CHAPTER

BILLS OF EXCHANGE AND

PROMISSORY NOTES

LEARNING OUTCOMES
After studying this chapter, you would be able to:
♦ Understand the meaning of Bills of Exchange and Promissory Notes
and also try to grasp their underlying features.
♦ Understand the accounting treatments relating to issue, acceptance,
discounting, maturity and endorsement of bills in the books of
drawer and drawee.
♦ Learn the technique of accounting relating to accommodation bills.
♦ Learn the special treatment needed in case of insolvency as well as
early retirement of bill.
 1.2
6.2 ACCOUNTING

CHAPTER OVERVIEW

BILLS OF EXCHANGE

Bill of Exchange Promissory Note

Normal Trading Accommodation

Date of Expiry Nature of Bill Other Aspects

Due Date Bill at sight Dishonour of bill

Days of grace Bill after date Nothing charges

Maturity Date Renewal of bill

Bill on Demand
Insolvency

Reitrement of bill

Bills for collection

1. BILLS OF EXCHANGE
It is general practice that when goods are sold or services are provided, the seller extends a
credit period to buyer. Sometimes, the seller may not be in a position to offer credit period
and the purchase is not in a position to pay immediately. In such circumstances the seller
would like that the purchaser should give a definite promise in writing to pay the amount of
the goods on a certain date which he can use to generate immediate funds. Commercial
practice has developed to treat these written promises into valuable instruments of credit that
when a written promise is made in proper form and is properly stamped, it is expected that
the buyer discharges his debt and the seller receives payment. This is because written
promises are often accepted by banks and money is advanced against them. Also, they can
be endorsed, i.e., passed on from person to person. The written promise is either in the form
of a Bill of Exchange or in the form of a promissory note.
A Bill of Exchange has been defined as an “instrument in writing containing an unconditional
 BILLS OF EXCHANGE AND PROMISSORY NOTES 6.3

order signed by the maker directing certain person to pay a certain sum of money only to or
to the order of a certain person or to the bearer of the instrument”. When such an order is
accepted in writing on the face of the order itself, it becomes a valid bill of exchange. Suppose
A orders B to pay `50,000 for three months after date and B accepts this order by signing his
name, then it will be a bill of exchange.
A Bill of Exchange has the following characteristics:
1. It must be in writing.
2. It must be dated.
3. It must contain an order to pay a certain sum of money.

4. The promise to pay must be unconditional.

5. The money must be payable to a definite person or to his order to the bearer.
6. The draft must be accepted for payment by the party to whom the order is made.

7. It should be properly stamped (except in case of bills payable ‘‘on demand”)

8. Payment must be in legal currency of the country.
The party which makes the order is known as the drawer. The party which accepts the order
is known as the acceptor and the party to whom the amount has to be paid is known as the
payee. The drawer and the payee can be the same.
A Bill of Exchange can be passed on to another person by endorsement. Endorsement on a
bill of exchange is made exactly as it is done in the case of a cheque. The primary liability on
a bill of exchange is that of the acceptor. If he does not pay, a holder can recover the amount
from any of the previous endorsers or the drawee.
Sometimes, it may happen that a bill of exchange is drawn for foreign trade operations. Such
a bill is known as “Foreign Bill of Exchange”. A foreign bill of exchange is one which is drawn
in one country and is payable in another. It is generally drawn up in triplicate wherein each
copy is sent by separate post so that at least one copy reaches the intended party. Payment
will be made only on one of the copies and when such payment is made the other copies
become useless. Section 12 of the Negotiable Instruments Act provides that all instruments,
which are not inland instrument, are foreign.
 1.4
6.4 ACCOUNTING

A specimen of foreign bill of exchange is given below:

` 11,50,000
New Delhi
July, 2022

Ninety days after date of this First Bill of Exchange (Second and Third of the same tenure
and date being unpaid) Pay to the order of M/s Vencent John & Associates, London the
sum of Rupees Eleven lakh Fifty thousand only, value received.

To,
Wallis Sons Accepted
M/a IONX (Wallis Sons) Stamp
Birmingham, UK

Drawee
The following are examples of foreign bills:
1. A bill drawn in India on a person resident outside India and made payable outside
India.
2. A bill drawn outside India on a person resident outside India.
3. A bill drawn outside India and made payable in India.
4. A bill drawn outside India and made payable outside India.

2. PROMISSORY NOTES
A promissory note is an instrument in writing, not being a bank note or currency note
containing an unconditional undertaking signed by the maker to pay a certain sum of money
only to or to the order of a certain person. Under Section 31(2) of the Reserve Bank of India
Act a promissory note cannot be made payable to bearer.
A promissory note has the following characteristics:
1. It must be in writing.
2. It must contain a clear promise to pay. Mere acknowledgement of a debt is not a
promissory note.
 BILLS OF EXCHANGE AND PROMISSORY NOTES 6.5

3. The promise to pay must be unconditional.“I promise to pay `50,000 as soon as I can”
is not an unconditional promise.

4. The promiser or maker must sign the promissory note.

5. The maker must be a certain person.
6. The payee (the person to whom the payment is promised) must also be certain.

7. The sum payable must be certain. “I promise to pay `50,000 plus all fine” is not certain.
8. Payment must be in legal currency of the country.
9. It should not be made payable to the bearer.

10. It should be properly stamped.

11. It does not require any acceptance.
Specimen of promissory note :

Specimen of a Promissory Note

` 10,00,000/- only Rohan
77, Sector-12, Ghaziabad
March 01, 2022
Three months after date I promise to pay Priya or his order the sum of ` Ten lakh only, for
value received.
To,
Priya Stamp
S-11, Rohini, Delhi. (Rohan)

Payee Maker

3 DIFFERENCES - BILL OF EXCHANGE AND

PROMISSORY NOTE
Bill of Exchange Promissory Note
A bill contains an order to pay A promissory note contains only a
promise to pay certain sum of money
There are generally 3 parties (Drawer, Drawee There are 2 parties (Maker and Payee) in
and Payee) in bill of exchange promissory note
 1.6
6.6 ACCOUNTING

A bill is paid by acceptor A promissory note is paid by maker

A bill is drawn by creditor A promissory note is made by debtor
The drawer and payee may be same person in In promissory note maker and payee
case of bill of exchange cannot be same person
In a bill of exchange the liability of drawer is In a promissory note the liability of a
secondary and conditional. He will be liable maker is primary and absolute.
only in case the acceptor does not honour the
bill.
A bill of exchange can be accepted A promissory note cannot be made
conditionally conditionally
In a bill of exchange, notice of dishonour Notice of dishonour is not required in
must be given case of promissory note
In case of dishonour, a bill of exchange must Noting and protest is not required in
be noted and protested case of dishonour of a promissory note.

