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Dishonour and Noting of the Bill

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Meaning

The purpose of drawing any bill by a drawer is to receive its payment of a specified amount from his drawee after the expiry of a certain period. Once the payment of this bill is made, it is considered that a bill has been honoured. Thus, on a successful payment of a bill, it is referred to as honour. However, it often happens that a bill gets dishonoured. Dishonouring a bill of exchange means non-payment of that bill.

Situations when a bill is dishonoured

A bill of exchange is said to be dishonoured in various cases. These situations are as follows-

  • When a bill results in non-payment.
  • When a drawee becomes insolvent.
  • If a drawee disagrees to fulfil his payment.
  • If a bill is renewed.
  • When a bill payment has not been fulfilled on or before its date of maturity.
  • If only a part of a bill has been made by its drawee.

It is during such situations that a bill is believed to be dishonoured. When a bill is dishonoured, it affects both- a drawer as well as his drawee. Thus, it will be recorded in both of their accounting books. However, a bill may even be noted and protested.

Noting of a bill (Noting Charges)

Concept

Once his drawee dishonours a bill of exchange, a drawer can easily move to the court and file a lawsuit against his drawee. However, a drawee can easily claim that he could not make his necessary payment since his drawer did not present him the bill. In such a case, it becomes very difficult for a drawer to justify with valid evidence in the court, that he had indeed presented the bill to his drawee. With lack of evidence, he may fail to prove that his drawee had actually refused to make the necessary payment.

To gather written evidence, a drawer may approach a lawyer and explain him about dishonouring a bill of exchange. Now this lawyer will take his bill to the drawee and then ask him to pay the amount. If the drawee again refuses to make his payment, the lawyer will note down his statement and then get it signed by this drawee. He will then put his own signature and affix his stamp on the statement of the drawee.

This statement which gets noted by the lawyer, acts as a written evidence for dishonouring that bill. This process where a lawyer writes down this statement is termed as “noting of the bill” and a lawyer who performs this work is called as the “Notary Public.” The fees which a notary public charges in exchange for his service are known as “Noting Charges.”

Features of Noting Charges

  1. Noting charges to notary public are always payable in cash by the drawer, as the bill is owned and possessed by him.
  2. It is the drawer who starts the process of noting being an owner who possesses this bill. It may even be the bank, in case he has discounted it or an endorsee in case if he has endorsed the bill in someone else’s name.
  3. In the books of a drawer, noting charges are neither credited nor debited.
  4. These noting charges are a loss for the drawee. Thus, he needs to debit it in his accounting book.
  5. The account of noting charges for a drawer is neither a profit nor a loss. This is because whatever he pays to this lawyer for noting his drawee’s statement, will later be realized from the drawee.
  6. In case a drawer has endorsed his bill in the name of an endorsee, it is this endorsee who has to pay the noting charges to his notary public. He will then gather this entire amount from his drawer, who will further realize it from that drawee.
  7. In case if this bill is discounted, it is the bank which will pay the noting charges to the notary public. Later on, it will collect the entire amount from its drawer, who will then realize it from that drawee.
  8. Journal entry related to noting charges is a part of that entry regarding this dishonoured bill. Thus, a combined entry needs to be passed for both noting charges and dishonor.

Accounting Treatment

Dishonour of a bill (if it is retained with the drawer)

Journal Entries-

Transactions                                       In the books of Drawer                         In the books of Drawee

                                                           (Assume him as A)                                  (Assume him as B)

  1. If B accepts a bill B/R A/c                                                    Dr.

Drawn by A ToB to Bills Payable A/c

(Since bill’s acceptance has been received)                (Since acceptance of this bill has been given)

  1. When B fails to meet B       B/P A/c                     Dr.

(honour or pay) this bill                To B/R A/c                                                  To A

onits due date(Since the bill has been dishonoured)    (Since the bill is dishonoured)

  1. When this bill is B                                                 B/P A/c                     Dr.

Dishonoured and A                To B/R A/c                                  Noting charges A/c    Dr.

has to pay notingTo Cash A/c                                     To

charges.

(Since this bill is dishonoured and                                (Since this bill is dishonoured and

noting charges are paid)                                                    noting charges are due)

Dishonouring a bill (if it has been discounted)

There are times when a drawer is suddenly in dire need of capital. During such situations, he gets his bill discounted with the bank. In this case, a drawer transfers his ownership and possession of bill to the bank. On the date of maturity, the bank presents the bill to the drawee. In case if this drawee refuses to make necessary payment, the bank will charge this entire amount from its drawer. It will debit this entire bill amount along with its noting charges (if any) to its drawer’s account.

In case the bill is dishonoured, the drawer needs to make the payment of the bill amount to the bank along with its noting charges. He will further collect the entire amount which he had to pay the bank from his drawee. Since the bank is a creditor and the drawer is a debtor here, the drawer will debit his drawee’s account and credit his bank account.

Accounting Treatment

Transactions                                       In the books of Drawer                         In the books of Drawee

                                                            (Suppose A)                                               (Suppose B)

1.B accepts a bill drawn by A         B/R A/c Dr.A               Dr.

            To  BTo B/P A/c

(Since the bill has been drawn)                              (Since the acceptance of the bill has been given)

  1. 2. This bill is discounted Cash A/c                                  (           Not concerned)

To B/R    A/c                                                     Discount A/c  Dr.       No entry

(Since the bill has been discounted)

  1. The bill is dishonoured B                                                  B/P A/c

To Bank A/c                                                      To

(Since the bill is dishonoured)                     (Since the bill is dishonoured)

  1. The bill is dishonoured B                                                     B/P A/c

and notarial charges                      To Bank A/c                           Noting Charges A/c

                                                                                          To A

                              (Since the bill is dishonoured and noting       (Since the bill is dishonoured

                              Charges paid are paid by the bank)                 and noting charges are due)

Dishonour of the Bill (if it has been endorsed)

A drawer can endorse his bill of exchange in the name of his creditor. This way, an endorsee becomes the owner of this bill. On the day of maturity, he presents this bill to the drawee. In case if he gets a refusal from this drawee, it will not be considered as a bad debt. This endorsee will gather this entire bill amount from his debtor, i.e., drawer along with the noting charges.

This drawer will then collect the entire amount of the dishonoured bill along with its noting charges from his drawee. According to the accounting concept, an endorsee is a creditor whereas a drawee is a debtor. Thus, while passing journal entries, a drawee’s account will be debited and an endorsee’s account will be credited. However, as the drawee is not related to the endorsement, he will not pass any journal entry.

 

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