Bills of Exchange | PAPER III – ACCOUNTING & FINANCIAL MANAGEMENT FOR BANKERS | MODULE A: ACCOUNTING PRINCIPLES AND PROCESSES

Bills of Exchange - Brief Notes

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1. Bills of Exchange

A Bill of Exchange is a written, unconditional order by the drawer to the drawee to pay a specific sum of money to the payee, either on demand or at a fixed future date.

2. Types of Instruments of Credit

• Promissory Note: Written promise to pay.
• Bills of Exchange: Order to pay.
• Cheque: A bill drawn on a bank and payable on demand.

3. Term and Due Date of a Bill

Term of Bill: Period for which the bill is drawn (e.g., 30 days, 3 months).
Due Date: The date on which payment is to be made; it includes 3 days of grace after maturity.

4. Important Terms

• Drawer: Person who makes the bill.
• Drawee: Person on whom the bill is drawn.
• Payee: Person who receives the payment.
• Endorser: One who transfers the bill.
• Endorsee: The recipient of the transferred bill.

5. Accounting Entries

When bill is drawn and accepted:
Drawer: Bills Receivable A/c Dr.
        To Debtor’s A/c

Drawee: Creditor’s A/c Dr.
        To Bills Payable A/c

6. Accommodation Bill

It is a bill drawn and accepted without any real transaction, only to help another party financially. It is not backed by goods or services.

7. Bill Books

These are registers maintained for recording all bills received and bills payable. It helps track due dates and settlement status.

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MCQs: Bills of Exchange

1. Who draws a bill of exchange?

a) Drawee
b) Payee
c) Drawer
d) Endorsee

2. How many days of grace are allowed on a bill of exchange?

a) 0 days
b) 3 days
c) 7 days
d) 15 days

3. A bill drawn without any consideration is known as:

a) Trade Bill
b) Demand Bill
c) Accommodation Bill
d) Cheque

4. Bills Receivable account is a:

a) Nominal account
b) Personal account
c) Real account
d) Revenue account

5. When a bill is dishonoured, the drawee account is:

a) Debited
b) Credited
c) Closed
d) Ignored

6. Endorser is the person who:

a) Accepts the bill
b) Makes the payment
c) Transfers the bill
d) Draws the bill

7. A bill of exchange must be:

a) Oral
b) In writing
c) On stamp paper
d) On plain paper

8. A cheque is always payable on:

a) Demand
b) Fixed date
c) After notice
d) Maturity

9. The bill books help in:

a) Cash accounting
b) Recording bills systematically
c) Calculating profit
d) Preparing trial balance

10. What is the purpose of drawing an accommodation bill?

a) Settle a trade transaction
b) Provide financial help
c) Avoid tax
d) Record depreciation

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Bills of Exchange - Notes with Mathematical Examples

Mathematical Examples

Simple Example (Due Date Calculation)

Q: A bill is drawn on 5th May for 3 months. What will be its due date?

Solution:
Add 3 months: 5th August
Add 3 days of grace: 8th August is the due date.

Medium Example (Accounting Entry for Bill Discounted)

Q: Ram draws a bill of ₹10,000 on Shyam for 3 months. Shyam accepts it. Ram gets it discounted from the bank at 10% p.a. What journal entry will Ram pass?

Solution:
Discount = ₹10,000 × 10% × 3/12 = ₹250
Bank A/c Dr. ₹9,750
Discount A/c Dr. ₹250
        To Bills Receivable A/c ₹10,000

Hard Example (Accommodation Bill Sharing)

Q: A and B draw a 2-month bill for ₹30,000 to help each other. A discounts it with the bank for ₹29,400. On maturity, B pays the full amount. What is the share of discount borne by each if they share the proceeds equally?

Solution:
Total discount = ₹30,000 - ₹29,400 = ₹600
Since they share proceeds equally, both get ₹14,700 each.
So, both bear half of the discount: ₹600 ÷ 2 = ₹300
Each partner’s discount share: ₹300