Bills of Exchange: formula sheet

Key formulas

Drawer: on acceptance

Bills Receivable A/c Dr. ; To Drawee's (Debtor's) A/c

Debtor is replaced by the bill. Amount is the face value of the bill.

Drawee: on acceptance

Drawer's (Creditor's) A/c Dr. ; To Bills Payable A/c

Creditor is replaced by the bill.

Drawer: honour on due date

Bank A/c Dr. ; To Bills Receivable A/c

Use Cash A/c if the bill is paid in cash.

Drawee: honour on due date

Bills Payable A/c Dr. ; To Bank A/c

Use Cash A/c if paid in cash.

Due date

Date of bill + term + 3 days of grace

Count months by calendar. If the due date is a public holiday, under the Negotiable Instruments Act, 1881 (s.25) the bill is due on the preceding business day only if the holiday is declared after the bill is drawn (an emergency holiday). Otherwise it falls due on the next business day. Follow the question's instruction.

Credit sale followed by a bill

Sale entry first: Debtor A/c Dr. ; To Sales A/c. Then acceptance entry.

Bill replaces the debtor, so the sale entry must exist before the bill entry.

Bank discount

Discount = Face value of bill × Rate of discount ÷ 100 × Unexpired period (in years or months ÷ 12)

Always charged on the face value of the bill, not on the amount you receive. Use days ÷ 365 if the question gives days.

Net proceeds from discounting

Cash received = Face value − Discount (− any bank charges)

Debit Bank with this amount.

Discounting entry

Bank A/c Dr (net proceeds); Discount on Bills A/c Dr (discount); To Bills Receivable A/c (face value)

Discount is an expense of the discounting period, even if the bill matures later.

Endorsement entry

Creditor's A/c Dr; To Bills Receivable A/c (face value)

If the creditor is paid less or more than the bill, adjust the balance in cash or in the creditor's account.

Collection entry

Without a fee: Bank A/c Dr; To Bills Receivable A/c. With a fee deducted: Bank A/c Dr (face value − fee); Bank Charges A/c Dr (fee); To Bills Receivable A/c (face value).

A bill held with the bank for collection is still a bill receivable until the bank credits you.

Unexpired period

Unexpired period = Date of maturity − Date of discounting

Under the Negotiable Instruments Act, 1881 (section 22), three days of grace are added to the due date of bills payable after a period (not on demand), unless the question states otherwise.

Dishonour entry (bill held by drawer)

Drawee A/c Dr. (bill amount + noting charges); to Bills Receivable A/c; to Cash/Bank A/c (noting charges)

Use when the drawer kept the bill till the due date.

Dishonour entry (bill discounted)

Drawee A/c Dr. (bill amount + noting charges); to Bank A/c (bill amount); to Cash A/c (noting charges paid by drawer)

If the bank itself charges the noting charges, credit Bank with the bill amount plus those charges and there is no cash credit. Discount already charged stays as an expense. Do not reverse it. Debit the drawee with noting charges only if they are to be recovered from the drawee.

Dishonour entry (bill endorsed)

Drawee A/c Dr.; to Endorsee's A/c

The endorsee's account is credited, and the debt to that party revives.

Noting charges borne by drawer

Noting Charges A/c Dr.; to Cash/Bank A/c

Use only if the question says the drawer bears them. Otherwise charge the drawee as in the dishonour entry.

Renewal: new bill amount

New bill = Old bill amount + noting charges (if included) − cash paid on account + interest on the stated base for the new bill period

State clearly which items are included and the base on which interest is charged.

Renewal entries

(1) Drawee Dr.; to Bills Receivable (cancel old bill). (2) Cash Dr.; to Drawee (part payment). (3) Drawee Dr.; to Interest A/c. (4) Bills Receivable Dr.; to Drawee (new bill).

Drawee's books show the mirror entries with Bills Payable and Interest paid.

Simple interest

Interest = Principal × Rate ÷ 100 × Time (in years)

For months, use Time = months ÷ 12.

Dishonour due to insolvency

Bill held: Acceptor A/c Dr (full bill amount) to Bills Receivable A/c. Bill discounted: Acceptor A/c Dr (full bill amount) to Bank A/c

Always debit the full bill amount first, even if only part will be recovered. For a discounted bill, Bills Receivable was already credited at discounting, so do not credit it again.

Amount recovered and loss

Amount received = Bill amount × dividend rate; Bad debt = Bill amount − Amount received

The dividend rate is stated as paise in the rupee, so 25 paise means 25%.

Entry for dividend and loss

Bank A/c Dr (received); Bad Debts A/c Dr (loss) to Acceptor A/c (full amount)

Interest or noting charges, if any, are added to the acceptor's debit before computing loss.

Accommodation bill, drawer and acceptor with sharing

Drawer's share of proceeds + Acceptor's share of proceeds = Net proceeds of discounting

Each party has a liability only for their own share. The acceptor pays the bank on the due date using funds sent by the drawer.

Discount on accommodation bill

Discount = Bill amount × rate × period ÷ 12 (rate per annum, period in months)

Discount is shared in the same ratio as the proceeds unless the question says otherwise.

