Accounting · Bills of Exchange and Promissory Notes

Discounting, Endorsement and Collection of Bills

Updated 1 October 2026

Discounting means the holder sells an accepted bill to a bank before maturity and receives the amount less discount. Endorsement means transferring the bill to a creditor to settle a debt. Collection means the bank collects the bill on the due date. Each case needs its own journal entries.

Understand Discounting, Endorsement and Collection of Bills

A bill of exchange is accepted by the drawee and held by the drawer. The drawer can keep it until the due date, or use it earlier in one of three ways.

Discounting: You sell the bill to a bank before maturity. The bank pays you the face value minus its discount, which is its charge for paying early. The discount is an expense (loss) for you. On the due date the bank collects from the acceptor.

Endorsement: You sign the back of the bill and hand it to a creditor. This settles your debt to that creditor, up to the bill amount. The creditor now becomes the holder and collects on the due date. No cash moves at the time of endorsement.

Collection: You send the bill to the bank so it collects the amount on the due date. The bank may charge a collection fee. Until collection, the bill is shown in Bills Sent for Collection A/c (or it is left in Bills Receivable if no separate entry is passed). Only when the bank reports the money received do you debit Bank.

If the acceptor dishonours a discounted or endorsed bill, you become liable to pay again. The bank or the endorsee will debit you, and you revive the claim on the acceptor.

Key rules to remember

Discount on bill: Discount = Face value × Rate of discount % × Unexpired period ÷ 12 (period in months); Unexpired period runs from the date of discounting to the due date (after adding 3 days of grace). If days are given, divide by 365 instead of 12.
Net proceeds from bank: Net proceeds = Face value − Discount; Also deduct any other bank charges if the question gives them.
Entry on discounting: Bank A/c Dr (net proceeds); Discount A/c Dr; to Bills Receivable A/c (face value); Discount is debited to Discount A/c (a loss), not to the bills account.
Entry on endorsement: Creditor's A/c Dr; to Bills Receivable A/c (face value); This entry applies when the bill equals the debt. If the bill is larger than the debt, debit the creditor's account for the debt and Bank/Cash for the excess received, and credit Bills Receivable with the face value. If the debt is larger than the bill, debit the creditor's account with the bill amount; the balance is paid separately.
Entry on sending for collection: Bills Sent for Collection A/c Dr; to Bills Receivable A/c; This entry is optional in many solutions. Many questions only record the final receipt.
Entry on collection: Bank A/c Dr; Collection charges Dr; to Bills Sent for Collection A/c (or Bills Receivable A/c); Bank is debited with the amount actually received after the charges.

How to solve Discounting, Endorsement and Collection of Bills questions

Use this order for any question on discounting, endorsement or collection.

1Identify the date of drawing, the period, and the date of acceptance. Find the due date by adding the period and then 3 days of grace.
2Find what happens to the bill: discounted, endorsed, sent for collection or retained to maturity.
3If discounted, compute the unexpired period from the discounting date to the due date. Then compute discount using the face value.
4Compute net proceeds as face value minus discount, minus any bank charges.
5Write the entry in the drawer's books. Debit Bank and Discount, credit Bills Receivable for discounting. Debit the creditor and credit Bills Receivable for endorsement.
6If the bill is dishonoured later, write the entry to revive the debt, adding any noting or bank charges.
7Check that total debits equal total credits and that the Bills Receivable credit equals the face value.

Quickest way: Face value first, then adjust

When to use it: Use this when you have limited time and the question asks only for journal entries.

Always credit Bills Receivable with the full face value, whatever the treatment.
Work out the discount in one line: face value × rate × months ÷ 12. Write the figure clearly so you earn the step marks.
Debit Bank with face value minus discount, and debit Discount A/c separately. The two debits must add up to the face value.
For endorsement, ignore discount and cash. Just debit the creditor and credit Bills Receivable.
For dishonour, debit the acceptor's account and credit the party who now claims from you (the bank or the endorsee). Add any charges to the amount.

