Accounting · Bills of Exchange and Promissory Notes

Dishonour, Noting Charges and Retiring of Bills

Updated 1 October 2026 · Fact-checked

A bill is dishonoured when the drawee fails to pay on the due date. The drawee's books: Bills Payable A/c Dr; To Drawer's (holder's) A/c. The drawer's books: Drawee A/c Dr (bill amount plus noting charges); To Bills Receivable A/c if the drawer holds the bill, or to the bank or endorsee if discounted or endorsed.

Understand Dishonour, Noting Charges and Retiring of Bills

A bill of exchange is an accepted promise to pay on a fixed date. Sometimes the drawee cannot or does not pay on that date. This is called dishonour. The bill is no longer an asset that will turn into cash. The drawee becomes an ordinary debtor in the drawer's books, and the drawer becomes an ordinary creditor in the drawee's books.

When a bill is dishonoured, the holder may get a notary public to record the fact. This is called noting. The notary charges a fee, called noting charges. These charges are normally recovered from the drawee, so the drawee's account is debited with them. If the holder bears them and does not recover them, they are an expense.

The entry depends on who holds the bill. If the drawer kept it, the drawer reverses Bills Receivable. If the drawer endorsed it to a creditor, the endorsee is the holder, and the drawer becomes liable to the endorsee. If the drawer discounted it with a bank, the bank claims the amount from the drawer. The drawer then debits the drawee with the bill amount plus any noting charges, and credits Bills Receivable (if held), or the bank or the endorsee with the amount they claim.

Retiring a bill means the drawee pays before the due date. The holder allows a rebate (a discount for early payment, often stated as interest for the unexpired period). Rebate is a loss to the holder and a gain to the drawee. It is calculated on the bill amount for the unexpired period, at the given rate per annum.

If the question does not say who bears noting charges, assume the drawee bears them. Keep each person's books separate in your mind: drawer, drawee, endorsee and bank.

Key rules to remember

Rebate on retiring a bill: Rebate = Bill amount × Rate % × Unexpired months ÷ 12; Unexpired period is from the date of payment to the due date. Use days ÷ 365 if days are given.
Cash paid on retirement: Cash paid = Bill amount − Rebate; The drawee pays this. The holder receives this.
Drawer's entry on dishonour (bill held): Drawee A/c Dr (bill amount + noting charges); To Bills Receivable A/c (bill amount); To Cash/Bank A/c (noting charges); Use when the drawer holds the bill and pays the noting charges. The drawee becomes an ordinary debtor in the drawer's books.
Drawee's entry on dishonour: Bills Payable A/c Dr (bill amount); Noting Charges A/c Dr (if drawee bears them); To Drawer's (holder's) A/c; The drawer becomes an ordinary creditor in the drawee's books. If the drawee is not liable for noting charges, the drawee records only the bill amount.
Dishonour of a discounted bill: Drawee A/c Dr (bill amount + noting charges); To Bank A/c (amount recovered by the bank, i.e. bill amount + noting charges); Use when the drawee is liable for noting charges. The bank's noting charges are recoverable from the drawee, so they are added to the drawee's debit. Discount already charged stays an expense. It is not reversed.
Dishonour of an endorsed bill: Drawee A/c Dr; To Endorsee A/c; The endorsee's account was debited when the bill was endorsed, so it is credited again on dishonour.

How to solve Dishonour, Noting Charges and Retiring of Bills questions

Use this order for any dishonour or retirement question. Decide first whose books you are writing.

1Identify whose books are asked for: drawer, drawee, endorsee or bank.
2Find out what happened to the bill: held till maturity, endorsed, discounted or sent for collection.
3Note the bill amount, noting charges and who bears them. If silent, the drawee bears them.
4For dishonour, reverse the original treatment. Reinstate the personal account and credit Bills Receivable, the endorsee, or the bank.
5Add noting charges to the amount debited to the drawee. Credit Cash or the party who paid them.
6For retirement, find the unexpired period, then compute the rebate and the cash actually paid.
7Write the entries with dates and short narrations. Show working for the rebate separately.
8Post to ledger accounts only if asked, and check that debits equal credits.

