills discounted' or 
'unexpired discount' or 'discount received in advance.' 
Since discount on bill discounted is an income for the bank and is shown in the 
Profit & Loss Account under schedule 13, the amount of unexpired discount, if 
given in the adjustments, is deducted from schedule 13 and is also shown on the 
liabilities side of the balance sheet in the item 'other liabilities and provisions' in 
schedule 15. Following entry is made for the adjustment: 
 Discount A/c        Dr. 
  To Rebate on Bills Discounted A/c 
 (For adjustment of unexpired discount) 
Note: However, if the account of unexpired discount is given inside the trial 
balance, it is shown only in the balance sheet. 
The Rebate A/c is shown on the liability side of the Balance Sheet as income 
received which has not accrued before the close of the year. Immediately on 
commencement of next financial year the Rebate A/c is closed by transfer to the 
credit of Discount A/c. 
Illustration 1 
The following is an extract from Trial Balance of overseas Bank as at 31st March, 20X1 
 ` ` 
Bills discounted 12,64,000 
Rebate on bills discounted not due 
on March 31st, 20X0  22,160 
Discount received  1,05,708 
  
 
8.72 ADVANCED ACCOUNTING 
An analysis of the bills discounted is as follows: 
 Amount Due Date 20X1 Rate of Discount 
 `  (%) 
(i)  1,40,000  June 5  14 
(ii)  4,36,000  June 12 14 
(iii)  2,82,000  June 25 14 
(iv)  4,06,000  July 6  16 
Calculate Rebate on Bills Discounted as on 31-3-20X1 and show necessary journal entries. 
Solution 
In order to determine the amount to be credited to the Profit and Loss A/c it is 
necessary to first ascertain the amount attributable to the unexpired portion of the 
period of the respective bills. The workings are as given below: 
(i) The bill is due on 5th June; hence the number of days after March 31st, is 66. 
The discount on ` 1,40,000 for 66 days @ 14% per annum will be 
 14/100 × 66/365 × ` 1,40,000 = ` 3,544. 
(ii) Number of days in the unexpired portion of the bill is 73: discount on  
` 4,36,000 for 73 days @ 14% per annum will be ` 12,208. 
(iii) Number of days in the unexpired portion of the period of the bill is 86: 
discount on ` 2,82,000 for 86 days @ 14% per annum will be ` 9,302. 
(iv) Number of days in the unexpired portion of the period of the bill is 97: 
discount on ` 4,06,000 for 97 days @ 16 % p.a. will be ` 17,263. 
The amount of discount to be credited to the Profit and Loss Account will be: 
   ` 
Transfer from Rebate on bills 
discount as on 31-3-20X0 22,160 
Add: Discount received during 
 the year ended 31-3-20X1 1,05,708 
  1,27,868 
Less: Rebate on bills discounted 
 as on 31.3.20X1(3,544 + 12,208 + 9,302+ 17,263) (42,317) 
   85,551 
Page 4


  
8.70 ADVANCED ACCOUNTING 
 
LEARNING OUTCOMES 
UNIT 5: SOME SPECIAL TRANSACTIONS OF BANKS 
 
 
? Learn the concept of a rebate on bills discounted. Try to 
understand the technique of computing such rebate. 
? Understand the technique for considering acceptance and 
endorsement as assets as well as liability. 
 5.1 DISCOUNTING, COLLECTION & ACCEPTANCE 
OF BILLS 
With reference to Bills, a banking company performs the following functions: 
1. Discounting of bills 
2. Collection of bills 
3. Acceptances on behalf of customers 
5.1.1Discounting 
A bank may straight away purchase a Bill (Discounting). In this case after reducing 
discount charges, the balance amount is credited to the account of the customer. 
The total of both is debited to ‘Bills purchased and discounted account’. This 
account is an Asset. For example, a person holds a bill of exchange duly accepted 
by his customer for retirement after 90 days. He may either wait for 90 days or have 
the same bill discounted with his banker who will credit the amount under a bill 
after deducting the discounting charges, to his account with the bank. On due date 
the bank will retire the bill with the customer and get his payment.  
Rebate on Bills Discounted 
Banks discount hundreds of bills every day and when someone gets a bill 
discounted, the bank credits the discount account with the full amount of the 
discount, the bank will earn in respect of that bill. But in practice, it frequently 
happens that some of these bills will not mature by the close of the accounting 
 
