Bill of Exchange for Collection

Learning Objectives:

1. Make journal entries in the books of creditor, debtor, and that of bank when a bill of exchange is sent to the bank for collection.

When a person receives a bill, he may keep it till the date of maturity in order to receive the full amount. But in order to ensure safety, he may send it to his bank with the instructions that the bill should be retained till maturity and should be realised on that date. This does not mean discounting of bill. The bank will not credit the customer or client until the amount is actually realised. If the bill is sent to the bank with such instructions it is know as "bill sent for collection". It will be recorded in the books of the creditor as under:

Creditor's Books

(a) When a bill of exchange is sent to the bank for collection:

Bank for collection account [Dr.]

To Bills receivable account [Cr.]

(b) On receipt of information from the bank as to collection of the bill on the due date:

Bank account [Dr.]

To Bank for collection account [Cr.]

Debtor's Books:

No entries are recorded in debtor's books. He has no concern with collection of bills.

Banker's Books:

If the bill is received by bank from its customer for collection, there will be no entry until the bill is collected, when the bill is collected, the following entry will be passed:

Cash account [Dr.]

To Customer's personal account [Cr.]

To Collection Charges account [Cr.]

Example:

P sold goods worth $1,000 to Q on credit for which a bill was drawn by P on Q. It was duly accepted by Q. P sent the bill to his banker for collection and the bank charged $5 for collecting the bill. The bill was met by Q on the due date.
Record the above transactions in the books of P, Q and Bank.

Journal Entries in the Books of P

		$	$
Q		1,000
To Sales account			1,000
(Goods sold on credit)
Bills receivable account		1,000
To Q			1,000
(Acceptance received)
Bank for collection account		1,000
To Bills receivable account			1,000
(Bill sent to bank for collection)
Bank account		995
Bank charges account		5
To Bank for collection account			1,000
(acceptance collected by the bank)

Journal Entries in the Books of Q

		$	$
Purchases account		1,000
To P			1,000
(Acceptance given)
P		1,000
To Bills payable account			1,000
(Acceptance given)
Bills payable account		1,000
To Cash account			1,000
(Bill paid)

Journal Entries in the Books of Bank

Cash account		1,000
To P			995
To Collection charges account			5
(Being the proceeds of a bill is collected)

Note: When the bill is received by the banker from P for collection, there will be no entry in the books of the bank until the bill is collected.