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Accounting treatment of Bill of Exchange Video Lecture | SSC CGL Tier 2 - Study Material, Online Tests, Previous Year
FAQs on Accounting treatment of Bill of Exchange Video Lecture - SSC CGL Tier 2 - Study Material, Online Tests, Previous Year
| 1. What is the accounting treatment of a Bill of Exchange? |  |
Ans. The accounting treatment of a Bill of Exchange involves recognizing it as a negotiable instrument and recording it in the books of accounts. Initially, the Bill of Exchange is recorded as an accounts receivable for the drawer and as an accounts payable for the drawee. Upon maturity, if the drawee honors the bill, it is recognized as cash received, and the accounts receivable is settled. Alternatively, if the drawee dishonors the bill, it is recorded as a bad debt expense and the accounts receivable is written off.
| 2. How is a Bill of Exchange recorded in the books of accounts? | |
Ans. A Bill of Exchange is recorded in the books of accounts by initially recognizing it as an accounts receivable for the drawer and as an accounts payable for the drawee. The amount of the bill is recorded in the respective accounts, and the details of the bill, including the due date, are noted. Upon maturity, if the drawee honors the bill, it is recognized as cash received, and the accounts receivable is settled. If the drawee dishonors the bill, it is recorded as a bad debt expense and the accounts receivable is written off.
| 3. What happens if a Bill of Exchange is dishonored? | |
Ans. If a Bill of Exchange is dishonored, it means that the drawee fails to make the necessary payment upon maturity. In such a case, the drawer of the bill can take legal action against the drawee to recover the amount due. Additionally, the dishonored bill is recorded as a bad debt expense in the books of accounts, and the accounts receivable is written off.
| 4. Can a Bill of Exchange be discounted or sold to a third party before maturity? | |
Ans. Yes, a Bill of Exchange can be discounted or sold to a third party before its maturity date. This allows the drawer to receive immediate cash by selling the bill at a discounted value to a financial institution or any interested party. The discount is usually determined based on the time remaining until the bill's maturity and the prevailing market interest rates.
| 5. What is the difference between a Bill of Exchange and a Promissory Note? | |
Ans. The main difference between a Bill of Exchange and a Promissory Note lies in the parties involved. A Bill of Exchange involves three parties: the drawer, who orders the drawee to pay a certain amount to a payee; the drawee, who is obligated to make the payment; and the payee, who receives the payment. On the other hand, a Promissory Note involves only two parties: the maker, who promises to pay a certain amount to the payee, and the payee, who receives the payment. Additionally, a Bill of Exchange is typically used in commercial transactions, while a Promissory Note is often used for personal loans or credit arrangements.
Text Transcript from Video
a quick summary of the accounting
entries discussed so far in the books of
the creditor drawer on one side books of
the debtor and acceptor on the other let
us continue with our old example where X
sells goods to 5 so X draws a bill of
exchange which is accepted by Y the bill
receivable in XS books and it is a bills
payable in Y's books so what is the what
are the entries in the books of X what
are the entries in the books of Y on
sale of goods in the books of X it would
be wise account debit to 6 this would be
wise account debit to sales bills
receivable account debit to wise account
when he receives the bill of exchange
and when the bill is collected it is
presented and money is received and
three would be cash or bank account
debit as the case may be to Bill's
receivable these would be the entries in
the books of X so Y is account debit to
sales bills receivable account debit to
Y and when money is collected against
the bill cash account debit to bills
receive other what would be the same
entry effect of the same entries same
transaction in the books of Y what would
be the entries for the same transactions
in the books of Y here it was sale but
in books of Y its purchase purchase
account debit to X's account then X's
account debit to bills payable because
he accepts a bill of exchange when the
bill is honored the entry becomes bills
payable account debit to cash
so we are compared both the N place in
the books of X and in the books of Y in
the books of the creditor in the books
of the debt in the books of the seller
and in the books of the buyer the books
of the drawer and the books of the
acceptor when the bill is discounted
with the bank what would be the entries
again this is in the books of X and this
is in the books of Y on sale of goods in
the books of X experts a wise account
debit to sale on getting the bill of
exchange bill receivable account debit
to y on discounting the Bell bank
account debit discount account debit to
bills receivable on maturity of the bill
there is no entry because it is the bank
which will present the bill the bank
