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Bills of exchange are drawn for specific time duration. Once its date of maturity arrives, the drawer will receive the due payment of his bill from his drawee. Such financial transactions get recorded in the books of accounts of both- a drawee as well as his drawer.
Journal Entries
Transactions Books of Drawer Books of Drawee
(Presume A) (Presume B)
- Goods are sold by A to B Purchases A/c to BDr. to Sales A/c to A
(Since goods are sold to B on credit) (Since goods purchased from A)
- Bill is accepted by B B/R A/c A Dr.
(Drawn by A) To B To bills payable A/c
(Since the acceptance of this bill exchange received) (Since acceptance of the bill given to A)
- The bill has been honoured Cash A/c Dr. B/P A/c Dr.
or paid on its due date. To B/R A/c to Cash A/c
(Since the payment of the bill received) (Since payment of the bill has been made)
Explaining these Journal Entries
On the basis of its payment, a bill of exchange can be classified into two categories. These classifications are as follows-
- Bills Payable
This refers to a bill of exchange whose payment has been made. It is the drawee who makes the payment of bills of exchange. Thus, it is only a drawee who can use the word “Bills Payable” in his books of accounting. Depending upon a particular case, he can either debit or credit his“Bills Payable” Account. A drawee will never use the term “Bills Receivable.”
- Bills Receivable
Bills of Exchange whose payment needs to be received are known as Bills Receivable. Since such payments are usually received by a drawer, it is always “bills receivable” for him. For accounting purposes, the drawer always credits or debits these bills receivable in his books of accountancy. The debtor will never have “bills payable” recorded in his books of accounting. Even if it is an endorsee who receives the payment of this bill, he will use the term “Bills Receivable” in his accounting book.
Explanation
- Acceptance of a Bill
Students who have been following the previous chapters will remember that in the initial stage, a bill which the drawer writes remains as a draft. This draft is treated as a valid bill of exchange only when his drawee accepts it. This clearly states that a bill comes into its real existence at the place of its drawee as it remained a draft till it was accepted.
Being a legally approved document, each of its movement will have a corresponding entry in the books of accountancy. Initially,a bill will go to its drawer for retention. Since the drawer receives it, he will debit the bills receivable account. This is due to the fact that B/R account is a real account and thus the rule of “debit whatever comes in” applies here.
As per the modern approach, since this“Bills Receivable” account is an asset which is on a gradual increase, it needs to be debited. As per the rule of “credit your giver,” a drawer will credit his drawee’s account. The modern approach believes that a debtor’s account will be credited as an asset since it is decreasing. Once they accept the bill, debtors will start decreasing and this decrease in assets will get credited.
The drawee will now credit bills payable account as bills payable is going out. He will debit his drawer’s account since the bill of exchange is now received by his drawer.
- Payment of a Bill
On the date of maturity, a drawer will send this bill of exchange to his drawee. The B/R account will be credited (as per the rule- credit that which goes out) since it goes outside. His cash account will then be debited since cash is coming in, as per another rule-debit that which comes in.
The drawee will credit his cash account as it is going outside the business and debit his bills payable account.
Links of Previous Main Topic:-
- Book keeping
- Meaning of gaap
- Origin of transaction
- Bills of exchange concept of bills of exchange
- Promissory note
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