 
 8.71 
 
BANKING COMPANIES 
year. The portion of the discount which relates to the period falling after the close of 
the accounting period is called 'rebate on bills discounted', or 'unearned discount'. 
Example 
A customer discounted a four month's bill from bank on 1st March, 20X1 and bank 
charged ` 800 as discount. Accounts are closed on 31st March every Year. The date 
or maturity of the bill is 30
th
June, 20X1. In this transaction the bank must have 
credited the discount account with ` 800 on 1st March. But out of this, the discount 
for the months of April, May and June 20X1 is not actually earned. Unearned 
discount for these three months @ ` 200 per month amounts to ` 600. This is the 
income which is related to the next accounting period and is called 'income 
received but not earned. It is also termed as 'rebate on bills discounted' or 
'unexpired discount' or 'discount received in advance.' 
Since discount on bill discounted is an income for the bank and is shown in the 
Profit & Loss Account under schedule 13, the amount of unexpired discount, if 
given in the adjustments, is deducted from schedule 13 and is also shown on the 
liabilities side of the balance sheet in the item 'other liabilities and provisions' in 
schedule 15. Following entry is made for the adjustment: 
 Discount A/c        Dr. 
  To Rebate on Bills Discounted A/c 
 (For adjustment of unexpired discount) 
Note: However, if the account of unexpired discount is given inside the trial 
balance, it is shown only in the balance sheet. 
The Rebate A/c is shown on the liability side of the Balance Sheet as income 
received which has not accrued before the close of the year. Immediately on 
commencement of next financial year the Rebate A/c is closed by transfer to the 
credit of Discount A/c. 
Illustration 1 
The following is an extract from Trial Balance of overseas Bank as at 31st March, 20X1 
 ` ` 
Bills discounted 12,64,000 
Rebate on bills discounted not due 
on March 31st, 20X0  22,160 
Discount received  1,05,708 
  
 
8.72 ADVANCED ACCOUNTING 
An analysis of the bills discounted is as follows: 
 Amount Due Date 20X1 Rate of Discount 
 `  (%) 
(i)  1,40,000  June 5  14 
(ii)  4,36,000  June 12 14 
(iii)  2,82,000  June 25 14 
(iv)  4,06,000  July 6  16 
Calculate Rebate on Bills Discounted as on 31-3-20X1 and show necessary journal entries. 
Solution 
In order to determine the amount to be credited to the Profit and Loss A/c it is 
necessary to first ascertain the amount attributable to the unexpired portion of the 
period of the respective bills. The workings are as given below: 
(i) The bill is due on 5th June; hence the number of days after March 31st, is 66. 
The discount on ` 1,40,000 for 66 days @ 14% per annum will be 
 14/100 × 66/365 × ` 1,40,000 = ` 3,544. 
(ii) Number of days in the unexpired portion of the bill is 73: discount on  
` 4,36,000 for 73 days @ 14% per annum will be ` 12,208. 
(iii) Number of days in the unexpired portion of the period of the bill is 86: 
discount on ` 2,82,000 for 86 days @ 14% per annum will be ` 9,302. 
(iv) Number of days in the unexpired portion of the period of the bill is 97: 
discount on ` 4,06,000 for 97 days @ 16 % p.a. will be ` 17,263. 
The amount of discount to be credited to the Profit and Loss Account will be: 
   ` 
Transfer from Rebate on bills 
discount as on 31-3-20X0 22,160 
Add: Discount received during 
 the year ended 31-3-20X1 1,05,708 
  1,27,868 
Less: Rebate on bills discounted 
 as on 31.3.20X1(3,544 + 12,208 + 9,302+ 17,263) (42,317) 
   85,551 
 
 
 8.73 
 
BANKING COMPANIES 
The journal entries will be as follows : 
  Dr. Cr. 
  
