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AccountingTreatmentofBillofExchange:

FinancialAccountingTopics
IntroductiontoAccounting

TransactionsandAccountingEquation

AnalysisofBusinessTransactions

Journal,LedgerandTrialBalance

AccountingforBillsofExchange

SpecialJournals

CashBook

BankReconciliationStatement

FinalAccounts

WorkSheet

CapitalandRevenueItems

ValuationofInventories

AccountsofNonprofitMakingOrganizations

StatementofCashFlows

AccountingRatiosAnalysis

Depreciation,ProvisionsandReserves

AccountingDictionary

FinancialCalculators

Inbusinessconcerns,numerousbillsofexchangearedrawnandaccepted.Specialjournalsareusedto
recordbillsofexchange,calledbillreceivablejournalandbillpayablejournal.Fromthesetwojournalsthe
totalsarepostedtobillsreceivableaccountandbillspayableaccountrespectively.
Everybillhastwodifferentaspects.Tothedrawerwhohassoldgoodsandwantstobepaidforthem,itisa
billreceivable,hehopestoreceivemoneyontheduedate.Suchbillsarerecordedinthebillsreceivable
journal.Itisasortofassetforthedrawerandasgoodasmoney.Totheacceptorofthebill,whohasbought
goodsoncreditandhasagreedtohonorthebillontheduedate,itisabillpayable.Theacceptormust
arrangeinduecoursethefundsavailabletohonorthebillwhenitfallsdue.Suchbillsarerecordedinthebills
payablejournal.

ExplanationwithanExample:
Wecanunderstandtheaccountingofbillsofexchangewiththehelpofanexample.Letussuppose,MrXisa
manufacturerofshoesandMr.Yisaretailtraderofshoes.Mr.Y(thebuyer)wishestobuyshoesfromthe
manufacturerbuthasnomoney.Heisagreedtoacceptabillofexchangefor90days,ifgoodsaresoldto
himoncreditbasis.Soboththepartiesagreed.Mr.XsuppliesgoodstoMr.Yworth$10,000fora90days
creditanddrawsuponhimabillforthefullvalueofgoodsfor90dayson1stJan.2005.
Theillustrationgivenabovecanbesummarizedbelow:

Mr.X
becomes
creditor
andMr.Y
becomes
debtor.

Acceptance
received
fromMr.Y.

ManagerialAccountingTopics
Therearethreetransactionswhichhavetakenplace:
1.Mr.XsoldgoodstoMr.Yworth$10,000oncreditbasis.
2.Mr.XdrewabillofexchangeonMr.Yfor90daysfor$10,000.
3.OntheduedatethebillwaspresentedtoMr.Yandhehonoredthebill(methisobligationonthedue
date)

JournalEntries:
NowweshallseehowthesetransactionsarerecordedinjournalofMr.XandMr.Y.

Mr.X'sJournal
TransactionNo.1
Mr.XsoldgoodstoMr.Yfor$10,000oncredit.Thejournalentryis:
YA/c Dr.

http://www.accountingexplanation.com/accounting_treatment_of_bills_of_exchange.htm

FinancialStatements

CostVolumeProfitRelationship

VariableCostingSystem

MaterialsandInventoryCostControl

ActivityBasedCostingSystem

StandardCostingandVarianceAnalysis

BalancedScorecard

CapitalInvestmentAnalysis/CapitalBudgeting

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1stJan.
2005

AccountingforaBillofExchange,JournalEntriesAccountingExplanation.com
YA/c Dr.
SalesA/c
(Goodssoldonc redit)

10,000
10,000

TransactionNo.2

Mr.YdrewabillonMr.Xfor90days.Thejournalentryis:
1stJan.
2005

Billrec eivableA/c Dr.

YA/c
(Ac c eptanc erec eivedfromMr.Y)

10,000
10,000

TransactionNo.3
Ontheduedateacceptorhonorsthebill.Thejournalentryis:
4April.
2005

Cash/BankA/c Dr.
Billrec eivableA/c
(Rec eivedc ashonpresentationofbill)

10,000
10,000

Mr.Y'sJournal
TransactionNo.1
BoughtgoodsfromMr.Xfor$10,000.Thejournalentryis:
1stJan.
2005

Purc hasesA/c Dr.

XA/c
(Goodspurc hasedoncredit)

10,000
10,000

TransactionNo.2
AcceptancegiventoMr.Xinsteadofpayinghimcash.Thejournalentryis:
1stJan.
2005

XA/c Dr.
BillpayableA/c
(Ac c eptanc egiventoMr.X)

10,000
10,000

TransactionNo.3
Acceptanceismet(paidofduedate).Thejournalentryis:
4April.
2005

BillpayableA/c Dr.
CashA/c
(Ac c eptanc eispaidinc ash)

10,000
10,000

DifferentUsesofaBillofExchange:
Intheaboveillustration,wejustdiscussedonlyoneuseofabillofexchangei.e.,thedrawerretainedthebill
withhimselftillduedateandthenpresentedtotheacceptor,whohonoredthebill(paidcashtothedrawer).
Everydrawerorreceiverofabillhasthreeoptionsforhim.
1.Hecanretainthebilltilltheduedate.(Asdiscussedabove).
2.Hecansendthebilltohisbankforcollection.Bankwillpresentthebillbeforedraweeonduedateand
willcollecttheamountfordrawer.Viewaccountingtreatmentforthisoptionon"BillofExchangeSent
toBankforCollection"page
3.Hecanendorsethebilltooneofhiscreditorsinsettlementofhisowndebts.Viewaccounting
treatmentforthisoptionon"EndorsementofBillofExchange"page
4.Hecandiscountitwithhisbankifheisinneedofmoneyandcannotwaittilltheduedate.View
accountingtreatmentforthisoptionon"DiscountingofaBillofExchange"page
Inthesamewayeveryacceptorhasfourpossibilities.
1.Hemaypaytheamountofbillonpresentation.(Asdiscussedabove).
2.Hemayrefusetohonorthebill.Itiscalleddishonorofabillofexchange.ReadDishonorofBillof
Exchange
3.Hemayrequestthedrawertorenewthebill(extendingtheperiodofpayment).ReadRenewalofBillof
Exchange
4.Hemaygetthebillretired.(payinghisobligationbeforetheduedate).ReadRetiringaBillofExchange
UnderRebate.

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Morestudymaterialfromthistopic:
Definitionandexplanationofbillofexchange
Typesandclassificationofbillofexchange
Accountingtreatmentofbillofexchange

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AccountingforaBillofExchange,JournalEntriesAccountingExplanation.com

Discountingofabillofexchange
Endorsementofbillofexchange
Billofexchangesenttobankforcollection
Dishonorofbillofexchange
Renewalofbillofexchange
Insolvencyofoneparty
Retiringabillofexchangeunderrebate
Accommodationbillsofexchange
Billsreceivableandbillspayablebooks
Promissorynote
Questionsandanswers

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