How to Deal with Bill of Exchange

Article Source:  http://churmura.com/business/finance/how-to-deal-with-bill-of-exchange/33057/
The holder of the Bill of Exchange has following options to deal with the bill:
1. Retain the bill till the date of maturity;
2. Discount the bill with the bank;
3. Endorse the bill in favour of a creditor ; and
4. Send the bill for collection.
1. When the Bill is Retained Till the Date of Maturity
When the bill is retained till the date of maturity, the drawer receives the money from the drawer on the due date. The entry is :
      Cash or Bank A/c                         …Dr.           [With the amount of the bill]
          To Bills Receivables A/c                             [With the amount of the bill]
Cash or Bank Account is debited because cash comes in and Bills Receivable Account is closed by crediting the account because the amount has been received against the bill receivable.
 2. When the Bill is discounted with the Bank
Entries in the Books of Drawer or Person Receiving the Bill: When the holder of the bill takes amount from a bank against the bill before the due date, it is known as discounting of the bill. The bank charges an amount termed as ‘Discounted Charges .’ The charges depend upon the rate of interest and the period of maturity. If, for example, a bill for Rs. 10,000 payable after three months is discounted @6% p.a, the
          amount discount will be Rs 150,                            Rs 10,000×6x3
                                                                                                -—————- The student must always
                                                                                                     100×12
Be careful to calculate the discounting charges with reference to the remaining period, from the date of discounting till the due date. For example, if a bill having three months maturity is discounted after one month, the discount charges will be Rs.120.
Accounting Entry
 When bill is discounted and Cash is received or credited to bank account:
       Cash or Bank A/c                               ….Dr.                             [The amount of the bill less discount]
       Discounting Charges A/c                 .…Dr.                                  [The discount charge by the bank]
     To Bills Receivables A/c                      …Dr.                                              [The full amount of the bill]
 Drawee’s Books: The acceptor or drawee is not affected by discounting of the bill and therefore, does not make any entry in his books in this regard. He will pay it to the holder of the bill (whosoeverhe may be) on maturity.
Accounting Entry
    Bills Payable A/c                     …Dr.
     To Cash or Bank A/c
 3. When a Bill is Endorsed or Negotiated in Favour of a Creditor
  When the holder of a bill transfers the bill to a third party, the bill is said to have been endorsed or negotiated. The term endorsement or negotiation means the transfer of a bill of exchange or promissory note to another person. The person who endorse the instrument (bill) is called the endorser.The person to whom the instrument (bill) is endorsed is called the endorsee.
Accounting Entry
In the Books of Drawer or Person Receiving the Bill:
Creditor                                                              ….Dr.
     To Bills Receivables A/c
  (Being the bills Receivable endorsed )
Creditor’s account is debited because a liability has been paid and Bills Receivable Account is credited because Bills Receivable has been endorsed.
As on the date of maturity, the payment will be received by the endorsee. Hence, at the time of payment, the endorser does not pass any entry in his books.
Acceptor’s Books: The acceptor of the bill does not pass entry relating to endorsement of the bill. He will pay the amount on the due date to the holder of the bill  and record the following entry:
    Bills Payable A/c                     …Dr.
      To Cash or Bank A/c
Endorsee’s Books: From endorsee’s viewpoint, the transaction entered into is: Receiving a bill receivable from the endorser. The Journal entry is:
Bills Recevable A/c                                   …Dr.
       To Endorser                
When bill is honoured at maturity, the following entry is made:
     Cash or Bank A/c                                …Dr.
         To Bills Receivable A/c
4. When the bill is Sent to the Bank for Collection
  The person receiving the bill of exchange, may retain the bill till maturity date and receive the amount as per the bill. But in order to ensure safety, he may send it to his bank with instructions that the bill be retained and realized on its due date. It means bank will retain the bill in safe custody and present it for payment on the due date. The bank will credit the account of the customer on realization of amount. If the bill is sent to the bank with such instructions, it is known as ‘bill sent for collection’. It is better to make a record of this also in books by passing the following entry:
   Bills Sent for Collection A/c                             …Dr.
       To Bills Receivable A/c
When the amount is realized, the entry is:
   Bank A/c                                                                 …Dr.
    To Bills Sent for Collection A/c
The balance  in the Bills Sent for Collection Account is shown in Balance Sheet as an asset.
Note that the drawee will not pass any entry in his books for the bills sent for collection. He will pass the entries in his books in the usual manner when he makes the payment, no matter whether the payment made to the drawer or his bank or an endorsee.