Dishonour of a Bill of Exchange

Learning Objectives:

1. Make journal entries when a bill of exchange is dishonoured by the drawee.

Definition and Explanation:

A bill of exchange is said to be dishonoured when the drawee refuses to accept or make payment on the bill. A bill may be dishonoured by non-acceptance or non-payment.

1. If the drawee refuses to accept the bill when it is presented before him for acceptance, it is called dishonour by non-acceptance. When a bill is dishonoured by non-acceptance, an immediate right of recourse against the drawer and endorser accrues to the holder. In this case, presentment for payment is not necessary.
2. If the drawer has accepted the bill, but on the due date, he refuses to make payment of the bill, it is called dishonour by non-payment. In this case the holder has immediate right of recourse against each party to the bill.

Noting Charges: When a bill of exchange is dishonoured, the holder can get such fact noted on the bill by a notary public. The advantages of noting is that the evidence of dishonoured is secured. The noting is done by recording the fact of dishonoured, the date of dishonour, the reason of dishonour, if any. For doing all this the notary public charges his fees which is called noting charges.

Journal entries on the dishonour of the bill of exchange:

Creditor's Books:

At the time a bill is dishonoured, it may be either with the drawer or with his banker with whom he has discounted it or with a creditor of whose favor he may have endorsed it:

(a) When the bill of exchange is still in the drawer's possession:

Acceptor's personal account (full value of the bill and noting charges) [Dr.]

To Bills receivable account [Cr.]

To Cash account (noting charges) [Cr.]

(b) When the bill of exchange has been discounted with the bank:

Acceptor's personal account [Dr.]

To Bank [Cr.]

Note: The amount will include the noting charges. No separate entry will be passed for noting charges as in case (a) above

(c) When the bill of exchange has been sent for collection:

Acceptor's personal account [Dr.]

To Bank for collection account [Cr.]

(d) When the bill of exchange has been sent for collection:

Acceptor's personal account [Dr.]

To Personal account of creditor [Cr.]

It may be noted that in all four cases the drawer debits the acceptor's credits that party's account who presents the bill for payment.

Debtor's Books:

When the bills payable is dishonoured the debtor has to pass the same journal entry in all the cases The journal entry is:

Bill payable account (full value of the bill) [Dr.]

Trade expenses account (noting charges) [Dr.]

To personal account of drawer [Dr.]

Example 1:

P draws a bill on Q for $2,000 who accepts and returns it to P on the same date. The bill is dishonoured by Q on the due date. P pays $30 as noting charges.
Record the above transactions in the books of P and Q.

Solution:

Journal Entries in the Books of P

Bills receivable account		2,000
To Q			2,000
(Acceptance received)
Q		2,030
To Bills receivable account			2,030
To Cash account			30
(Bill endorsed)

Journal Entries in the Books of Q

P		2,000
To Bills payable account			2,000
(Acceptance given)
Bills payable account		2,000
Trade expense account		30
To P			2,030
(Acceptance dishonoured and noting charges paid)

Journal Entries in the Books of R

Bill receivable account		2,000
To P			2,000
(Bill received from from a debtor - Q)
Cash account		2,000
To Bill receivable account			2,000
(amount of the bill received)

Example 2:

On 1st January, 1991 P draws on Q a three months bill for $2,000 who accepts and return it to P on the same date. On 4th January P discounts it with his bank at 6% per annum. The acceptance is dishonoured in the due date, and bank pays $30 as noting charges.
How these transactions should be recorded in the journal of P & Q.

Solution:

Journal Entries in the Books of P

1991
Jan. 1	Bills receivable		2,000
	To Q			2,000
	(Acceptance received)
Jan. 4	Bank account		1,970
	Discount account		30
	To Bills receivable account			2,000
	(bill discounted)
April 4	Q		2,030
	To Bank account			2,030
	(Q's acceptance dishonoured)

Journal Entries in Books of Q

1991
Jan. 1	P		2,000
	To Bills payable account			2,000
	(Acceptance given)
April 4	Bills payable account
	Trade expense
	To P
	(Bill dishonoured, noting charges paid.)

Example 3:

P draws a bill for $2,000 on Q who accepts and returns it to P on the same date. P sent the bill to his banker for collection. On the due date the bill is dishonoured by Q. Give journal entries in the books of P.

Solution:

Bills receivable account		2,000
To Q			2,000
(Acceptance received)
Bank for collection account		2,000
To Bills receivable account			2,000
(Bill sent for collection)
Q
To Bank for collection account
(Bill dishonoured)