8. Example 1: Bill Retained by Drawer, Bill Met
In January 2019, Mr. A sold goods to Mr. B for $20,000 on credit. On the same day, Mr. A drew
three months bills on Mr. B who accepted them and returned the same to Mr. A. The bill was for
On the due date, the bill is honored by Mr. B.
Required: Pass journal entries in the books of Mr. A and Mr. B.
9. Example 2: Bill Retained by Drawer, Bill Dishonored
Mr. Y purchased goods on credit from Mr. X for $15,000 in April 2019.
Mr. X drew a bill of exchange on Mr. Y on the same day for the same amount, which was duly
accepted by Mr. Y and returned to Mr. X. On the due date, Mr. X presented the bill to Mr. Y, who
returned the bill dishonored.
Required: Pass journal entries in the books of both parties.
10. Option 2: When Drawer Discounts Bill
The act of selling a bill of exchange to the bank in consideration of small charges (discount) is called discounting of bill of exchange.
As the term of the bill of exchange is drawn for a specific time period, it can be paid only on the due date. If the bill's holder needs cash before the due
date, they can ask the bank to discount the bill.
When the bank discounts a bill of exchange, it deducts interest from the amount of the bill, and the balance amount is credited to the account of the
person who gets the bill discounted.
Interest is the rent of money lent by the bank, which is justified by the bank because it has to wait for the bill's due date. Here, interest is known as
Discount is an expense for the person who gets the bill discounted and a form of income for the bank. The discounted amount is based on the current rate
of interest and the time period (i.e., from the date of discounting to the date of maturity).
Study Note: Banks will not discount bills of exchange if the holder has an overdraft balance.
Example 3: Discounted Bill Met
On 1 January 2019, John sold goods to David for $25,000 and drew a four-month bill on the latter. David accepted the bill and returned it to John. On 3
February, John got the bill discounted at 6% p.a. The bill was duly met on the due date.
Required: Pass journal entries in the books of John, David, and the bank.
11. Option 3: When Bill Is Endorsed to Third-party Endorsee
This is another use of the bill of exchange by the drawer. A bill of exchange is easily transferable from one person to another. This is
because bill of exchange is a negotiable instrument.
The negotiability of a bill of exchange makes it transferable by mere physical delivery, which increases its usefulness.
The act of transferring bill of exchange from one person to another for the settlement of debts is called endorsement of bill.
The person who transfers or endorses the bill is called the endorser and the person to whom the bill is transferred or endorsed is
called the endorsee.
Example 5: Endorsed Bill Met
On 1 January 2019, John sold goods worth of $12,000 to David on credit. John drew a three-month bill on David on the same date for
John then bought goods from Harry for $15,000. On 4 February 2019, John endorsed David's bill to Harry to settle his debt, paying
the balance in cash. On the due date, David met the bill.
Required: Record the transactions in the books of all the parties.
12. Option 4: When Bill Is Sent to Bank for Collection
Sometimes a drawer has many bills receivable at a time. It becomes difficult for the drawer to keep the bills safely and to present
them to their respective drawee.
To overcome this difficulty, the drawer can send the bills to the bank for safety and collection purposes.
The act of a drawer sending a bill of exchange to the bank for safety and collection purposes is called bill sent for collection. Bill
sent for collection should not be confused with discounting of bill.
In discounting, the bill is sold to the bank, whereas in bills sent for collection, the bill is taken into the custody of the bank for
safekeeping and convenient collection.
Example 7: Bill Sent For Collection Met
John sold goods to Harry for $20,000. Later, John drew a three-month bill on Harry for the amount.
Harry accepted the bill and returned it to John, who sent the bill to his banker for collection. On the due date, the bill was met by the
drawee and the bank deducted collection charges of $100.
Required: Pass journal entries in the books of John, Harry, and the bank.