Accounting Treatment for a Bill Receivable Received from an Insolvent Customer

When a business receives a bill receivable (BR) from a customer, it means that the customer owes money to the business. In this scenario, the BR received from Mohan is for 5000 rs. If the bill is discounted from a bank, it means that the business has sold the BR to the bank at a discount, and the bank will collect the full amount from the customer when the bill matures.

However, in this case, Mohan has become insolvent, which means that he is unable to pay his debts. As a result, the business will only receive 60 paise per rupee (i.e., 60% of the total amount) from Mohan's estate.

The accounting treatment for this scenario is as follows:

1. Record the BR received from Mohan
Debit: BR account - 5000 rs
Credit: Mohan's account - 5000 rs

2. Discount the BR from the bank
Debit: Bank account - (amount received from the bank)
Debit: Discount on BR account - (discount amount)
Credit: BR account - 5000 rs

3. Record the receipt of payment from Mohan's estate
Debit: Cash account - (amount received)
Credit: Mohan's account - (amount received)

4. Write off the remaining amount as bad debts
Debit: Bad debts account - (amount written off)
Credit: Mohan's account - (amount written off)

In summary, when a business receives a BR from a customer, it should be recorded in the books of accounts as a receivable. If the BR is discounted from a bank, the discount should be recorded separately. When the customer becomes insolvent and is unable to pay the full amount, the business should record the amount received from the estate and write off the remaining amount as bad debts.

1)Bills receivable A/c Dr.5,000
To Mohan's A/c. 5,000
(Being bill drawn and acceptance received)
2)Bank A/c Dr.5,000
To Bills receivable A/c 5,000
(Being bill discounted)
3)Mohan's A/c. Dr.5,000
To Bank A/c. 5,000
( Being bill dishonoured)
4)Bank A/c Dr.3,000
Bad Debts A/c. Dr.2,000
To Mohan's A/c. 5,000
(Being account settled and balance transferred to bad Debts A/c)