` ` 
Rebate on Bills Discounted A/c Dr. 22,160  
 To Discount on Bills A/c   22,160 
(Being the transfer of Rebate on Bills Discounted on 
31-3-20X0 to Discount on Bills Account) 
   
Discount on Bills A/c Dr. 42,317  
 To Rebate on Bills Discounted A/c   42,317 
(Being the transfer of rebate on bills discounted 
required on 31-3-20X0 from discount on Bills Account) 
   
Discount on Bills A/c Dr. 85,551  
 To Profit and Loss A/c   85,551 
(Being the amount of discount on Bills transferred to 
Profit and Loss Account) 
   
Note: In the Profit and Loss Account, the discount on bills will not appear as a 
separate item but will be included in the heading Interest/Discount on 
advances/bills as per Form B of the new format. 
Illustration 2 
On 31st March, 20X1, Uncertain Bank had a balance of ` 9 crores in “rebate on bills 
discounted” account. During the year ended 31st March, 20X2, Uncertain Bank 
discounted bills of exchange of ` 4,000 crores charging interest at 18% per annum 
the average period of discount being for 73 days. Of these, bills of exchange of ` 600 
crores were due for realisation from the acceptors/customers after 31st March, 20X2, 
the average period outstanding after 31st March, 20X2 being 36.5 days. 
Uncertain Bank asks you to pass journal entries and show the ledger accounts pertaining 
to: 
(i) discounting of bills of exchange and 
(ii) rebate on bills discounted. 
 
Page 5


  
8.70 ADVANCED ACCOUNTING 
 
LEARNING OUTCOMES 
UNIT 5: SOME SPECIAL TRANSACTIONS OF BANKS 
 
 
? Learn the concept of a rebate on bills discounted. Try to 
understand the technique of computing such rebate. 
? Understand the technique for considering acceptance and 
endorsement as assets as well as liability. 
 5.1 DISCOUNTING, COLLECTION & ACCEPTANCE 
OF BILLS 
With reference to Bills, a banking company performs the following functions: 
1. Discounting of bills 
2. Collection of bills 
3. Acceptances on behalf of customers 
5.1.1Discounting 
A bank may straight away purchase a Bill (Discounting). In this case after reducing 
discount charges, the balance amount is credited to the account of the customer. 
The total of both is debited to ‘Bills purchased and discounted account’. This 
account is an Asset. For example, a person holds a bill of exchange duly accepted 
by his customer for retirement after 90 days. He may either wait for 90 days or have 
the same bill discounted with his banker who will credit the amount under a bill 
after deducting the discounting charges, to his account with the bank. On due date 
the bank will retire the bill with the customer and get his payment.  
Rebate on Bills Discounted 
Banks discount hundreds of bills every day and when someone gets a bill 
discounted, the bank credits the discount account with the full amount of the 
discount, the bank will earn in respect of that bill. But in practice, it frequently 
happens that some of these bills will not mature by the close of the accounting 
 
 
 8.71 
 
BANKING COMPANIES 
year. The portion of the discount which relates to the period falling after the close of 
the accounting period is called 'rebate on bills discounted', or 'unearned discount'. 
Example 
A customer discounted a four month's bill from bank on 1st March, 20X1 and bank 
charged ` 800 as discount. Accounts are closed on 31st March every Year. The date 
or maturity of the bill is 30
th
June, 20X1. In this transaction the bank must have 
credited the discount account with ` 800 on 1st March. But out of this, the discount 
for the months of April, May and June 20X1 is not actually earned. Unearned 
discount for these three months @ ` 200 per month amounts to ` 600. This is the 
income which is related to the next accounting period and is called 'income 
received but not earned. It is also termed as 'rebate on bills discounted' or 
'unexpired discount' or 'discount received in advance.' 
Since discount on bill discounted is an income for the bank and is shown in the 
Profit & Loss Account under schedule 13, the amount of unexpired discount, if 
given in the adjustments, is deducted from schedule 13 and is also shown on the 
liabilities side of the balance sheet in the item 'other liabilities and provisions' in 
schedule 15. Following entry is made for the adjustment: 
 Discount A/c        Dr. 
  To Rebate on Bills Discounted A/c 
 (For adjustment of unexpired discount) 
Note: However, if the account of unexpired discount is given inside the trial 
balance, it is shown only in the balance sheet. 
The Rebate A/c is shown on the liability side of the Balance Sheet as income 
received which has not accrued before the close of the year. Immediately on 
commencement of next financial year the Rebate A/c is closed by transfer to the 
credit of Discount A/c. 
Illustration 1 
The following is an extract from Trial Balance of overseas Bank as at 31st March, 20X1 
 ` ` 
Bills discounted 12,64,000 
Rebate on bills discounted not due 
on March 31st, 20X0  22,160 
Discount received  1,05,708 
  
