Retiring of a Bill of Exchange

Learning Objectives:

1. Make journal entries in the books of drawer and drawee when a bill of exchange is retired before it maturity.

Definition and Explanation:

Retiring a bill means making payment before the date of maturity. When the acceptor of a bill is prepared to make the payment of the bill before the due date, he may ask the holder to accept the payment, provided he receives some rebate or discount for the unexpired period. Such a rebate or discount is an expense to the party receiving the payment and gain to the party making the payment.

Journal entries:

Creditor's Books:

Cash account (actual amount received) [Dr]

Rebate account (rebate granted) [Dr]

To Bill receivable account [Cr]

Debtor's Books:

Bill payable account [Dr]

To cash account [Cr]

To Rebate account [Cr]

Example:

A sells goods for $1,000 to B and draw a bill at three months for the amount. B accepts it and returns to A. B retires his acceptance under a rebate of $10.
Record the transactions in the books of A and B.

Solution:

Journal Entries in the Books of A

B		1,000
To sales account			1,000
(Goods sold on credit)
Bills receivable account		1,000
To B			1,000
(Acceptance received)
Cash account		990
rebate account		10	1,000
To Bills receivable account
(Amount of the bill received and rebate allowed)

Journal Entries in the Books of B

Purchases account		1,000
To A			1,000
(Goods purchased on credit)
A		1,000
To Bills payable			1,000
(Acceptance received)
Bills payable account		1,000
To Cash account			990
To rebate account			10
(Acceptance retired under rebate)

Example 2:

A bill for $600 is drawn by B & Co. on C and accepted by the latter payable at his bank. Show what entries should be passed in the books of B & Co. under each of the following circumstances:

1. If they retain the bill till the due date and then realized it on the maturity.
2. If they discounted it with their bank for $580
3. If they endorsed it over to their creditors M & Co. in settlement of their debt.
4. If they sent the same to their bank for collection.

State what further entries would be passed in the books of B & Co. in each of the above cases if the bill was dishonored on the due date.

Solution:

Journal Entries in the Books of B & Co.

1	Bill receivable account		600
	To C			600
	(Acceptance received)
	Cash account		600
	To bill receivable account			600
	(Payment of the bill received)
2	Bills receivable account		600
	To C			600
	(Acceptance received)
	Bank account		580
	Discount account		20
	To Bills receivable account			600
	(Bill discounted)
3	Bills receivable account		600
	To C			600
	(Acceptance received)
	M & Co		600
	To Bills receivable account			600
	(Bill endorsed)
4	Bill receivable account		600
	To C			600
	(Acceptance received)
	Bank for collection account		600
	To Bill receivable account			600
	(Bill sent for collection)

When the bill is dishonoured the following further entries would be passed in each of the circumstances:

1	C		600
	To Bills receivable account			600
	(Bill dishonoured)
2	C		600
	To Bank account			600
	(Bill dishonoured)
3	C		600
	To M & Co.			600
	(Bill dishonoured)
4	C		600
	To Bank for collection			600
	(Bill dishonoured)