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)