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Concept

A drawer of a bill of exchange can wait for an entire time span regarding his bill for receiving its payment. However, there are times when a sudden emergency arises, where he is in need of capital. In such situations, he can easily get his bill of exchange discounted with his bank.

This discounting of a bill means borrowing funds from a bank in exchange of the security of a bill or en cashing his bill of exchange. During such a case, a drawer transfers the ownership and possession in regard to his bill of exchange in the name of his bank. Now a bank charges some discount for this period in the form of an interest since it has advanced necessary funds for this drawer much before its due date. Once this date of maturity comes, the bank will present this bill of exchange to its drawee and receive the entire payment.

Calculating this discount

Since the bank has advanced a loan to a drawer, it will charge a certain discount for this entire period. This discount varies from one bill to another since it depends on the time span of a particular bill.

Accounting Treatment

All journal entries regarding the discount of a bill will be made only in the books of a drawer. As the drawee is not bothered with this discount, he will not make any entry in his books.

A drawer will not pass any journal entry for the payment of this bill as he has already transferred the ownership and possession of his bill to the bank. Since he is no longer in possession of the bill, he cannot present it to his drawee for payment. Being unable to obtain any payment; he cannot even make a journal entry for this payment. It is only his bank who will present this bill, receive its payment and then pass a corresponding journal entry for the same.