Due date of a bill

Due date = Date of bill + Term + 3 days of grace

Count months by the calendar. No grace days for bills payable on demand or at sight. If the maturity date is a public holiday, the bill falls due on the preceding business day (s.25 NI Act); if the day is an emergency holiday it falls due on the next day.

Closing balance of Bills Receivable

Closing BR = Opening BR + Bills received − (Collected + Discounted + Endorsed + Dishonoured)

Gives unmatured bills in hand. Unmatured discounted bills are shown separately as a contingent liability.

Closing balance of Bills Payable

Closing BP = Opening BP + Bills accepted − (Paid on maturity + Retired early + Dishonoured)

Gives accepted bills not yet due.

Posting from Bills Receivable Book

Dr Bills Receivable A/c (total); Cr each customer (individual bill)

The book is a subsidiary book, so no journal entry is needed for receipt of bills.

Posting from Bills Payable Book

Cr Bills Payable A/c (total); Dr each supplier (individual bill)

Mirror image of the Bills Receivable Book.

Discount on discounting a bill

Discount = Face value × Rate % × Unexpired period (in years)

Unexpired period runs from the date of discounting to the legal due date, including grace days.

Entry on discounting a bill

Dr Bank (face value − discount); Dr Discount A/c; Cr Bills Receivable A/c (face value)

The Bills Receivable A/c is credited with the full face value.

Quick revision

• The drawer writes and signs the bill; the drawee accepts it and pays on maturity.
• On acceptance, the drawer debits Bills Receivable and credits the drawee's personal account.
• On acceptance, the drawee debits the drawer's personal account and credits Bills Payable.
• Discounting with a bank: debit Bank A/c for the net amount received and Discount A/c for the discount, and credit Bills Receivable A/c at the full face value of the bill. Never credit only the net amount.
• Endorsement to a creditor: debit the creditor, credit Bills Receivable.
• On maturity, the drawer debits Bank and credits Bills Receivable; the drawee debits Bills Payable and credits Bank.
• On dishonour, the drawer debits the drawee and credits Bills Receivable if the bill is held, Bank if it was discounted, or the endorsee's account if it was endorsed. The amount debited includes any noting charges.
• Noting charges are normally recovered from the drawee, so they are debited to the drawee's account.
• In renewal, the old bill is cancelled and a new bill is drawn for the amount due plus any interest.
• When the acceptor is insolvent, record the dividend received from the estate, then write off the unpaid balance as bad debt. If the bill was discounted or endorsed, the drawer pays the bank or endorsee and then receives the dividend.
• An accommodation bill is not for a trade sale. The drawee accepts it to accommodate the drawer (or both parties) without receiving any consideration. The proceeds are shared as agreed, and each party who receives proceeds must remit the amount at maturity.
• Check the date: the discount is calculated only for the period from the discounting date to maturity.

Common mistakes

• Debiting Bills Receivable in the drawee's books Fix: Ask who owes money. The drawee owes, so it is Bills Payable. The drawer is owed, so it is Bills Receivable.
• Passing an entry when the bill is only drawn and not yet accepted Fix: Record entries only on acceptance. If the question says the bill is accepted, pass the entry.
• Calculating discount on the amount received instead of the face value. Fix: Banks charge discount on the face value for the unexpired period. Work out the discount first, then subtract it.
• Using the full bill period instead of the unexpired period. Fix: Count from the discounting date to the due date. The due date includes 3 days of grace unless told otherwise.
• Crediting Bills Receivable when the bill was already discounted. Fix: If the bill was discounted, the bank has the bill. Credit Bank. If it was endorsed, credit the endorsee.
• Reversing the discount on dishonour of a discounted bill. Fix: Discount was a cost of getting cash early. It stays as an expense. Only the bill amount and noting charges are recovered from the drawee.
• Debiting Bad Debts for the full bill amount. Fix: Bad debt is only the unrecovered part. Calculate cash received first, then take the balance.
• Treating the dividend rate 40 paise as 40 rupees or 4%. Fix: Convert paise to a fraction of ₹1. 40 paise in the rupee means 40%.
• Debiting or crediting the wrong account when posting the books, for example crediting Bills Receivable A/c with the book total. Fix: Remember that Bills Receivable is an asset, so receipt is a debit. Bills Payable is a liability, so acceptance is a credit. The party account always takes the opposite side.
• Crediting Bills Receivable A/c with the net amount received from the bank on discounting. Fix: Credit Bills Receivable at the full face value. Debit the difference to Discount A/c.

Exam tips

• In MCQs, the usual trap is the account name. Check whether the question asks for the drawer's or drawee's books before choosing Bills Receivable or Bills Payable.
• In written answers, show the due date calculation in a separate line. It earns method marks even if a later entry slips.
• Use a clear heading for each party and give each entry a short narration. Presentation helps step marks.
• Read the wording: accepted, retained, honoured. Each word tells you which entry is needed and which is not.
• If the due date is not asked, still check it. A bill may fall due after the accounting year-end and then stays in the balance sheet.
• Read the date of discounting carefully. The unexpired period drives the whole calculation, so show how you counted the days.
• Write the working for discount as a separate line. The calculation earns step marks even if the final entry slips.
• In MCQs, check whether the question asks for net proceeds, the discount or the face value. Options often include the other two.