4. RECORD OF BILLS OF EXCHANGE AND

PROMISSORY NOTES
A party which receives a Promissory Note or receives an accepted Bill of Exchange will treat it
as a new asset under the name of Bills receivable. A party which issues a Promissory Note or
accepts a Bill of Exchange will treat it as new liability under the heading of Bills Payable. We
shall first deal with the entries in the books of the party which receives promissory notes or
bills. (When we talk of bills, we include promissory notes also).
On receipt of Bill, the payee makes the following entry in his books of accounts:
Bills Receivable Account Dr.
To Drawee/Maker of the note
(1) A accepts a Bill of exchange drawn on him by B. In the books of B the entry will be :
Bills Receivable Account Dr.
To A
(2) A sends to B the acceptance of D. In this case also, the entry in the books of B will be:
Bills Receivable Account Dr.
To A
 BILLS OF EXCHANGE AND PROMISSORY NOTES 6.7

The person who receives the bill has three options. These are:
(i) He can hold the bill till maturity. (Naturally in this case no further entry is passed until
the date of maturity arrives).
(ii) The bill can be endorsed in favour of another party say Z. In this case, the entry will be
to debit the party which now receives the bill and to credit the Bills Receivable Account.
Z Dr.
To Bills Receivable Account
(iii) The Bill of Exchange can be discounted with bank. The bank will deduct a small sum of
money as discount and pay rest of the money.

Bank Account Dr. (with the amount actually received)

Discount Account Dr. (with the amount of loss or discount)
To Bills Receivable Account

On the date of maturity there will be two possibilities:

(a) The first is that the bill will be paid, that is to say, met or honoured. The entries for this
will depend upon what was done to the bill during the period of maturity. If the bill
was kept, the cash will be received by the party which originally received the bill. In his
books, therefore, the entry will be :
Bank Account Dr.
To Bills Receivable Account
But if he has already endorsed the bill in favour of his creditor or if the bill has been
discounted with the bank he will not get the amount; it will be the creditor or the bank
which will receive the money. Therefore, in these two cases, no entry will be made in
the books of the party which originally received the bill.
(b) The second possibility is that the bill will be dishonoured, that is to say, the bill will not
be paid. If the bill is dishonoured, the bill becomes useless and the party from whom
the bill was received will be liable to pay the amount (and also the expenses incurred
by the party).

Therefore, the following entries will be made :

1. If the bill was kept till maturity then :
Drawee / Maker Account Dr.

To Bills Receivable Account

 1.8
6.8 ACCOUNTING

2. If the bill was endorsed in favour of a creditor, the entry is :

Drawee / Maker Account Dr.
To Creditor Account
3. If the bill was discounted with the bank :
Drawee / Maker Account Dr.
To Bank Account
Thus, it will be seen that in case of dishonour, the party which gave the bill has to be debited
(because he has become liable to pay the amount). The credit entry is in Bills Receivable
Account (if it was retained) or the Creditor or the bank (if it was endorsed/discounted in their
favour).

5. TERM OF A BILL
The term of bill of exchange may be of any duration. Usually the term does not exceed 90
days from the date of the bill.
 When a bill is drawn after sight, the term of the bill begins to run from the date of
‘sighting’, i.e., when the bill is accepted.
 When a bill is drawn after date, the term of the bill begins to run from the date of
drawing the bill.

6. EXPIRY / DUE DATE OF A BILL

The date on which the term of the bill terminates is called as ‘Expiry/Due Date of the bill’.

7. DAYS OF GRACE
Every instrument payable otherwise than on demand is entitled to three days of grace.

8. DATE OF MATURITY OF BILL

The date which comes after adding three days of grace to the expiry/due date of a bill, is
called the date of maturity.
The maturity of a promissory note or bill of exchange is the date at which it falls due. Every
promissory note or bill of exchange gets matured on the third day after the day on which it is
expressed to be payable, except when it is expressed to be payable:
 BILLS OF EXCHANGE AND PROMISSORY NOTES 6.9

(i) on demand,
(ii) at sight, or
(iii) on presentment

9. BILL AT SIGHT
Bill at Sight means the instruments in which no time for payment is mentioned. A cheque is
always payable on demand. A promissory note or bill of exchange is payable on demand-

(a) when no time for payment is specified, or

(b) when it is expressed to be payable on demand, or at sight or on presentment.
Notes:
(i) "At sight" and "presentment" means on demand.
(ii) An instrument payable on demand may be presented for payment at any time.
(iii) Days of grace is not to be added to calculate maturity for such types of bill.

10. BILL AFTER DATE

Bill after date means the instrument in which time for payment is mentioned. A promissory
note or bill of exchange is a time instrument when it is expressed to be payable-
(a) after a specified period.
(b) on a specific day
(c) after sight
(d) on the happening of event which is certain to happen
Notes:
(i) The expression ‘after sight’ means-
(a) in a promissory note, after presentment for sight
(b) in a bill of exchange, after acceptance or noting for non-acceptance or protest for
non-acceptance.
(ii) A cheque cannot be a time instrument because the cheque is always payable on demand.
Though a cheque can be post dated and which can be presented on or after such date. A
cheque has validity of 90 days from its date after that it becomes void, normally termed
as ‘Stale Cheque’ as bank will not honour such cheque.
 1.10
6.10 ACCOUNTING

11. HOW TO CALCULATE DUE DATE OF A BILL

The due date of each bill is calculated as follows:

Case Due Date

(a) When the bill is made payable on a (a) That specific date will be the due date.
specific date.
(b) When the bill is made payable at a (b) That date on which the term of the bill
stated number of months(s) after shall expire will be the due date.
date.
Note: The term shall expire on that day of
the month which corresponds with the day
on which the bill is dated. If the month in
which the period terminates has no
corresponding day, the period shall be
deemed to expire on the last day of such a
month. For example a bill signed on January
31st payable after 3 months will be due on
May 3rd.
(c) When the bill is made payable at a (c) That date which comes after adding
stated number of days after date. stated number of days to the date of bill,
shall be the due date.
Note: The date of Bill is excluded.

(d) When the due date is a public holiday. (d) The preceding business day will be the
due date.
(e) When the due date is an emergency/ (e) The next following day will be the date.
unforeseen holiday.

Note: The term of a Bill after sight commences from the date of acceptance of the bill
whereas the term of a Bill after date commences from the date of drawing of bill.

12. NOTING CHARGES

It is necessary that the fact of dishonour and the causes of dishonour should be established.
If the acceptor can prove that the bill was not properly presented to him for payment, he may
escape liability. Therefore, if there is dishonour, or fear of dishonour, the bill will be given to
a public official known as “Notary Public”. These officials present the bill for payment and if
the money is received, they will hand over the money to the original party. But if the bill is
dishonoured they will note the fact of dishonour, with the reasons and give the bill back to
 BILLS OF EXCHANGE AND PROMISSORY NOTES 6.11

their client. For this service they charge a small fee. This fee is known as noting charges. The
amount of noting charges is recoverable from the party which is responsible for dishonour.

