This document defines key concepts related to bill discounting. It explains that most business transactions occur on credit rather than cash basis. Bills of exchange and promissory notes are common instruments used for credit transactions. Bill discounting occurs when a holder of a bill receivable needs immediate cash - they sell the bill to a bank before the due date. The bank pays the discounted value after deducting discount calculated as interest on the unexpired period. Key terms discussed include true discount, banker's discount, banker's gain, present worth, face value, discounted value, and date of maturity.

1. Maheshwar S
Assistant Professor
Government First Grade College
Kyathanahalli
BILL DISCOUNTING

2. INTRODUCTION
 Business transactions are done in two ways
 Cash basis
 Credit basis
 Majority of the business in the world takes place
on credit basis. ( Remember basis of accounting )
 Why credit basis?

3. Instruments of credit
 Bill of exchange
 Promissory note

4. Meaning
Bills of exchange:
A bill of exchange is a written order or
document binding one party to pay a fixed sum
of money to another party on demand at some
point in the future
 Who are the parties
 Seller ( creditor ) draws or makes or creates the bill
to
 Buyer (debtor )
Buyer receives and honours (agreeing ) by signing
the BE

5.  Mr P is the seller writes the bill to Mr Q who is a
buyer
 Mr Q agrees and signs the bill.

6. Meaning
Promissory note
A promissory note is a financial instrument
that contains a written promise by one party
(debtor or maker) to pay another party (seller or
creditor) a definite sum of money, either on
demand or at a specified future date.

7. Bill discounting or Discounting of bill
When a holder of a bill receivable ( creditor
holding bills of exchange) is in need of urgent
cash before the due date... What he should do?
 Simple>>> He sells the bill to the bank or bill
broker
 The bank pays to bill holder after deducting
certain amount of discount ( interest on the
amount of the bill of unexpired period)
 The above process is called as bill discounting

8. Process of Bill discounting

9. Concepts
 True discount
 Banker’s discount
 Banker’s gain
 Present worth/value
 Face value or Amount of the bill(A)
 Discounted value
 Date of maturity

10. True discount
 It is simple interest calculated on present value of the bill.
 For example: Arun has taken loan from Guru of amount 10000 for 5 years at
x% ROI
 After calculating interest Arun should return 15000 after 5 years to Anu
 But Arun returns the money immediately after 3 years, so should he pay
15000?
Mathematically speaking he should pay less as he returns early
 At this time Anu calculates the present value of the money(ex PV-12500)
 The difference between Face value and Present value is true discount i,e.
15000-12500 = 2500 is the true discount. Hence, Arun must repay Anu only
12500 and remaining is a Discount for paying early.
Formula:
1. TD = FV-PV or TD = where P=Present worth of bill
T=Time or Number of days
R=Rate of Interest
2. If present value is not given > TD = ATR
100+TR where A = Amount or
Face value
PTR
100

11. Banker’s discount
 It is the simple interest on Face value or Amount
of the bill or It is the amount that the banks
deducts form the bill before paying to bill
holder.
 It is also know as Commercial Discount
1. Formula : > TD = ATR
100

12. Banker’s Gain
 It is the excess of banker’s discount over True
Discount or the difference between Banker’s Discount
and True Discount
Formula ; 1. BG = BD – TD
or
2. BG = ATR - ATR
100 100+TR

13. Present value
 Present value or Present worth of the bill is the
actual value at a given date. To be specific, at the
date of discounting
Formula: 1. PV = Face value – True Discount
or
2. PV = A x 100
100 + TR

14.  Face value or amount of the bill
 It is the original value of the bill created at the time
of drawing the bill agreed by both the parties
 Discounted value
 It is the net amount received by the holder from the
bank
 It is the amount received by the bill holder after
deducting Banker’s discount from the face value.
DV = Face value – Banker’s doscount

15. Due date or date of maturity
It is the date on which the bill becomes DUE or
PAYABLE.
or
It is the maturity date of the bill
Note: While calculating due date THREE days of
grace period must be added to the date of expiry.
Example: If date of expiry of the bill is 12/04/2020
then Date of maturity of the bill is 15/04/2020

16. Thank you