collects the money from y/x does not
have to pass any Henry for these
transactions what is the entry in the
books of why why has purchased the goods
sale in the books of X purchase in the
books of Y entry would be purchase
account debit to X is account for
accepting the bill it would be X's
account debit to Bill is payable when x
discounted the bill why does not pass
any entry that transaction discounting
of the bill is between X and the bank on
maturity however y has to honor the bill
irrespective of who presents it and many
honors the bill y passes the entry bills
payable account debit to back money is
paid against the next what happens when
the bill is endorsed by the creditor to
another person to the third person so
again you have X cells goods to Y and
you have
why having a bills receivable X in the
books of X in the books of Y it's a bill
payable and we have X endorsing this
bill to Z endorsing this bill to sit if
that be the case on sale of goods
letters account debit this is in the
books of X so it is wise account debit
to sales bills receivable account debit
to wise account and then X endorses the
bill endorses the bill to Z so it
becomes Z's account debit to Bill
receive over on maturity of the bill
there is no entry because the
transactions are between Z and Y Z
presents the will to Bill - why why
honors the Bell and X does not come into
the picture so what is the corresponding
entry for these transactions in the
books of Y when the goods were purchased
by Y its purchase account debit to X's
account X is account debit to bills
payable when he accepts the mirror when
X endorses the bill to Z Y is not
affected he is nowhere in the picture he
does not pass any entry however on
maturity when the bill is presented by
said he honors the bill therefore the
bill is canceled bills payable account
debit to bank or cash as the case may be
thus we see that irrespective of whether
X presented the bill the bank presents
the bill or Z presents the bill when the
bill is honored on maturity by Y the
entry in all cases is the same bills
payable account debit to cash or back
what happens in case the bill is
Dishonored a quick summary of the
transactions involved when the bill is
Dishonored
again we shall do the same thing this is
in the books of X and this is in the
books of Y so when X has sold the goods
X passes the entry wise account debit to
sales next on receiving the bill bills
receivable account debit to data but the
bill is dishonoured if the bill is
dishonored and noting charges are
incurred then now Y is responsible for
both the bill amount as well as the
noting charges so it becomes debtors
account debit with bill amount plus
noting charges bill amount plus noting
charges so the entry becomes wise
account debit say ten thousand two
hundred assuming 200 is the noting
charge and ten thousand value of the
bill to Bill's receivable is only ten
thousand two cash two hundred being the
cash that he has paid for registering
the dishonor the cash he has paid as
noting charges the cash that he has paid
to the notary public what happens what
are the entries for these same
transactions in the books of wife
purchase of goods the entry is purchase
account debit to creditor on accepting
the bill its creditors account debit to
bills payable on dishonor and noting
charges incurred who is responsible for
the dishonor y is responsible for the
dishonor since Y is responsible for the
dishonor noting charges is an expense in
the books of Y so the entry becomes
bills payable account with the amount of
the bill say ten thousand noting charges
account
debit 200 say 200 to X is account
10200 since X has to pay X has to be
paid ten thousand two hundred ten
thousand the value of the bill and two
hundred noting charges that X has bit
when the bill is discounted with the
bank and subsequently dishonoured there
would be no change in the entries in the
books of Y but we shall quickly run
through the whole thing on sale of goods
debtors account debit to sales X we'll
say Y account debit to sales he gets a
bill bill receivable account debit to
debtor on Y on discounting of the bill
bank account debit discount account
debit to bills receivable
but if the bill is dishonored and the
noting charges are incurred it is the
bank who would have paid the noting
charges the bank will recover it from X
the money will be taken out of excess
bank account so excess bank account is
credited with not only the bill amount
plus noting charges plus noting charges
debtor account or wise account debit ten
thousand two hundred to back ten
thousand two hundred correspondingly the
first two entries remain the same
purchase account debit to X X's account
debit to bills payable X discuss the
bill no entry but when the bill is
dishonoured entry would be bill payable
account debit with the amount of the
bill noting charges account debit with
the amount of noting charges to X's
account
ten thousand two hundred
if you notice the entries in the books
of the acceptor are the same
irrespective of whether the creditor
keeps retains the bill till majority
discounts it with the bank or endorses
it to another creditor so when the bill