Suppose X received from Y a bill for `1,000. On Maturity the bill is dishonoured and `10 is
paid as noting charges. The entry in this case will be
` `
Y Dr. 1,010
To Bills Receivable Account 1,000
To Bank A/c 10
Suppose X had endorsed this bill in favour of Z. In that case entry for dishonoured bill would
have been
Y Dr. 1,010
To Z 1,010
This is because Z will claim `1,010 from X and X has the right of recovering `1,010 from
Y. Similarly, if the bill has been discounted with a bank, entry will be :
Y Dr. 1,010
To Bank A/c 1,010

13. RENEWAL OF BILL

Sometimes the acceptor is unable to pay the amount and he himself moves that he should be
given extension of time and in consideration agrees to bear interest for the extended time
period (calculated from the date of maturity of old bill till the date of expected settlement).
In such a case a new bill will be drawn and the old bill will be cancelled. If this happens entries
should be passed for cancellation of the old bill. This is done exactly as already explained for
dishonour. When the new bill is received entries for the receipt of the bill will be repeated.
The amount of the new bill may represent any of the following:
(i) Where the drawee pays nothing: Total of amount of original bill as well as the interest
for the extended time period.

(ii) Where the drawee pays the interest amount at the time of renewal: Amount of the
Original bill.
(iii) Where the drawee makes part payment of the original bill or interest amount or both:
Unpaid part of total of amount of original bill as well as the interest for the extended
time period on such amount.
 1.12
6.12 ACCOUNTING

14. RETIREMENT OF BILLS OF EXCHANGE & REBATE

We have seen that renewal of a bill of exchange is made when a person does not have
sufficient fund to pay for the bill of exchange on the due date and he requires a further period
of credit. Many a time instances do arise when the acceptor has spare funds much before the
maturity date of the bill of exchange accepted by him. In such circumstances he approaches
the payee of the bill of exchange and asks him whether the payee is prepared to accept cash
before the maturity date. In such cases the acceptor gets a certain rebate or interest or
discount for premature payment. The rebate becomes the income of the acceptor and expense
of the payee. It is a consideration of premature payment.
ILLUSTRATION 1
Ms. Sujata receives two bills from Ms. Aruna dated 1st January 2022 for 2 months. The first bill
is for 10,200 and the second bill is for ` 15,000. The First bill is discounted immediately with the
bank for ` 10,000 and the second bill was endorsed in favour or Mr. Sree on 3rd January 2022.
Pass the necessary journal entries in the books of Ms. Sujata.
SOLUTION
In the books of Sujata
Journal Entries

Date Particulars L.F. DR. (`) CR. (`)

01/01/2022 Bills receivables A/c Dr. 25,200

To Aruna A/c 25,200
(Being 2 bills receivable from Aruna)

01/01/2022 Bank A/c Dr. 10,000

Discount charges A/c Dr. 200
To Bills receivable A/c 10,200
(Being the bills receivable discounted with
the bank at a charge of ` 200)
03/01/2022 Sree A/c Dr. 15,000
To Bills receivable A/c 15,000
(Being bill endorsed in favour of Mr. Sree)

ILLUSTRATION 2
Vijay sold goods to Pritam on 1st September, 2022 for `1,06,000. Pritam immediately accepted
a three months bill. On due date Pritam requested that the bill be renewed for a fresh period of
 BILLS OF EXCHANGE AND PROMISSORY NOTES 6.13

two months. Vijay agrees provided interest at 9% p.a. was paid immediately in cash. To this
Pritam was agreeable. The second bill was met on due date. Give Journal entries in the books of
Vijay and Pritam.
SOLUTION
Books of Vijay
Journal

Date Particulars Debit` Credit`

2022
1 Sept. Pritam Dr. 1,06,000
To Sales Account 1,06,000
(Sales of goods to Pritam as per Invoice No...)
Bills Receivable Account Dr. 1,06,000
To Pritam 1,06,000
(3 months acceptance received from Pritam for the
amount due from him)
Dec. 4 Pritam Dr. 1,06,000
To Bills Receivable Account 1,06,000
(Pritam acceptance cancelled because of renewal)
Pritam Dr. 1,590
To interest 1,590
(Interest @ 9% on `1,06,000 due from Pritam for 2
months because of renewal)
Bills Receivable Account Dr. 1,06,000
Cash Account Dr. 1,590
To Pritam 1,07,590
[New acceptance for 2 months for `106,000 and
Cash (for interest) received from Pritam]
2023
Feb. 7 Cash Account Dr. 1,06,000
To Bills Receivable Account 1,06,000
(Cash received against Pritam’s second acceptance)
 1.14
6.14 ACCOUNTING

Books of Pritam
Journal

Date Particulars ` `

2022
1 Sept. Purchase Account Dr. 1,06,000
To Vijay A/c 1,06,000
(Purchase of goods from Vijay as per Invoice No...)
Vijay A/c Dr. 1,06,000
To Bills Payables Account 1,06,000
(3 months acceptance given to Vijay for the
amount)
Dec. 4 Bills Payable Account Dr. 1,06,000
To Vijay A/c 1,06,000
(Cancellation of bill because of renewal)
Interest Account Dr. 1,590
To Vijay 1,590
(Interest @ 9% on `1,06,000 due to Vijay for 2
months because of renewal)
Vijay Account Dr. 1,07,590
To Cash Account 1,590
To Bills Payable Account 1,06,000
[New acceptance for 2 months for `106,000 and
Cash (for interest) paid to Vijay]
2023
Feb. 7 Bills Payable Account Dr. 1,06,000
To Cash Account 1,06,000
(Cash paid against second bill)

ILLUSTRATION 3
On 1st January, 2022, Ankita sells goods for `5,00,000 to Bhavika and draws a bill at three
months for the amount. Bhavika accepts it and returns it to Ankita. On 1st March, 2022, Bhavika
 BILLS OF EXCHANGE AND PROMISSORY NOTES 6.15

retires her acceptance under rebate of 12% per annum. Record these transactions in the journals
of Ankita and Bhavika.
SOLUTION
Journal Entries in the books of Ankita

Date Particulars ` `
2022
Jan. 1 Bhavika’s account Dr. 5,00,000
To Sales account 5,00,000
(Being the goods sold to Bhavika on credit)
Bills receivable account Dr. 5,00,000
To Bhavika’s account 5,00,000
(Being the acceptance of bill received)
Mar.1 Bank account Dr. 4,95,000
Rebate on bills account Dr. 5,000
To Bills receivable account 5,00,000
(Being retirement of bill by Bhavika one month
before maturity, the rebate being given to her at
12% p.a.)

