Journal Entries for a Bill of Exchange

Introduction:
A bill of exchange is a negotiable instrument which is used to transfer the ownership of goods and services from one party to another. It is also known as a promissory note. When a bill of exchange is drawn, it involves three parties: the drawer, the drawee and the payee.

Journal Entries:
In the given scenario, Ajay drew a bill on Sanjay of ₹10,000 at 3 months. Sanjay accepted the bill and returned it to Ajay. On the same date, Ajay discounted the bill with his bank for ₹9,700. However, on the due date, the bill was honoured.

The journal entries for the above transactions in the books of Ajay and Sanjay are as follows:

Journal Entries in the Books of Ajay:

1. When the bill was drawn:
Debtor: Sanjay
Credit: Bills Receivable ₹10,000

2. When the bill was discounted:
Debtor: Bank Account
Credit: Bills Receivable ₹9,700
Credit: Discount ₹300

3. When the bill was honoured:
Debtor: Sanjay
Credit: Bank Account ₹10,000

Journal Entries in the Books of Sanjay:

1. When the bill was accepted:
Debtor: Ajay
Credit: Bills Payable ₹10,000

2. When the bill was honoured:
Debtor: Bank Account
Credit: Ajay ₹10,000

Explanation:
1. When the bill was drawn:
In the books of Ajay, Sanjay is the debtor as he has to pay the amount of ₹10,000 on the due date. Bills Receivable account is credited as Ajay is receiving the amount in the future.

2. When the bill was discounted:
Ajay discounted the bill with his bank for ₹9,700. Bills Receivable account is debited as the bill is no longer in Ajay's possession. Bank account is credited with the discounted amount of ₹9,700 and the discount of ₹300.

3. When the bill was honoured:
On the due date, Sanjay paid the amount of ₹10,000. Sanjay's account is debited and bank account is credited with the same amount.

In the books of Sanjay, when he accepted the bill, he becomes the debtor and Ajay becomes the creditor. Bills Payable account is credited as Sanjay has a liability to pay the amount on the due date.

When the bill was honoured, Sanjay paid the amount to the bank. Bank account is debited and Ajay's account is credited with the same amount.

Conclusion:
Journal entries for a bill of exchange are important to keep a record of the transactions between the parties involved. These entries help in maintaining proper accounts and tracking the payment and receipt of the amount.