 
8.72 ADVANCED ACCOUNTING 
An analysis of the bills discounted is as follows: 
 Amount Due Date 20X1 Rate of Discount 
 `  (%) 
(i)  1,40,000  June 5  14 
(ii)  4,36,000  June 12 14 
(iii)  2,82,000  June 25 14 
(iv)  4,06,000  July 6  16 
Calculate Rebate on Bills Discounted as on 31-3-20X1 and show necessary journal entries. 
Solution 
In order to determine the amount to be credited to the Profit and Loss A/c it is 
necessary to first ascertain the amount attributable to the unexpired portion of the 
period of the respective bills. The workings are as given below: 
(i) The bill is due on 5th June; hence the number of days after March 31st, is 66. 
The discount on ` 1,40,000 for 66 days @ 14% per annum will be 
 14/100 × 66/365 × ` 1,40,000 = ` 3,544. 
(ii) Number of days in the unexpired portion of the bill is 73: discount on  
` 4,36,000 for 73 days @ 14% per annum will be ` 12,208. 
(iii) Number of days in the unexpired portion of the period of the bill is 86: 
discount on ` 2,82,000 for 86 days @ 14% per annum will be ` 9,302. 
(iv) Number of days in the unexpired portion of the period of the bill is 97: 
discount on ` 4,06,000 for 97 days @ 16 % p.a. will be ` 17,263. 
The amount of discount to be credited to the Profit and Loss Account will be: 
   ` 
Transfer from Rebate on bills 
discount as on 31-3-20X0 22,160 
Add: Discount received during 
 the year ended 31-3-20X1 1,05,708 
  1,27,868 
Less: Rebate on bills discounted 
 as on 31.3.20X1(3,544 + 12,208 + 9,302+ 17,263) (42,317) 
   85,551 
 
 
 8.73 
 
BANKING COMPANIES 
The journal entries will be as follows : 
  Dr. Cr. 
  
` ` 
Rebate on Bills Discounted A/c Dr. 22,160  
 To Discount on Bills A/c   22,160 
(Being the transfer of Rebate on Bills Discounted on 
31-3-20X0 to Discount on Bills Account) 
   
Discount on Bills A/c Dr. 42,317  
 To Rebate on Bills Discounted A/c   42,317 
(Being the transfer of rebate on bills discounted 
required on 31-3-20X0 from discount on Bills Account) 
   
Discount on Bills A/c Dr. 85,551  
 To Profit and Loss A/c   85,551 
(Being the amount of discount on Bills transferred to 
Profit and Loss Account) 
   
Note: In the Profit and Loss Account, the discount on bills will not appear as a 
separate item but will be included in the heading Interest/Discount on 
advances/bills as per Form B of the new format. 
Illustration 2 
On 31st March, 20X1, Uncertain Bank had a balance of ` 9 crores in “rebate on bills 
discounted” account. During the year ended 31st March, 20X2, Uncertain Bank 
discounted bills of exchange of ` 4,000 crores charging interest at 18% per annum 
the average period of discount being for 73 days. Of these, bills of exchange of ` 600 
crores were due for realisation from the acceptors/customers after 31st March, 20X2, 
the average period outstanding after 31st March, 20X2 being 36.5 days. 
Uncertain Bank asks you to pass journal entries and show the ledger accounts pertaining 
to: 
(i) discounting of bills of exchange and 
(ii) rebate on bills discounted. 
 
  
 
8.74 ADVANCED ACCOUNTING 
Solution 
Uncertain Bank  
Journal Entries 
(Rupees in crores) 
  Dr. Cr. 
  
` ` 
Rebate on bills discounted A/c Dr. 9.00  
 To Discount on bills A/c   9.00 
(Being the transfer of opening balance in rebate 
on bills discounted account to discount on bills 
account) 
   
Bills purchased and discounted A/c Dr. 4000.00  
 To Discount on bills A/c   144.00 
 
??
??
??
` 
18 73
4,000crores× ×
100 365
  
   
 To Clients A/c   3,856.00 
(Being the discounting of bills of exchange during 
the year) 
   
Discount on bills A/c Dr. 10.80  
 To Rebate on bills discounted A/c   10.80 
(Being the unexpired portion of discount in 
respect of the 
   
discounted bills of exchange carried forward 18% 
of 600 crs for average period of 36.5 days) 
   
Discount on bills A/c Dr. 142.20  
 To Profit and loss A/c   142.20 
(Being the amount of income for the year from 
discounting of bills of exchange transferred to 
Profit and Loss A/c)