Common mistakes in Discounting, Endorsement and Collection of Bills

Calculating discount on the net amount or on the time from drawing date.
Students mix up the full period of the bill with the period left after discounting.
Fix: Count only the days or months from the discounting date to the due date, and apply the rate to the face value.
Forgetting the 3 days of grace when finding the due date.
Students treat the stated period as the final date.
Fix: Add 3 days of grace to the period for bills that are not payable on demand. Then work out the unexpired period from that due date.
Crediting Bank or Discount A/c for the discount.
Students think of discount as money received.
Fix: Discount is an expense of the holder. Debit Discount A/c and credit Bills Receivable for the full face value.
Recording cash on endorsement.
Students link every transfer of a bill to money being received.
Fix: On endorsement, no cash moves. Debit the creditor and credit Bills Receivable.
Debiting Bank when a bill is merely sent for collection.
Students assume the bank has already paid.
Fix: Until the bank confirms collection, show the bill under Bills Sent for Collection or Bills Receivable. Debit Bank only on receipt.
Ignoring dishonour of a discounted or endorsed bill.
Students treat discounting as the end of the matter.
Fix: Remember that the drawer or endorser stays liable. On dishonour, debit the acceptor with the face value plus any charges and credit the bank or the endorsee.

Worked examples

Example 1

On 1 January, Ravi drew a 3-month bill for ₹60,000 on Sunil, who accepted it. On 4 January, Ravi discounted it with his bank at 12% per annum. Pass the journal entries in Ravi's books on discounting. Use months (not exact days) to find the unexpired period.

Show the solution

Due date: 1 January plus 3 months is 1 April. Add 3 days of grace to get 4 April.
Unexpired period: discounting is on 4 January and the due date is 4 April. By the month method, this is 3 months. This is an approximation. Counting exact days (non-leap year) gives 27 + 28 + 31 + 4 = 90 days.
Discount (month method, as the question asks) = ₹60,000 × 12% × 3 ÷ 12 = ₹1,800. If the question wanted exact days, it would be ₹60,000 × 12% × 90 ÷ 365 = ₹1,775.34 (rounded).
Net proceeds = ₹60,000 − ₹1,800 = ₹58,200.
Entry: Bank A/c Dr ₹58,200; Discount A/c Dr ₹1,800; to Bills Receivable A/c ₹60,000.

Answer: Bank A/c Dr ₹58,200 and Discount A/c Dr ₹1,800, to Bills Receivable A/c ₹60,000.

Example 2

Meena received a bill of ₹40,000 from Arun. She endorsed it to her creditor Kiran in full settlement of ₹40,000 owed to him. On the due date, Arun dishonoured the bill. Kiran paid noting charges of ₹200 and debited Meena's account with the bill amount and the charges. Meena will recover the whole amount from Arun. Pass the entries in Meena's books.

Show the solution

On receipt of the bill: Bills Receivable A/c Dr ₹40,000; to Arun ₹40,000.
On endorsement: Kiran's A/c Dr ₹40,000; to Bills Receivable A/c ₹40,000. No cash moves.
On dishonour, Meena's debt to Kiran is revived and now includes the ₹200 noting charges. So: Arun's A/c Dr ₹40,200; to Kiran's A/c ₹40,200.
Arun's account now shows ₹40,200 due from him (the bill amount plus charges). Kiran's account shows ₹40,200 payable by Meena, to be settled later by paying him.

Answer: Entries: (1) Bills Receivable A/c Dr ₹40,000 to Arun ₹40,000. (2) Kiran Dr ₹40,000 to Bills Receivable ₹40,000. (3) Arun Dr ₹40,200 to Kiran ₹40,200. When Meena later pays Kiran, she debits Kiran and credits Bank.

Exam tips

Always show the discount calculation as a working note. Marks are given for the method even if the final figure is wrong.
Write the due date working neatly. Many errors start with the grace days.
Read whether the question says discounted, endorsed or sent for collection. The entries are different for each.
For dishonour questions, check who bears the noting charges before debiting.
Keep the sequence of entries in date order and label each with the date.

Practice questions from Bills of Exchange and Promissory Notes

Discounting, Endorsement and Collection of Bills: frequently asked questions

Is discount on a bill an expense or an income?

For the person who discounts the bill, it is an expense or loss. It is the price paid to get cash early. It is shown in the Profit and Loss Account.

Do I add grace days when calculating discount?

Yes. Find the due date first by adding 3 days of grace. The unexpired period runs from the discounting date to that due date.

What happens if a discounted bill is dishonoured?

The bank debits the drawer's account for the bill amount plus any charges. The drawer then debits the acceptor and credits the bank, so the claim on the acceptor is revived.

Is there any cash entry when a bill is endorsed?

No. Endorsement only transfers the bill to a creditor. The creditor's account is debited and Bills Receivable is credited.