Accounting For Bills Of Exchange – Part 2: Bills Receivable

July 25th, 2007 Comments off
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Bills Receivable
As explained in Part 1,

1. The bill of exchange after it is accepted is known as bill receivable to the drawer and bill payable to the acceptor [ When a drawee accepts the bill and signs he/she is known as the acceptor. The acceptor is primarily liable on a bill to the drawer so long as the drawer retains the bill. When the bill is negotiated and transferred to a payee, the drawer than become liable on the bill as well as the acceptor.]

Below shows the accounting entries of Bills Receivable and an illustration on how to pick up the Bills Receivable in the Ledger Accounts.
Accounting Entries For Bills Receivable

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When the bill of exchange is received from the customer:
Bills Receivable account XX
Customer’s account XX
Bill paid on maturity by customer:
Bank account XX
Bills Receivable account XX
Where the bill has been discounted:
Discount Charges account XX
Bills Receivable account XX
Bill endorsed over to creditor
Creditor’s account XX
Bills Receivable account XX
Face value of bills dishonored where it has not been discounted or endorsed:
Customer’s account XX
Bills Receivable account XX
Face value of bills dishonored where It has been discounted with a bank:
Customer’s account XX
Bank account XX
Face value of bills dishonored where it has been endorsed over to a creditor:
Customer’s account XX
Creditor’s account XX
Face value of Bill returned:
Customer’s account XX
Bills Receivable account XX
Interest charged to customer as a result of returning old bill and issuing a new one:
Customer’s account XX
Interest Receivable account XX
Record with new bill amount being face value of old one plus interest charged
Bills Receivable account XX
Customer’s account XX

Illustration: On 1/1/200X, A sold goods to B for $50,000 and drew a bill on B at four months in settlement. B accepted the bill. On 30/1/0X, A discounted the bill with the bank at 6% per annum. At maturity, B failed to meet his bill and the holder had recourse against A. On 1/5/0X, A drew and B accepted a new bill at three months for the amount of the original bill, plus interest at 12% per annum.

Question: Show the ledger accounts in A’s books.

Solution: In A’s Books:

Bills Receivable Account

$ $
1/1 B’s account 50,000 30/1 Bank-bill discounted 49,250
1/5 B’s account 51,500 Discount charges a/c 750

B’s Account

$ $
1/1 Sales a/c 50,000 1/1 Bills Receivable a/c 50,000
30/4 Bank a/c 50,000 1/5 Bills Receivable a/c 51,150
1/5 Interest Receivable a/c 1,500

Bank Account

$ $
30/1 Bills Receivable 49,250 30/4 B’s account -bill dishonored 50,000

Discount Charges Account

$ $
30/1 B’s account 750

Interest Receivable Account

$
1/5 B’s a/c 1,500
See next article Part C on Accounting for Bills Payable

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