Journal Entries of Bills of Exchange

Before passing the journal entries, you should know about bills of exchange. There is the law which applies on Bill of Exchange. Its name is Indian Negotiable Instrument Act. 1881. This Act has defined Bill of Exchange.

"Bill of exchange is written order letter in which there is not any condition. Writer's sign will be in it. In this letter, order to other person is given to pay the certain sum of money to the writer of letter or to pay any other authorized person or who has this bill of exchange."

Now, we can define it in our own words which will help you to understand it. When a customer buy goods or borrow money. He has to pay money to creditor. In past when there is not any other alternatives of getting money, creditor had right to get money through writing this letter from debtor."

Today, there are lots of other alternatives like Paypal, payoneer,  checks, wire transfer and transfer through ATM. So, it has less important. But still as the student of  accounting, you should know its journal entries.

You should know first some terms which is used in bill of exchange.

1. Drawer = Writer = Maker = Creditor
2. Drawee = Acceptor = Debtor = Borrower
3. Payee or who have right to get payment

Maturity Date 

Due date of bill is also called maturity date and we can get three day of grace period for paying debt through bill.

Endorsement 

If drawer signs on the back side of bill for giving the right to other for getting money from debtor, it will be endorsement.

Dishonour of Bill of Exchange

If drawee or debtor does not pay the money of bill of exchange on maturity, then bill will be dishonour. After this, debtor will be responsible to his unpaid dues.

Journal Entries in the books of Drawer


1. Drawer receives a bill accepted by drawee

Bill receivable account Debit 

 Drawee account Credit


( Logic : Drawee is the debtor for drawer or creditor, so in the books of drawer, bill receivable asset will increase. So, it will debit. Drawee is also current asset, it will decrease. He will get more right to transfer bill receivable asset to other party than debtor asset.)

2. Drawee pays the bill on due date

Cash account Debit 

 B/R account Credit 

( Logic : Cash is the current asset. When money will receive it will increase. So, it will debit. B/R is also current asset, when bill receivable has matured and paid, it will decrease in the book of drawer. So, it will credit)
or 

2.  Drawee dishonours the bill on due date

Drawee account Dr.

B/R Account Credit 


( Logic : When drawee has no money in pocket and he dishonour our written bill of exchange on due date, our current asset of debtor or drawee will increase. So, it will debit and Bill receivable asset will decrease. So, it will credit)

3. If noting charges are paid by drawer 

Drawee account Debit 

Cash account Credit

( Logic : It is the duty of drawer to note the dishonour of bill. So, he has to pay on the behalf of drawee. His drawee asset will increase. So, it will debit and cash asset will decrease. So, cash account credit. )

Remember Rule : Increase in asset will debit. Decrease in asset will credit.


Journal Entries in the books of Drawee or 

Debtor 

1. Drawer receives a bill accepted by drawee

Drawer account Dr. 

To Bill payable account 

( Logic : Drawer is the creditor for debtor or drawee. So, in the books of drawee, when drawee will accept the bill. His liability to pay direct to drawer will decrease. So, decrease of liability will debit. Now, he has to pay the bill. So, bill payable liability will increase. So, it will credit.

2. Drawee pays the bill on due date

B/P Dr. 

cash  account Cr.

( Logic : When drawee will pay the bill. One side bill payable liability will decrease. So, it will debit. Our cash will decrease. So, decrease in asset will credit.)

or 

2.  Drawee dishonours the bill on due date

B/P account Dr. 

 Drawer  account  Cr. 

( Logic : When a bill will dishonour by drawee. Drawee is liabile to pay directly to drawer. So, his liability to drawer will increase. So, increase in the liability will credit. Bill payable liability will decrease. So, it will debit. )

3. If noting charges are paid by drawer 

Noting Charges  account Dr. 

Drawer  account  Cr.

( Logic : Drawer had paid noting charges on the behalf of drawee. So, it will increase the liability of drawee. So, in the books of drawee, we will show more liability of drawer by credit the drawer. Noting charges account will debit because it is expense of drawee but paid by drawer. You can learn more about journal entries on the behalf of other)


Important : Soon, this page will update with many examples of explaining the journal entries of bill of exchange. 


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Accounting Education: Journal Entries of Bills of Exchange
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