is dishonored assert if and the bill is
endorsed were creditor and is
subsequently dishonoured the entry on
sale in the books of X would be wise
account debit to sale for receipt of the
bill bills receivable account debit to Y
assuming that the bill has been endorsed
to say it would be Z's account debit to
Bill's receivable now what happens in
case of dishonor who presents the bill Z
has presented the bill for payment and Z
does not get the payment the bill is
dishonored the bill is dishonored and
let us say noting charges are incurred
take the same amount of ten thousand and
two hundred Z ends up paying this 200
for the notary public but Z will recover
this money from X Z will inform X about
the dishonor inform him about the noting
charges and will recover the money from
X therefore now X has a liability to Z
for an amount of ten thousand two
hundred Z's account is credited for ten
thousand two hundred and X will collect
this money from Y so Y account debit
tows eggs account and amount of ten
thousand two hundred value of the bill
plus two hundred nothing charges however
there is no change in the books of Y
purchase account debit to X X account
debit to bills payable in case of
endorsement that is entirely accessorize
no runs no entry in the box of Y but on
dishonor bills payable account debit the
bill is canceled
no thing charges is the expense in the
books of Y so noting charges account is
debited for two hundred two x is account
10200 y has to pay x 10,000 plus noting
charge reserved two hundred
entries discussed so far in the books of
the creditor drawer on one side books of
the debtor and acceptor on the other let
us continue with our old example where X
sells goods to 5 so X draws a bill of
exchange which is accepted by Y the bill
receivable in XS books and it is a bills
payable in Y's books so what is the what
are the entries in the books of X what
are the entries in the books of Y on
sale of goods in the books of X it would
be wise account debit to 6 this would be
wise account debit to sales bills
receivable account debit to wise account
when he receives the bill of exchange
and when the bill is collected it is
presented and money is received and
three would be cash or bank account
debit as the case may be to Bill's
receivable these would be the entries in
the books of X so Y is account debit to
sales bills receivable account debit to
Y and when money is collected against
the bill cash account debit to bills
receive other what would be the same
entry effect of the same entries same
transaction in the books of Y what would
be the entries for the same transactions
in the books of Y here it was sale but
in books of Y its purchase purchase
account debit to X's account then X's
account debit to bills payable because
he accepts a bill of exchange when the
bill is honored the entry becomes bills
payable account debit to cash
so we are compared both the N place in
the books of X and in the books of Y in
the books of the creditor in the books
of the debt in the books of the seller
and in the books of the buyer the books
of the drawer and the books of the
acceptor when the bill is discounted
with the bank what would be the entries
again this is in the books of X and this
is in the books of Y on sale of goods in
the books of X experts a wise account
debit to sale on getting the bill of
exchange bill receivable account debit
to y on discounting the Bell bank
account debit discount account debit to
bills receivable on maturity of the bill
there is no entry because it is the bank
which will present the bill the bank
collects the money from y/x does not
have to pass any Henry for these
transactions what is the entry in the
books of why why has purchased the goods
sale in the books of X purchase in the
books of Y entry would be purchase
account debit to X is account for
accepting the bill it would be X's
account debit to Bill is payable when x
discounted the bill why does not pass
any entry that transaction discounting
of the bill is between X and the bank on
maturity however y has to honor the bill
irrespective of who presents it and many
honors the bill y passes the entry bills
payable account debit to back money is
paid against the next what happens when
the bill is endorsed by the creditor to
another person to the third person so
again you have X cells goods to Y and
you have
why having a bills receivable X in the
books of X in the books of Y it's a bill
payable and we have X endorsing this
bill to Z endorsing this bill to sit if
that be the case on sale of goods
letters account debit this is in the
books of X so it is wise account debit
to sales bills receivable account debit
to wise account and then X endorses the
bill endorses the bill to Z so it
becomes Z's account debit to Bill
receive over on maturity of the bill
there is no entry because the
transactions are between Z and Y Z
presents the will to Bill - why why
honors the Bell and X does not come into
the picture so what is the corresponding
entry for these transactions in the
books of Y when the goods were purchased
by Y its purchase account debit to X's
account X is account debit to bills
payable when he accepts the mirror when
X endorses the bill to Z Y is not