Journal Entries in the books of Bhavika

Date Particulars ` `
2022
Jan. 1 Purchases account Dr. 5,00,000
To Ankita Account 5,00,000
(Being the goods purchased from Ankita on credit)
Ankita Account Dr. 5,00,000
To Bills Payable Account 5,00,000
(Being the acceptance of bill)
Mar .1 Bills Payable Account Dr. 5,00,000
To Rebate Income Account 5,000

To Bank Account 4,95,000

 1.16
6.16 ACCOUNTING

(Being retirement of bill one month before

maturity, the rebate being received at 12% p.a.)

ILLUSTRATION 4
Journalise the following transactions in K. Katrak’s books:

(i) Katrak’s acceptance to Basu for ` 2,500 discharged by a cash payment of ` 1,000 and
a new bill for the balance plus ` 50 for interest.
(ii) G. Gupta’s acceptance for ` 4,000 which was endorsed by Katrak to M. Mehta was
dishonoured. Mehta paid ` 20 noting charges. Bill withdrawn against cheque.
(iii) D. Dalal retires a bill for ` 2,000 drawn on him by Katrak for `10 discount.
(iv) Katrak’s acceptance to Patel for ` 5,000 was discharged by endorsing Mody’s acceptance
to Katrak for a similar amount.
SOLUTION
Books of K. Katrak
Journal Entries

` `

(i) Bills Payable Account Dr. 2,500

Interest Account Dr. 50
To Cash A/c 1,000
To Bills Payable Account 1,550
(Bills Payable to Basu discharged by cash payment of
`1,000 and a new bill for `1,550 including `50 as interest)

(ii) (a) G. Gupta Dr. 4,020

To M. Mehta 4,020
(G. Gupta’s acceptance for `4,000 endorsed to M. Mehta
dishonoured,`20 paid by M. Mehta as noting charges)
(b) M. Mehta Dr. 4,020
To Bank Account 4,020
(Payment to M. Mehta on withdrawal of bill earlier
received from Mr. G. Gupta)
(iii) Bank Account Dr. 1,990
Discount Account Dr. 10
 BILLS OF EXCHANGE AND PROMISSORY NOTES 6.17

To Bills Receivable Account 2,000

(Payment received from D. Dalal against his acceptance for
`2,000. Allowed him a discount of `10)

(iv) Bills Payable Account Dr. 5,000

To Bills Receivable Account 5,000
(Bills Receivable from Mody endorsed to Patel in
settlement of bills payable issued to him earlier)

ILLUSTRATION 5
On 1st January, 2022, Vilas draws a bill of exchange for `10,000 due for payment after 3 months on
Eknath. Eknath accepts to this bill of exchange. On 4th March, 2022 Eknath retires the bill of exchange
at a discount of 12% p.a. You are asked to show the journal entries in the books of Eknath.
SOLUTION
Journal entries in the books of Eknath

Date Particulars Debit ` Credit `

2022
Jan. 1 Vilas A/c Dr. 10,000
To Bills Payable A/c 10,000
(Being the bill draws by him accepted)
Mar. 4 Bills Payable A/c Dr. 10,000
To Bank A/c 9,900
To Interest A/c (Discount A/c) 100
(Being retirement of acceptance 1 month before
maturity, interest allowed at 12% p.a.)

ILLUSTRATION 6
On 1st January, 2022, Vilas draws a Bill of Exchange for `10,000 due for payment after 3 months
on Eknath. Eknath accepts to this bill of exchange. On 4th March, 2022. Eknath retires the bill of
exchange at a discount of 12% p.a. You are asked to show the journal entries in the books of Vilas.
 1.18
6.18 ACCOUNTING

SOLUTION
Journal entries in the books of Vilas

Date Particulars Debit ` Credit `

2022
Jan. 1 Bills Receivable A/c Dr. 10,000
To Eknath A/c 10,000
(Being bill of exchange drawn on Eknath due for
payment on 4th April 2022)
Mar. 4 Bank A/c Dr. 9,900
Interest A/c (Discount) A/c Dr. 100
To Bills Receivable A/c 10,000
(Being retirement of bill of exchange due for
maturity on 4th April, 2022 by Eknath 1 month before
maturity, the rebate being given to him at12% p.a.)

15. INSOLVENCY
Insolvency of a person means that he is unable to pay his liabilities. This means that bills
accepted by him will be dishonoured. Therefore, when it is known that a person has become
insolvent, entry for dishonour of his acceptance must be passed. Later on, something may be
received from his estate. When and if an amount is received, cash account will be debited and
the personal account of the debtor will be credited. The remaining amount will be irrecoverable
and, therefore, should be written off as bad debt. The students should be careful to calculate
the amount actually received from an insolvent’s estate and amount to be written off only after
preparing his account.
In the books of drawee of the bill, the amount not ultimately paid by him due to insolvency,
should be credited to Deficiency Account.
ILLUSTRATION 7
Mr. David draws two bills of exchange on 1.1.2022 for `6,000 and `10,000. The bills of exchange
for `6,000 is for two months while the bill of exchange for `10,000 is for three months. These
bills are accepted by Mr. Thomas. On 4.3.2022, Mr. Thomas requests Mr. David to renew the first
bill with interest at 18% p.a. for a period of two months. Mr. David agrees to this proposal. On
20.3.2022, Mr. Thomas retires the acceptance for `10,000, the interest rebate i.e. discount being
`100. Before the due date of the renewed bill, Mr. Thomas becomes insolvent and only 50 paise
in a rupee could be recovered from his estate.
You are to give the journal entries in the books of Mr. David.
 BILLS OF EXCHANGE AND PROMISSORY NOTES 6.19

SOLUTION
Journal Entries in the books of Mr. David

2022 (` ) (` )
Jan. 1 Bills receivable (No. 1) A/c Dr. 6,000
Bills receivable (No. 2) A/c Dr. 10,000
To Mr. Thomas’s A/c 16,000
(Being drawing of bills receivable No. 1 due for
maturity on 4.3.2022 and bills receivable No. 2 due for
maturity on 4.4.2022)
4-Mar Mr. Thomas’s A/c Dr. 6,000
To Bills receivable (No.1) A/c 6,000
(Being the reversal entry for bill No.1 on agreed
renewal)
4-Mar Bills receivable (No. 3) A/c Dr. 6,180
To Interest A/c 180
To Mr. Thomas’s A/c 6,000
(Being the drawing of bill of exchange no. 3 due for
maturity on 7.5.2022 together with interest at 18%p.a.
in lieu of the original acceptance of Mr. Thomas)
20-Mar Bank A/c Dr. 9,900
Discount A/c Dr. 100
To Bills receivable (No. 2) A/c 10,000
(Being the amount received on retirement of bills
No.2 before the due date)
7-May Mr. Thomas’s A/c Dr. 6,180
To Bills receivable (No. 3) A/c 6,180
(Being the amount due from Mr. Thomas on
dishonour of his acceptance on presentation on the
due date)
7-May Bank A/c Dr. 3,090
To Mr. Thomas’s A/c 3,090
(Being the amount received from official assignee of
Mr. Thomas at 50 paise per rupee against
dishonoured bill)
 1.20
6.20 ACCOUNTING

