Expert Tutors
A drawer can use his bill of exchange in various ways. It can be possible that a drawer is himself a debtor of some other drawer. As per the prevalent trade practice, a drawer can accept a bill which has been drawn by his creditor. In such a case, instead of accepting a fresh bill from his drawee, a drawer can directly endorse his Bills Receivable to his creditor. This endorsee becomes the new owner of this bill. He will then realize this bill payment on the date of maturity from the drawee.
For example, A has sold his goods to B for $1000 on credit. B has now accepted the draft formed by A for a specified amount of $1000 to be paid on April 4. A remembers that he owes $1000 to C, his creditor. In such a case, he endorses his “bills receivable” in the name of C. On April 4, i.e. the date of maturity; C presents this bill of exchange to B and then he realizes the entire amount of $1000.
Endorsing this accounting treatment
- In the books of accounts of a drawer (A)
It is A who sold his goods to B. Being the drawer of this bill; he needs to pass three journal entries. These entries are-
- For selling his goods to B
- Drawing this bill of exchange
- Endorsing this bill in the name of C
He will never pass a journal entry for “Bills Payable.”
- In the books of accountancy of a drawee (B)
B is responsible for purchasing goods from A. He is even accountable for accepting and paying this bill. Thus, he needs to pass three journal entries.
- For purchasing goods
- Accepting the bill
- Paying the bill
It needs to be considered here that being a drawee, B is not interested with the endorsement of Bill by his drawer in the name ofC. No matter who presents him the bill on the due date, he will pay his due amount to him.
- In the books of accounting of endorsee (C)
Being an endorsee, C is only responsible for receiving the “Bills Receivable” from his debtor and then receiving the payment regarding this bill from Bon the date of maturity.
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- Bills of exchange concept of bills of exchange
- Promissory note
- Accounting treatment of bills of exchange
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