Dishonour of a Bill of Exchange:
Learning Objectives:
-
Make journal entries when a bill of exchange
is dishonoured by the drawee.
Definition and Explanation:
A bill of exchange is said to be dishonoured
when the drawee refuses to accept or make payment on the bill. A bill may be
dishonoured by non-acceptance or non-payment.
-
If the drawee refuses to accept the bill when
it is presented before him for acceptance, it is called dishonour by
non-acceptance. When a bill is dishonoured by non-acceptance, an immediate
right of recourse against the drawer and endorser accrues to the holder. In
this case, presentment for payment is not necessary.
-
If the drawer has accepted the bill, but on
the due date, he refuses to make payment of the bill, it is called dishonour
by non-payment. In this case the holder has immediate right of recourse
against each party to the bill.
Noting Charges:
When a bill of exchange is dishonoured, the holder can get such fact noted
on the bill by a notary public. The advantages of noting is that the
evidence of dishonoured is secured. The noting is done by recording the fact
of dishonoured, the date of dishonour, the reason of dishonour, if any. For
doing all this the notary public charges his fees which is called noting
charges.
Journal entries on the dishonour of the bill of exchange:
Creditor's Books:
At the time a bill is dishonoured, it may be
either with the drawer or with his banker with whom he has discounted it or
with a creditor of whose favor he may have endorsed it:
| (a) When the
bill of exchange is still in the drawer's possession: |
| Acceptor's personal account
(full value of the bill and noting charges) [Dr.] |
|
To Bills receivable account [Cr.] |
|
To Cash account (noting charges) [Cr.] |
| (b) When the bill of
exchange has been discounted with the bank: |
| Acceptor's personal account [Dr.] |
|
To Bank [Cr.] |
| |
Note: The amount will include
the noting charges. No separate entry will be passed for noting charges as
in case (a) above
| (c) When the bill
of exchange has been sent for collection: |
| Acceptor's personal account [Dr.] |
|
To Bank for collection account [Cr.] |
| (d) When the bill
of exchange has been sent for collection: |
| Acceptor's personal account [Dr.] |
|
To Personal account of creditor [Cr.] |
It may be noted that in all four cases the
drawer debits the acceptor's credits that party's account who presents the
bill for payment.
Debtor's Books:
When the bills payable is dishonoured the
debtor has to pass the same journal entry in all the cases The journal entry
is:
| Bill payable account
(full value of the bill) [Dr.] |
| Trade expenses account
(noting charges) [Dr.] |
|
To personal account of drawer [Dr.] |
| |
Example 1:
P draws a bill on Q for $2,000 who accepts
and returns it to P on the same date. The bill is dishonoured by Q on the
due date. P pays $30 as noting charges.
Record the above transactions in the books
of P and Q.
Solution:
Journal Entries in the Books of P
| Bills
receivable account |
|
2,000 |
|
|
To Q |
|
|
2,000 |
| (Acceptance
received) |
|
|
|
|
|
|
|
| Q |
|
2,030 |
|
|
To Bills receivable account |
|
|
2,030 |
|
To Cash account |
|
|
30 |
| (Bill endorsed) |
|
|
|
|
|
|
|
Journal Entries in the Books of Q
| P |
|
2,000 |
|
|
To Bills payable account |
|
|
2,000 |
| (Acceptance
given) |
|
|
|
|
|
|
|
| Bills payable
account |
|
2,000 |
|
| Trade expense
account |
|
30 |
|
|
To P |
|
|
2,030 |
| (Acceptance
dishonoured and noting charges paid) |
|
|
|
|
|
|
|
Journal Entries in the Books of R
| Bill receivable
account |
|
2,000 |
|
|
To P |
|
|
2,000 |
| (Bill received from
from a debtor - Q) |
|
|
|
|
|
|
|
| Cash account |
|
2,000 |
|
|
To Bill receivable account |
|
|
2,000 |
| (amount of the bill
received) |
|
|
|
Example 2:
On 1st January, 1991 P draws on Q a three
months bill for $2,000 who accepts and return it to P on the same date. On
4th January P discounts it with his bank at 6% per annum. The acceptance is
dishonoured in the due date, and bank pays $30 as noting charges.
How these transactions should be recorded
in the journal of P & Q.
Solution:
Journal Entries in the Books of P
| 1991 |
|
|
|
|
| Jan. 1 |
Bills receivable |
|
2,000 |
|
| |
To Q |
|
|
2,000 |
| |
(Acceptance received) |
|
|
|
| |
|
|
|
|
| Jan. 4 |
Bank account |
|
1,970 |
|
| |
Discount account |
|
30 |
|
| |
To Bills receivable account |
|
|
2,000 |
| |
(bill discounted) |
|
|
|
| |
|
|
|
|
| April 4 |
Q |
|
2,030 |
|
| |
To Bank account |
|
|
2,030 |
| |
(Q's acceptance
dishonoured) |
|
|
|
Journal Entries in Books of Q
| 1991 |
|
|
|
|
| Jan. 1 |
P |
|
2,000 |
|
| |
To Bills payable account |
|
|
2,000 |
| |
(Acceptance given) |
|
|
|
| |
|
|
|
|
| April 4 |
Bills payable account |
|
|
|
| |
Trade expense |
|
|
|
| |
To P |
|
|
|
| |
(Bill dishonoured, noting
charges paid.) |
|
|
|
Example 3:
P draws a bill for $2,000 on Q who accepts
and returns it to P on the same date. P sent the bill to his banker for
collection. On the due date the bill is dishonoured by Q. Give journal
entries in the books of P.
Solution:
| Bills receivable account |
|
2,000 |
|
|
To Q |
|
|
2,000 |
| (Acceptance received) |
|
|
|
|
|
|
|
| Bank for collection
account |
|
2,000 |
|
|
To Bills receivable account |
|
|
2,000 |
| (Bill sent for collection) |
|
|
|
|
|
|
|
| Q |
|
|
|
|
To Bank for collection account |
|
|
|
| (Bill dishonoured) |
|
|
|
|
