NCERT Class 11 Accountancy Chapter 8: Bill of Exchange

Introduction to Bills of Exchange and Promissory Notes

According to the Negotiable Instruments Act, 1881, 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.

In standard credit transactions, there are three primary parties involved in a Bill of Exchange:

1. Drawer: The seller or creditor who writes (draws) the bill.
2. Drawee: The buyer or debtor upon whom the bill is drawn and who must accept it to make it legally binding.
3. Payee: The person entitled to receive the payment. Often, the Drawer and Payee are the same person.

In contrast, a Promissory Note is an unconditional written promise made by the debtor (maker) to pay a specific amount to the creditor on demand or at a specified future date. It only involves two parties: the Maker (debtor) and the Payee (creditor).

Important Accounting Terms & Concepts

Term of Bill

The period of time between the date on which a bill is drawn and the date on which it becomes payable.

Days of Grace

A standard addition of three extra days given to the drawee beyond the term of the bill to make the payment.

Date of Maturity

The final date on which the bill becomes due for payment. It is calculated by adding 3 days of grace to the term of the bill.

Discounting of Bill

The process of selling a bill to a bank before its maturity date for a cash amount less than the face value (net of a discounting fee).

Endorsement

The act of signing on the back of the bill of exchange to transfer its ownership to a third party (often a creditor).

Dishonour of Bill

When the drawee fails to pay the amount of the bill on its maturity date.

Step-by-Step Accounting Treatment for Bill Transactions

1. Drawing and Acceptance of Bill — First, the credit transaction occurs. The drawer records a debit to Bills Receivable (B/R) and credits the Drawee. The drawee records a debit to the Drawer and credits Bills Payable (B/P).
2. Deciding the Course of Action — The drawer can handle the accepted bill in one of four ways: Retain it till maturity, discount it with the bank (debit Cash and Discounting Charges, credit B/R), endorse it to a creditor (debit Creditor, credit B/R), or send it to bank for collection (debit Bill Sent for Collection, credit B/R).
3. Accounting on Maturity (Honoured) — On maturity, if the bill is met (honoured), cash is received. If retained: Bank Account Dr to B/R. If discounted/endorsed: No entry is made in the drawer's book since the payment goes directly to the holder.
4. Accounting for Dishonour and Noting Charges — If the drawee defaults, the bill is cancelled. To establish proof, a notary public charges a small fee called Noting Charges. The drawer always debits the Drawee's account to recover both the bill amount and noting charges paid on their behalf.

Critical Exam Tips & Common Calculation Pitfalls

1. Maturity Calculation Rules: Always add exactly 3 days of grace to the term. If the calculated maturity date falls on a public holiday (e.g., Sunday, 15th August, 26th January, 2nd October), the bill matures on the preceding business day. If it is declared an emergency holiday, the bill matures on the succeeding business day.
2. Months vs. Days: If the term is in months, calculate monthly increments (e.g., 2 months from 30th January is 30th March + 3 days = 2nd April). If the term is in days, count exact days excluding the date of drawing (e.g., 60 days from 1st June).
3. Noting Charges Trap: Noting charges are initially paid in cash by the holder of the bill, but are ultimately borne by the drawee. Therefore, always debit Noting Charges in the Drawee's books, never in the Drawer's books.

Practice Questions with Solutions

• Q: Calculate the maturity date of a bill drawn on 23rd November 2023 for 2 months. A: Step 1: Calculate the date matching the term. 2 months from 23rd November 2023 falls on 23rd January 2024. Step 2: Add 3 days of grace to 23rd January 2024. 23 + 3 = 26th January 2024. Step 3: Analyze holidays. Since 26th January is Republic Day (a public holiday), the maturity date shifts to the preceding day. Final answer: 25th January 2024.
• Q: On 1st April 2023, Amit sold goods to Sumit for Rs. 10,000 on credit and immediately drew a 3-month bill. Sumit accepted the bill. Amit retained the bill until maturity, and it was honoured. Pass journal entries in the books of Amit (Drawer) and Sumit (Drawee). A: Step 1: Record credit sale on April 1, 2023. In Amit's books: Sumit A/c Dr 10,000 to Sales A/c 10,000. In Sumit's books: Purchases A/c Dr 10,000 to Amit A/c 10,000. Step 2: Record bill acceptance on April 1, 2023. In Amit's books: Bills Receivable A/c Dr 10,000 to Sumit A/c 10,000. In Sumit's books: Amit A/c Dr 10,000 to Bills Payable A/c 10,000. Step 3: Calculate maturity date. 3 months from April 1 + 3 days of grace = July 4, 2023. Step 4: Record receipt of cash on maturity. In Amit's books: Bank A/c Dr 10,000 to Bills Receivable A/c 10,000. In Sumit's books: Bills Payable A/c Dr 10,000 to Bank A/c 10,000. Final answer: Complete journal entries made for both parties.
• Q: X draws a bill on Y for Rs. 20,000 on 1st May 2023 for 3 months. X discounts it with his bank on 4th June 2023 at 12% p.a. Show journal entries in X's books. A: Step 1: Journal entry for drawing the bill on May 1: Bills Receivable A/c Dr 20,000 to Y A/c 20,000. Step 2: Calculate the unexpired term for discounting on June 4. The bill matures on August 4 (May 1 + 3 months + 3 days). The period from June 4 to August 4 is exactly 2 months. Step 3: Calculate discounting charges. Charges = 20,000 (12/100) (2/12) = Rs. 400. Step 4: Pass journal entry for discounting on June 4: Bank A/c Dr 19,600 Discounting Charges A/c Dr 400 To Bills Receivable A/c 20,000. Final answer: Journal entries passed with discounting charge calculated as Rs. 400.
• Q: A bill of Rs. 15,000 accepted by Rohan was dishonoured on due date. Noting charges of Rs. 150 were paid by the holder. Pass journal entries in the books of the Drawer (Hari) and Drawee (Rohan). A: Step 1: For Dishonour in Drawer's (Hari's) books: We must charge Rohan for both the bill amount and noting charges. Debit Rohan's A/c: 15,000 + 150 = 15,150. Credit Bills Receivable A/c: 15,000. Credit Cash/Bank (for noting charges paid): 150. Entry: Rohan A/c Dr 15,150 to Bills Receivable A/c 15,000 to Cash/Bank A/c 150. Step 2: For Dishonour in Drawee's (Rohan's) books: Debit Bills Payable A/c: 15,000. Debit Noting Charges A/c (since Rohan ultimately bears this loss): 150. Credit Hari's A/c: 15,150. Entry: Bills Payable A/c Dr 15,000, Noting Charges A/c Dr 150 to Hari A/c 15,150. Final answer: Both parties' books adjusted correctly with noting charges included.

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