May 7 Bad debts A/c Dr. 3,090

To Mr. Thomas’s A/c 3,090
(Being the balance 50% debt in Mr. Thomas’s Account
arising out of dishonoured bill written as bad)

ILLUSTRATION 8
Rita owed `1,00,000 to Siriman. On 1st October, 2021, Rita accepted a bill drawn by Siriman for
the amount at 3 months. Siriman got the bill discounted with his bank for `99,000 on 3rd
October, 2021. Before the due date, Rita approached Siriman for renewal of the bill. Siriman
agreed on the conditions that `50,000 be paid immediately together with interest on the
remaining amount at 12% per annum for 3 months and for the balance, Rita should accept a
new bill at three months. These arrangements were carried out. But afterwards, Rita became
insolvent and 40% of the amount could be recovered from his estate.
Pass journal entries (with narration) in the books of Siriman.
SOLUTION
In the books of Siriman
Journal Entries

Particulars ` `
Bills Receivable A/c Dr. 1,00,000
To Rita 1,00,000
(Being a 3 month’s bill drawn on Rita for the amount due)
Bank A/c Dr. 99,000
Discount A/c Dr. 1,000
To Bills Receivable A/c 1,00,000
(Being the bill discounted)
Rita Dr. 1,00,000
To Bank A/c 1,00,000
(Being the bill cancelled up due to Rita’s inability to pay it)
Rita Dr. 1,500
To Interest A/c 1,500
(Being the interest due on ` 50,000 @ 12% for 3 months)
Bank A/c Dr. 51,500
To Rita 51,500
(Being the receipt of a portion of the amount due on the bill
together with interest)
 BILLS OF EXCHANGE AND PROMISSORY NOTES 6.21

Bills Receivable A/c Dr. 50,000

To Rita 50,000
(Being the new bill drawn for the balance)
Rita Dr. 50,000
To Bills Receivable A/c 50,000
(Being the dishonour of the bill due to Rita’s insolvency)
Bank A/c Dr. 20,000
Bad Debts A/c Dr. 30,000
To Rita 50,000
(Being the receipt of 40% of the amount due on the bill from
Rita’s estate)

16. ACCOMMODATION BILLS

Bills of Exchange are usually drawn to facilitate trade transmission, that is, bills are meant to
finance actual purchase and sale of goods. But the mechanism of bill can be utilised to raise
finance also. Suppose Boss needs finance for three months. In that case he may persuade his
friend Kapoor to accept his draft. The bill of exchange may then be taken by Boss to his bank
and get it discounted there. Thus, Boss will be able to make use of funds. When the three
months period expires, Boss will send the requisite amount to Kapoor and Kapoor will meet
the bill. Thus, Boss is able to raise money for his use. If both Boss and Kapoor need money,
the same devise can be used. Either Boss accepts a bill of exchange or Kapoor does. In either
case, the bill will be discounted with the bank and the proceeds divided between the two
parties according to mutual agreement. The discounting charges must also be borne by the
two parties in the same ratio in which the proceeds are divided. On the due date the acceptor
will receive from the other party his share. The bill will then be met. When bills are used for
such a purpose, they are known as accommodation bills.
However, it may so happen that the drawer is not able to remit the proceeds to drawee on
the due date. In such a case, the drawee may draw a bill on the drawer, and get it discounted
with the bank to honour the first bill. If the new drawer (drawee of the first bill) also remits
some proceeds of the new bill to new drawee (drawer of the first bill), then the proportion of
discount to be borne by the new drawee will be based upon the proceeds remitted as well as
the benefit obtained by him on the first bill (i.e., by not paying the amount due to the original
drawee on due date).
Entries are passed in the books of two parties exactly in the way already pointed out for
ordinary bills. The only additional entry to be passed is for sending the remittance for one
party to the other party and also debiting the other party with the shared amount of discount.
 1.22
6.22 ACCOUNTING

ILLUSTRATION 9
On 1st July, 2022 Gorge drew a bill for `1,80,000 for 3 months on Harry for mutual
accommodation. Harry accepted the bill of exchange. Gorge had purchased goods worth
`1,81,000 from Jack on the same date. Gorge endorsed Harry’s acceptance to Jack in full
settlement. On 1st September, 2022, Jack purchased goods worth `1,90,000 from Harry. Jack
endorsed the bill of exchange received from Gorge to Harry and paid ` 9,000 in full settlement
of the amount due to Harry. On 1st October, 2022, Harry purchased goods worth `2,00,000 from
Gorge. Harry paid the amount due to Gorge by cheque. Give the necessary Journal Entries in the
books of Harry , Gorge and Jack.
SOLUTION
In the books of Harry
Journal Entries

Date Particulars ` `
1.7.2022 Gorge’s account Dr. 1,80,000
To Bills payable account 1,80,000
(Acceptance of bill drawn by Gorge)
1.9.2022 Jack’s account Dr. 1,90,000
To Sales account 1,90,000
(Sales made to Jack)
1.9.2022 Bills receivable account Dr. 1,80,000
Bank account Dr. 9,000
Discount account Dr. 1,000
To Jack’s account 1,90,000
(Acceptance received from Jack’s endorsement of
bill received from Gorge for ` 1,80,000 and `
9,000 received in full settlement of the amount
due)
1.9.2022 Bills payable account Dr. 1,80,000
To Bills receivable account 1,80,000
(Own acceptance received from Jack’s
endorsement, cancelled)
1.10.2022 Purchase account Dr. 2,00,000
To Gorge’s account 2,00,000
(Purchases made from Gorge)
BILLS OF EXCHANGE AND PROMISSORY NOTES 6.23

Gorge’s account Dr. 20,000

To Bank account 20,000
(Amount paid to Gorge after adjusting `180,000
for accommodation extended to him)

In the books of Gorge

Journal Entries

Date Particulars ` `

1.7.2022 Purchases Account Dr. 1,81,000

To Jack Account 1,81,000
(Purchase of goods from Jack)
1.7.2022 Bills Receivable Account Dr. 1,80,000
To Harry Account 1,80,000
(Acceptance by Harry of bill drawn on him)
1.7.2022 Jack’s account Dr. 1,81,000
To Rebate Account 1,000
To Bills Receivable Account 1,80,000
(Harry’s bill endorsed to Jack)
1.10.2022 Harry Account Dr. 2,00,000
To Sales account 2,00,000
(Sales to Harry)
1.10.2022 Bank Account Dr. 20,000
To Harry account 20,000
(Amount received from Gorge after adjusting
`180,000 for accommodation extended by him)

