Accounting For Bills Of Exchange – Part 3: Bills Payable

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

1. The bill of exchange after it is accepted is known as bill receivable to the drawer and 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.] Refer below for the Accounting entries for Bills Payable and a simple illustration to demonstrate how to pick up Bills Payable in the Ledger Accounts.

Accounting Entries For Bills Payable

DR CR
Face value of bill of exchange accepted for payment to a creditor:
Creditor’s account XX
Bills Payable account XX
Face value of bill paid on maturity:
Bills Payable account XX
Bank account XX
Face value of bill returned:
Bills Payable account XX
Creditor’s account XX
Interest charged by customer due to return of old bill and re-issue new one:
Interest Payable account XX
Creditor’s account XX
Face value of new bill issued being face value of old one plus interest charged
Creditor’s account XX
Bills Payable 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 B’s books.

Solution: In B’s Books:

Bills Payable Account

$ $
30/4 A’s account- Bills dishonored 50,000 1/1 A’s account-Bills accepted 50,000
1/5 A’s account 51,500

A’s Account

$ $
1/1 Bills Payable a/c- bill accepted 50,000 1/1 Purchases 50,000
1/5 Bills Payable Face value- $50,000 plus interest charged 51,500 30/4 Bills Payable a/c-Bills dishonored 50,000
1/5 Interest payable 1,500

Interest Payable Account

$ $
1/5 A’s a/c-interest charged 1,500

Note:On maturity, the bank will present the bill to B. On its dishonor, the bank will hand the bill back to A and will debit A’s bank account with the face value of the bill. In A’s book, the amount is debited back to B’s account to show that B is still in debt.

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Financial Accounting

 
 

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