affected he is nowhere in the picture he
does not pass any entry however on
maturity when the bill is presented by
said he honors the bill therefore the
bill is canceled bills payable account
debit to bank or cash as the case may be
thus we see that irrespective of whether
X presented the bill the bank presents
the bill or Z presents the bill when the
bill is honored on maturity by Y the
entry in all cases is the same bills
payable account debit to cash or back
what happens in case the bill is
Dishonored a quick summary of the
transactions involved when the bill is
Dishonored
again we shall do the same thing this is
in the books of X and this is in the
books of Y so when X has sold the goods
X passes the entry wise account debit to
sales next on receiving the bill bills
receivable account debit to data but the
bill is dishonoured if the bill is
dishonored and noting charges are
incurred then now Y is responsible for
both the bill amount as well as the
noting charges so it becomes debtors
account debit with bill amount plus
noting charges bill amount plus noting
charges so the entry becomes wise
account debit say ten thousand two
hundred assuming 200 is the noting
charge and ten thousand value of the
bill to Bill's receivable is only ten
thousand two cash two hundred being the
cash that he has paid for registering
the dishonor the cash he has paid as
noting charges the cash that he has paid
to the notary public what happens what
are the entries for these same
transactions in the books of wife
purchase of goods the entry is purchase
account debit to creditor on accepting
the bill its creditors account debit to
bills payable on dishonor and noting
charges incurred who is responsible for
the dishonor y is responsible for the
dishonor since Y is responsible for the
dishonor noting charges is an expense in
the books of Y so the entry becomes
bills payable account with the amount of
the bill say ten thousand noting charges
account
debit 200 say 200 to X is account
10200 since X has to pay X has to be
paid ten thousand two hundred ten
thousand the value of the bill and two
hundred noting charges that X has bit
when the bill is discounted with the
bank and subsequently dishonoured there
would be no change in the entries in the
books of Y but we shall quickly run
through the whole thing on sale of goods
debtors account debit to sales X we'll
say Y account debit to sales he gets a
bill bill receivable account debit to
debtor on Y on discounting of the bill
bank account debit discount account
debit to bills receivable
but if the bill is dishonored and the
noting charges are incurred it is the
bank who would have paid the noting
charges the bank will recover it from X
the money will be taken out of excess
bank account so excess bank account is
credited with not only the bill amount
plus noting charges plus noting charges
debtor account or wise account debit ten
thousand two hundred to back ten
thousand two hundred correspondingly the
first two entries remain the same
purchase account debit to X X's account
debit to bills payable X discuss the
bill no entry but when the bill is
dishonoured entry would be bill payable
account debit with the amount of the
bill noting charges account debit with
the amount of noting charges to X's
account
ten thousand two hundred
if you notice the entries in the books
of the acceptor are the same
irrespective of whether the creditor
keeps retains the bill till majority
discounts it with the bank or endorses
it to another creditor so when the bill
is dishonored assert if and the bill is
endorsed were creditor and is
subsequently dishonoured the entry on
sale in the books of X would be wise
account debit to sale for receipt of the
bill bills receivable account debit to Y
assuming that the bill has been endorsed
to say it would be Z's account debit to
Bill's receivable now what happens in
case of dishonor who presents the bill Z
has presented the bill for payment and Z
does not get the payment the bill is
dishonored the bill is dishonored and
let us say noting charges are incurred
take the same amount of ten thousand and
two hundred Z ends up paying this 200
for the notary public but Z will recover
this money from X Z will inform X about
the dishonor inform him about the noting
charges and will recover the money from
X therefore now X has a liability to Z
for an amount of ten thousand two
hundred Z's account is credited for ten
thousand two hundred and X will collect
this money from Y so Y account debit
tows eggs account and amount of ten
thousand two hundred value of the bill
plus two hundred nothing charges however
there is no change in the books of Y
purchase account debit to X X account
debit to bills payable in case of
endorsement that is entirely accessorize
no runs no entry in the box of Y but on
dishonor bills payable account debit the
bill is canceled
no thing charges is the expense in the
books of Y so noting charges account is
debited for two hundred two x is account
10200 y has to pay x 10,000 plus noting
charge reserved two hundred
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Feb 10, 2026 Last updated
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