In the books of Jack

Journal Entries

Date Particulars ` `

1.7.2022 Gorge Account Dr. 1,81,000

To Sales Account 1,81,000
(Sold goods to Gorge)
 1.24
6.24 ACCOUNTING

1.7.2022 Bills Receivable Account Dr. 1,80,000

Rebate Account Dr. 1000
To Gorge Account 1 ,81,000
(Being Harry’s acceptance received from Gorge)
1.9.2022 Purchase Account Dr. 1,90,000
To Harry Account 1,90,000
(Purchase of goods from Harry)
1.9.2022 Harry Account Dr. 1,90,000
To Bills Receivable Account 1,80,000
To Bank Account 9,000

To Discount Account 1000

(Endorsement of bill received from Gorge for Rs.
1,80,000 to Harry and Rs. 9,000 paid in full settlement
of the amount due)

ILLUSTRATION 10
X draws on Y a bill of exchange for ` 30,000 on 1st April, 2022 for 3 months. Y accepts the bill
and sends it to X who gets it discounted for ` 28,800. X immediately remits ` 9,600 to Y. On the
due date, X, being unable to remit the amount due, accepts a bill for ` 42,000 for three months
which is discounted by Y for ` 40,110. Y sends 6,740 to X. Before the maturity of the bill, X
becomes bankrupt, his estate paying fifty paise in the rupee. Give the journal entries in the books
of X and Y.
SOLUTION
In the books of X
Journal Entries

Date Particulars DR. CR.

(in `) (in `)
1/4/2022 Bills receivables A/c Dr. 30,000
To Y A/c 30,000
(Being bill of exchange drawn on Mr. Y)
1/4/2022 Bank A/c Dr. 28,800
Discount charges A/c Dr. 1,200
To Bills receivable A/c 30,000
(Being the bills receivable discounted with
the bank at a charge of ` 1,200)
BILLS OF EXCHANGE AND PROMISSORY NOTES 6.25

1/4/2022 Y A/c Dr. 10,000

To Bank A/c 9,600
To Discount charges 400
(Being the amount remitted to Y along with
his share of the bank charges)
4/7/2022 Y A/c Dr. 42,000
To Bills payable A/c 42,000
(Being the bills drawn by Y, due to non-
payment of earlier bill)
4/7/2021 Bank A/ c Dr. 6,740
 20,000 + 6,740  Dr. 1,260
Discount charges A/c  × 1,890 
 40,110 
To Y A/c 8,000
(Being the amount discounted and sent it by
Y to X)
Bills payable A/c Dr.
To Y’s A/c 42,000
(Being the bill due dishonoured due to
bankruptcy)
Y A/c Dr. 28,000
To Bank A/c 14,000
To Deficiency account 14,000
(Being the amount due to Y discharged by
payment of 50 paise in a rupee)

In the books of Y
Journal Entries

Date Particulars DR. CR.

(in `) (in `)
1/4/2022 X A/c Dr. 30,000
To Bills payable A/c 30,000
(Being bill of exchange accepted and sent
to Mr. X)
1/4/2022 Bank A/c Dr. 9,600
Discount charges A/c Dr. 400
 1.26
6.26 ACCOUNTING

To X A/c 10,000
(Being the amount received from X on
account of the bills receivable)
4/7/2022 Bills receivable A/c Dr. 42,000
To X A/c 42,000
(Being the bills accepted by X)
4/7/2022 Bank A/c Dr. 40,110
Discount charges A/c Dr. 1,890
To Bills receivable A/c 42,000
(Being X acceptance discounted with bank)
Bills payable A/c Dr. 30,000
To Bank A/c 30,000
(Being the amount met on the due date)
X A/c Dr. 8,000
To Bank A/c 6,740
To Discount account 1,260
(Being the amount received and the discount
debited to X)
X A/c Dr. 42,000
To Bank A/c 42,000
(Being X’s acceptance which was
discounted dishonoured due to X’s
bankruptcy)
Bank A/c Dr. 14,000
Bad debts A/c Dr. 14,000
To X A/c 28,000
(The amount received from X and the balance
being written off as debt)

ILLUSTRATION 11
For the mutual accommodation of ‘X’ and ‘Y’ on 1st April, 2022, ‘X’ drew a four months’ bill on
‘Y’ for ` 4,000. ‘Y’ returned the bill after acceptance of the same date. ‘X’ discounts the bill from
his bankers @ 6% per annum and remit 50% of the proceeds to ‘Y’. On due date, ‘X’ is unable
to send the amount due and therefore ‘Y’ draws a bill for ` 7,000, which is duly accepted by ‘X’.
 BILLS OF EXCHANGE AND PROMISSORY NOTES 6.27

‘Y’ discounts the bill for ` 6,600 and sends ` 1,300 to ‘X’. Before the bill is due for payment ‘X’
becomes insolvent. Later 25 paise in a rupee received from his estate.
Record Journal entries in the books of ‘X’.
SOLUTION
In the books of X
Journal Entries

Date Particulars Debit Credit

2022 ` `

1-Apr Bills receivable account Dr. 4,000

To Y’s account 4,000
(Acceptance received from Y for mutual
accommodation)
1-Apr Bank account Dr. 3,920
Discount account Dr. 80
To Bills receivable account 4,000
(Bill discounted for ` 3,920)
Y’s account Dr. 2,000
To Cash account 1,960
To Discount account 40
(Half of proceeds remitted to Y)
Aug. 4 Y’s account Dr. 7,000
To Bills payable account 7,000
(Acceptance given to Y, being unable to remit the due
amount)
Bank account Dr. 1300
 2,000 + 1,300  Dr. 200
Discount account  × 400 
 6,600 
To Y’s account 1500
(Amount received from Y and discount amount
credited to him)
Bills payable account Dr. 7,000
 1.28
6.28 ACCOUNTING

To Y’s account 7,000

(Acceptance to Y dishonoured because of insolvency)
Y account Dr. 3,500
To Bank account 875
To Deficiency account 2,625
(Amount paid @ 25 paise in a rupee and balance
credited to deficiency account as being unable to pay)

17. BILLS OF COLLECTION

When a person receives a bill of exchange, he may decide to retain the bill till the date of
maturity. But in order to ensure safety, he may send it to bank with instructions that the bill
should be retained till maturity and should be realised on that date. This does not mean
discounting because the bank will not credit the client until the amount is actually realised. 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 following entry:
Bills for Collection Account Dr.
To Bills Receivable Account
When the amount is realised the entry will be
Bank Account Dr.
To Bills for Collection Account
When the amount is not honoured, the entry will be
Drawee’s A/c (from whom the bill was received) Dr.
To Bills for collections A/c

18. BILLS RECEIVABLE AND BILLS PAYABLE BOOKS

Bills receivable and bills payable books are journals (Day Books) to record in a chronological
order the details of bills receivable and bills payable. When large number of bill transactions
take place in an organization, it is convenient to maintain these books. Wherein any bill
transaction takes place, the same is entered in the Day Books in the first instance. Postings to
individual Debtors or Creditors accounts are made from the Day Books. Also totals of bills
received or accepted are posted periodically to Bills Receivable Account and Bills Payable
Account respectively.
 BILLS OF EXCHANGE AND PROMISSORY NOTES 6.29

Bills receivable book and bills payable book are very useful for following up the status of
outstanding bills. When there are large number of bills and these bills fall due on different
dates, some of these bills may not be honoured on maturity due to varied reasons. It is
possible from these Day Books to trace the details of the outstanding bills and to identify the
reasons for not honouring the bills. Given below are forms of Day Books for both bills
receivable and bills payable:
Bills Receivable Book (Folio No . . .)

