Concept of a bill under rebate
The payment of a bill of exchange is made once its specified period comes to an end. A drawee can even make his necessary payment to his creditor much before a bill’s date of maturity. In such situations, where a drawer is able to receive his payment before the date of maturity of his bill of exchange, he allows some discount to his drawee as a customary business practice. This discount offered on a bill is termed as “rebate.”
There are two logics behind the practice of rebate.
- Since the drawer will be able to receive his payment early, he can make use of this in his trade. With this, he will be able to earn more and better profits than that which he has offered as are bate.
- A drawer is free from his worry of losing his money. His fear regarding-in case his drawee fails to repay, is now over. There are times when a drawer keeps it clear to his drawee from before about the rate of discount he will be offering if his drawee makes an earlier payment.
Calculating the amount of rebate
The calculation of an amount of rebate can be of two types-
- At times the drawer makes his drawee know about the rebate amount he will offer from before.
- There are times when a rebate is allowed at particular rates. During such cases, this rebate amount will be evaluated as per the span between the date of maturity and payment date. Such business follows the policy of – Earlier is the payment of a bill, more is the amount of rebate offered.
A rebate offered, has its effect both on a drawee as well as his drawer. Thus, there should be journal entries in the books of both drawer and drawee. While it will be an expense to the drawer, it will be a profit to his drawee. Along with the cash account, his rebate account will be debited in the books of a drawer. On the other hand, a drawee will credit his cash account along with his rebate account.
Links of Previous Main Topic:-
- Bills of exchange concept of bills of exchange
- Promissory note
- Accounting treatment of bills of exchange
- Endorsement of the bill
- Discounting of the bill
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