Discounting a Bill of Exchange


Discounting a Bill of Exchange:

Learning Objectives:

  1. Make journal entries in the books of creditor and debtors at the time of discounting of bill of exchange.

If the holder of a bill is need of money before the due date of the bill he may sell it to the bank. The bank (buyer) will give cash fir it in consideration of a small charge. This is called discounting the bill. The amount deducted by bank of the bill from the face value of the bill is called “discount”. The discount is usually calculated at a certain rate per annum on the amount of the bill. The accounting entries will be:

Creditor’s Books

(a) When a bill of exchange is discounted.
Bank account (discounted value) [Dr.]
Discount account (amount of discount) [Dr.]
     To Bills receivable account                    [Cr.]

Debtor’s Books:

The acceptor has no concern with the discounting of the bill. He has to pay it on the due date to the holder. Whoever he may be. There will be no journal entry for discounting of the bill of exchange.

Example:

X draws a three month bill for $2,000 on Y on the 1st January, 1991 for the value received. Y accepts it and returns it to X, who discounts it on 4th January, 1991 with his bank at 6 per cent per annum. Y pays acceptance on the due date.

Record the transactions in the books of X and Y.

Journal Entries in the Books of X

1991 $ $
Jan. 1 Bills receivable account 2,000
     To Y 2,000
(Acceptance received)

Jan. 4 Bank account 1,970
Discount account 30*
     To Bills receivable account 2,000
(Bill discounted at bank)

*Calculation of discount: 2000 × 6/10 × 3/12

Journal Entries in the Books of Y

1991 $ $
Jan. 1 X 2,000
     To Bills payable account 2,000
(Acceptance given)

Apr. 2 Bills payable account 2,000
     To Cash account 2,000
(Acceptance paid)

You may also be interested in other articles from “accounting for bills of exchange page” chapter:

  1. Definition and Explanation of Bill of Exchange
  2. Advantages of a Bills of Exchange
  3. How a Bill of Exchange Functions
  4. Promissory Note
  5. Difference between Bill of Exchange and Promissory Note
  6. Difference Between Bill of Exchange and Cheque/Check
  7. Recording Transactions of Bill of Exchange
  8. Drawing, Acceptance, and Payment of Bill of Exchange
  9. Discounting of Bill of Exchange
  10. Bills of Exchange for Collection
  11. Endorsement of a Bill of Exchange
  12. Dishonour of a Bill of Exchange
  13. Renewal of a Bill of Exchange
  14. Retiring of a Bill of Exchange
  15. Accommodation Bill of Exchange
  16. Insolvency of the Acceptor in a Bill of Exchange

Other Related Accounting Articles:

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