Date of Voucher Party from Accept Date of Due Place of Amt. ` L.F. Mode of
receipt No. whom or Bill Date Payment Disposal
Received

Bills Payable Book (Folio No . . .)

Date of Drawer Payee Date of Due Date Place of Amt.` L.F. Mode of
Acceptance Bill Payment Disposal

SUMMARY
 A Bill of Exchange is defined as an “instrument in writing containing an unconditional
order signed by the maker directing a certain person to pay a certain sum of money
only to or to the order of a certain person or to the bearer of the instrument”.
 A promissory note is an instrument in writing, not being a bank note or currency note
containing an unconditional undertaking signed by the maker to pay a certain sum of
money only to or to the order of a certain person. Under Section 31(2) of the Reserve
Bank of India Act a promissory note cannot be made payable to bearer.
 A party which receives a Promissory Note or receives an accepted Bill of Exchange will
treat it as a new asset under the name of Bills receivable. A party which issues a
Promissory Note or accepts a Bill of Exchange will treat it as new liability under the
heading of Bills Payable.
 1.30
6.30 ACCOUNTING

TEST YOUR KNOWLEDGE

True and False
1. Bills payable account is a nominal account.
2. Promise to pay is included in a bill of exchange.
3. Days of rebate are added to the due date to arrive at the maturity date.

4. Discount at the time of retirement of a bill is a gain for the drawee.

5. Foreign bill is drawn in the country and payable outside the country.
6. Promissory note is different from bill of exchange because the amount is paid by the
maker in case of former and by the acceptor in the later.
7. A has drawn a bill on B. B accepts the same and endorses the bill to C.
8. A bill given to a creditor is called bills payable.

Multiple Choice Questions

1. On 1.1.2022, A draws a bill on B for `1,20,000 for 3 months’ maturity date of the bill will be:
(a) 1.4.2022
(b) 3.4.2022
(c) 4.4.2022
2. On 16.6.2022 P draws a bill on Q for `1,25,000 for 30 days. 19th July is a public holiday,
maturity date of the bill will be:
(a) 19th July

(b) 18th July

(c) 17th July
3. PQ draws a bill on XY for `130,000 on 1.1.2022. XY accepts the same on 4.1.2022 for
period of 3 months after date. What will be the maturity date of the bill:
(a) 4.4.2022
(b) 3.4.2022

(c) 7.4.2022
4. A draws a bill on B. A endorsed the bill to C. The payee of the bill will be
(a) A
 BILLS OF EXCHANGE AND PROMISSORY NOTES 6.31

(b) B
(c) C
5. A bill of ` 120,000 was discounted by Saras with the banker for `1,18,800. At maturity,
the bill returned dishonoured, noting charges ` 200. How much amount will the bank
deduct from Saras’s bank balance at the time of such dishonour?
(a) ` 1,20,000
(b) ` 1,18,800
(c) ` 1,20,200
6. X draws a bill on Y for `300,000 on 1.1.2022 for 3 months after sight, date of acceptance
is 6.1.2022. Maturity date of the bill will be:
(a) 8.4.2022
(b) 9.4.2022
(c) 10.4.2022
7. X sold goods to Y for ` 5,00,000. Y paid cash `4,30,000. X will grant 2% discount on
balance, and Y request X to draw a bill for balance, the amount of bill will be:
(a) ` 98,000
(b) ` 68,000
(c) ` 68,600
8. On 1.1.2022, X draws a bill on Y for ` 5,00,000 for 3 months. X got the bill discounted
4.1.2022 at 12% rate. The amount of discount on bill will be:
(a) ` 15,000
(b) ` 16,000
(c) ` 18,000
9. Mr. Jay draws a bill on Mr. John for ` 3,00,000 on 1.1.2022 for 3 months. On 4.2.2022,
John got the bill discounted at 12% rate. The amount of discount will be:
(a) ` 9,000
(b) ` 6,000
(c) ` 3,000
10. XZ draws a bill on YZ for ` 2,00,000 for 3 months on 1.1.2022. The bill is discounted with
banker at a charge of `1,000. At maturity the bill return dishonoured. In the books of XZ,
for dishonour, the bank account will be credited by:
(a) `199,000
 1.32
6.32 ACCOUNTING

(b) ` 200,000
(c) ` 201,000
11. On 1.1.2022, XA draws a bill on YB for ` 1,00,000. At maturity YB request XA to renew
the bill for 2 months at 12% p.a. interest. Amount of interest will be:
(a) ` 2,000
(b) ` 1,500
(c) ` 1,800
12. A bill of exchange is drawn by a
(a) Creditor
(b) Debtor
(c) Debenture holder
13. At the time of drawing a bill, the drawer credits
(a) Bills Receivables A/c
(b) Bills Payable A/c
(c) Debtor’s A/c
14. A promissory note is made by a
(a) Seller
(b) Purchaser
(c) Endorsee
15. A bill of exchange contains
(a) An unconditional order
(b) A promise
(c) A request to deliver the goods
16. A promissory note contains
(a) An unconditional order
(b) A promise
(c) A request to deliver the goods
17. The rebate on the bill shows that
(a) It has been endorsed
(b) It has been paid after the date of maturity
 BILLS OF EXCHANGE AND PROMISSORY NOTES 6.33

(c) It has been paid before the date of maturity

18. Notary Public may charge his fee from the
(a) Holder of bill of exchange
(b) Drawer
(c) None

Theoretical Questions
1. Write short notes on:
(a) Accommodation bill.
(b) Renewal of bill.

(c) Noting charges.

2. What is bill of exchange? How does it differ from Promissory Note?

Practical Questions
1. On 1st January, 2022, A sells goods for `10,000 to B and draws a bill at three months for
the amount. B accepts it and returns it to A. On 1st March, 2022, B retires his acceptance
under rebate of 12% per annum. Record these transactions in the journals of B.
2. A draws upon B three Bills of Exchange of ` 3,000, ` 2,000 and ` 1,000 respectively. A
week later his first bill was mutually cancelled, B agreeing to pay 50% of the amount in
cash immediately and for the balance plus interest `100, he accepted a fresh Bill drawn
by A. This new bill was endorsed to C who discounted the same with his bankers for
`1,500. The second bill was discounted by A at 5%. This bill on maturity was returned
dishonoured (nothing charge being `30). The third bill was retained till maturity when it
was duly met.
Give the necessary journal entries recording the above transactions in the books of A.