Quickest way: Reverse and Add

When to use it: Use in time-pressed written answers where a dishonour or retirement entry is needed fast.

Ask: what did I do when the bill was accepted, endorsed or discounted? Do the exact opposite.
Debit the drawee with the full bill amount plus any noting charges.
Credit the party who now claims money (Bills Receivable, the endorsee or the bank) with the bill amount. Credit the cash or bank with the noting charges.
For retirement, calculate the rebate first. Holder's entry: Cash Dr (amount − rebate); Rebate Allowed Dr; To Bills Receivable.
Drawee's entry on retirement: Bills Payable Dr (bill amount); To Cash (amount − rebate); To Rebate Received.
For dishonour in the drawee's books, debit Bills Payable (and Noting Charges if the drawee is liable) and credit the drawer or holder. Do not just swap the drawer's entry.

Common mistakes in Dishonour, Noting Charges and Retiring of Bills

Reversing the bank discount when a discounted bill is dishonoured.
Students think dishonour cancels everything.
Fix: Discount was a cost of raising cash early. It stays as an expense. Only credit the bank with the amount it recovers.
Debiting noting charges to the Profit and Loss account when the drawee should bear them.
Noting charges look like an expense.
Fix: If the drawee is liable, debit the drawee's account. Treat them as an expense only if the question says the holder bears them.
Crediting Bills Receivable with the amount including noting charges.
The debit total is the bill plus charges, so students credit the same total to one account.
Fix: Bills Receivable is credited only with the bill amount. Credit cash separately for the noting charges.
Computing rebate on the wrong period or the wrong amount.
Students use the full period of the bill instead of the unexpired period.
Fix: Count only from the date of payment to the due date. Calculate on the bill amount at the given rate.
Using Bills Receivable in the drawee's books.
Students mix up drawer and drawee.
Fix: The drawee owes the money, so the drawee always uses Bills Payable. The drawer or holder uses Bills Receivable.
Forgetting to reinstate the endorsee's liability after an endorsed bill is dishonoured.
Students stop at the drawee's account.
Fix: Credit the endorsee. The drawer now owes the endorsee and the drawee owes the drawer.

Worked examples

Example 1

Ravi drew a bill for ₹50,000 on Suman, who accepted it. Ravi discounted the bill with his bank at ₹49,000. On the due date the bill was dishonoured. The bank paid ₹300 as noting charges and recovered the total from Ravi. Pass the entries in the books of Ravi and Suman.

Show the solution

Amount recovered by the bank from Ravi = ₹50,000 + ₹300 = ₹50,300.
Ravi's books: on discounting, Bank A/c Dr ₹49,000 and Discount A/c Dr ₹1,000, To Bills Receivable ₹50,000. This entry is not reversed.
On dishonour in Ravi's books: Suman A/c Dr ₹50,300, To Bank A/c ₹50,300.
Assumption: the question is silent, so the noting charges are recoverable from Suman, the drawee. Suman's books: Bills Payable A/c Dr ₹50,000 and Noting Charges A/c Dr ₹300, To Ravi A/c ₹50,300.
If Suman were not liable for the noting charges, his books would show only Bills Payable A/c Dr ₹50,000, To Ravi A/c ₹50,000.

Answer: Ravi: Suman A/c Dr ₹50,300 To Bank A/c ₹50,300. Suman (assuming he bears the noting charges): Bills Payable A/c Dr ₹50,000, Noting Charges A/c Dr ₹300, To Ravi A/c ₹50,300. If Suman is not liable for the charges, he records only ₹50,000.

Example 2

Meena holds a 4-month bill of ₹60,000 accepted by Karan. Karan retires it 1 month before the due date. Meena allows a rebate at 12% per annum. Pass the entries in the books of both parties.

Show the solution

Unexpired period = 1 month.
Rebate = 60,000 × 12% × 1 ÷ 12 = ₹600.
Cash received = 60,000 − 600 = ₹59,400.
Meena's books: Cash A/c Dr ₹59,400 and Rebate (Discount) Allowed A/c Dr ₹600, To Bills Receivable A/c ₹60,000.
Karan's books: Bills Payable A/c Dr ₹60,000, To Cash A/c ₹59,400 and To Rebate (Discount) