Meaning of Rebate on Bills Discounted:
Rebate on Bills Discounted is also known as Discount Received in Advance, or, Unexpired Discount or, Discount Received but not earned.
Its treatment is same as we do in the case of Interest Received in Advance.
(i) If it is given only in the Trial Balance:
— the same will be shown as a liability and will appear in the liability side of the Balance Sheet.
(ii) If it is given in adjustment:
— In that case, the same is deducted from the Income from Interest and Discount in Profit and Loss Account and the same also will appear in the liability side of the Balance Sheet.
For example, a customer discounts a bill of Rs. 30,000 for 3 months at 12% on 1st March 2000, it will be calculated as under:
Bank will earn discount @ 12% for 92 days i.e., = Rs. 30,000 x 12/100 x 92/365 = Rs. 907.
But this amount of discount is meant for March, April and May. As accounts are prepared on 31st March each year, discount received for 61 days (30 + 31) for April and May is not actually earned. Thus, discount of 61 days i.e., Rs. 601 is called Rebate on Bill Discounted. So, actual income is Rs. 306 (i.e., 907 – Rs. 601).
In respect of the following transactions of the Prosperity Bank Ltd., you are required to indicate the necessary journal entries as well as their treatment in the Profit and Loss Account and Balance Sheet in respect of the year ended 31.12.1992:
(a) The following bills were discounted at 5%:
(b) The Bank has accepted Bills on behalf of its customers amounting to Rs. 2,00,000 at nominal commission of 2%.
(c) The Bank has advanced an amount of Rs. 5,00,000 having a covering for the same through bills worth Rs. 2,00,000 and goods on key-loan basis Rs. 4,00,000.
Treatment in Profit and Loss Account and Balance Sheet:
(i) Discount earned (up to 31.12.1992) will be credited to P & L A/c and unexpired discount will, however, be credited to Rebate on Bills Discounted A/c, and will appear in the liability side of the Balance Sheet.
(ii) Commissions earned will be credited to P & L A/c whereas customers’ liability for acceptance will appear on the asset side of the Balance Sheet and Acceptance on behalf of customer will appear in the liability side as contra items, and
(iii) Loans and advances will appear in the assets side of the Balance Sheet.
As on 31st December 2000, the books of the Hercules Bank include, among others, the following balances:
Throughout 2000, the Bank’s rate for discounting has been 18% and the rate of commission on bills for collection, 4%.
On investigation and analysis, the average due date for the bills discounted and purchased is calculated as 15th February 2001 and that for bills for collection as 15th January 2001.
Show the calculation of the amount to be credited to the Bank’s Profit and Loss Account under discount earned for the year 2000. Show also the journal entries required to adjust the above-mentioned accounts.