3. Journalize the following in the books of Don:

(i) Bob informs Don that Ray’s acceptance for ` 3,000 has been dishonoured and
noting charges are ` 40. Bob accepts ` 1,000 cash and the balance as bill at three
months at interest of 10%. Don accepts from Ray his acceptance at two months
plus interest @ 12% p.a.
(ii) James owes Don ` 3,200; he sends Don’s own acceptance in favour of Ralph for
` 3,160; in full settlement.
 1.34
6.34 ACCOUNTING

(iii) Don meets his acceptance in favour of Singh for ` 4,500 by endorsing John’s
acceptance for ` 4,450 in full settlement.
(iv) Ray’s acceptance in favour of Don retired one month before due date, interest is
taken at the rate of 6% p.a.

Answers/hints

True and False

1. False: The bills payable account is a personal account that represents a liability.

2. False: Bill of exchange contains an order to pay the required amount and not a mere
promise to pay.
3. False:3 Days of grace are added to the due date to arrive at the maturity date.

4. True: Discount at the time of retirement of a bill is a gain for the drawee and loss for
the drawer.
5. True: When a bill is drawn in the country and is payable outside the country it is termed
as a foreign bill.
6. True: In case of the promissory note, it is generally the maker who makes the payment,
but in case of the bill of exchange, the person accepting the bill shall be liable to make
the payment to the holder of the bill.
7. False: B cannot endorse the bill to C as he is a drawee. Only A, the drawer can do so.
8. True: A bill given to a creditor is called Bills Payable as the debtor commits to pay by
giving a bill to creditor.

Multiple Choice Questions

1. (c) 2. (b) 3. (a) 4. (c) 5. (c) 6. (b)
7. (c) 8. (a) 9. (b) 10. (b) 11. (a) 12. (a)
13. (c) 14. (b) 15. (a) 16. (b) 17. (c) 18. (a)

Theoretical Questions
1. (a) Bills of Exchange are usually drawn to facilitate trade transmission, that is, bills
are meant to finance actual purchase and sale of goods. But the mechanism of
bill can be utilised to raise finance also. When bills are used for such a purpose,
they are known as accommodation bills.
 BILLS OF EXCHANGE AND PROMISSORY NOTES 6.35

(b) When the acceptor of a bill finds himself in financial straits to honour the bill
on the due date, then he may request the drawer to cancel the original bill and
draw on him a fresh bill for another period. And if the drawer agrees, a new bill
in place of the original bill may be accepted by the drawee for another period.
This is called the renewal of bill.
(c) The charges paid to Notary public for notify the dishonour are noting charges.
Refer para 1.12 for details.
2. A bill of exchange has been defined as “an instrument in writing containing an
unconditional order signed by the maker directing a certain person to pay a certain
sum of money only to or to the order of certain person or to the bearer of the
instrument”. When such an order is accepted by the drawee, it becomes a valid bill of
exchange. A promissory note is an instrument in writing (not being a bank note or a
government currency note) containing an unconditional undertaking, signed by the
maker, to pay a certain sum of money only to, or to the order of, a certain person, or
to the bearer of the instrument.
A promissory note needs no acceptance, as the debtor himself writes the document
promising to pay the stated amount. Like bills of exchange, promissory notes are also
negotiable instruments, and can be transferred by endorsement. In case of bill of
exchange, the drawer and the payee may be the same person but in case of a
promissory note, the maker and the payee cannot be the same person.

Practical Questions
1. Journal Entries in the books of B

Date Particulars Debit Credit

2022 ` `
Jan. 1 Purchases account Dr. 10,000
To A’s account 10,000
(Being the goods purchased from A on credit)
A’s account Dr. 10,000
To Bills payable account 10,000
(Being the acceptance of bill given to A)
1-Mar Bills payable account Dr. 10,000
To Bank account 9,900
To Rebate on bills account 100
(Being the bill discharged under rebate @ 12% p.a.)
 1.36
6.36 ACCOUNTING

Working Note :
Calculation of rebate:
`10,000 x 12/100 x 1/12 = `100
2. Journal of A
` `
Bills Receivable A/c Dr. 6,000
To B 6,000
(Three bills for `3,000, `2,000 and `1,000 drawn on B and duly
accepted by him received)
B Dr. 3,000
To Bills Receivable A/c 3,000
(Bill received from B cancelled for renewal)
Cash Account Dr. 1,500
Bill Receivable Account Dr. 1,600
To B 3,000
To Interest Account 100
(Amount received on cancellation of the first bill,50% along
with a new bill for 50% of the amount plus interest `100)
C Dr. 1,600
To Bills Receivable A/c 1,600
(A’s acceptance endorsed in favour of C)
Bank A/c Dr. 1,900
Discount A/c Dr. 100
To Bills Receivable A/c 2,000
(Second Bill for ` 2,000 discounted with the bank @ 5%)
B Dr. 2,030
To Bank A/c 2,030
(Second Bill for `2,000 discounted with the Bank dishonoured,
noting charges `30 paid by the Bank)
Bank A/c Dr. 1,000
To Bills Receivable A/c 1,000
(Amount received on maturity of the third bill)

Note: It is assumed that the bill for `1,600 has not yet fallen due for payment.
 BILLS OF EXCHANGE AND PROMISSORY NOTES 6.37

3. Books of Don
` `
(i)(a) Ray Dr. 3,040
To Bob 3,040
(Ray’s acceptance endorsed to Bob dishonoured on
due date nothing charges paid by Bob `40)
(b) Bob Dr. 3,040
Interest Dr. 51
To Cash 1,000
To Bills Payable A/c 2,091
(Amount payable to Bob `3,040 settled by cash
payment
`1,000 and issue of new bill for `2,091 including
interest ` 51 for three months on `2,040 @ 10% p.a.)
(c) Bills Receivable A/c Dr. 3,100.80
To Ray 3,040.00
To Interest 60.8
(Bill received from Ray for `3,040due against earlier
acceptance dishonoured plus ` 60.80 interest for two
months @ 12% p.a.)
(ii) Bills Payable A/c Dr. 3,160
Discount A/c Dr. 40
To James 3,200
(Cancellation of bills payable to Ralph for `3,160 in
settlement of `3,200 due from James)
(iii) Bills payable A/c Dr. 4,500
To Bills Receivable A/c 4,450
To Discount A/c 50
(Settlement of acceptance issued to Mr. Singh by
endorsement of John’s Acceptance for `4,450)
(iv) Bank A/c Dr. 3,085.30
Discount A/c Dr. 15.5
Total Bills Receivable A/c 3,100.80
(Amount received from Ray in settlement of Bills
Payable, retired one month before due date)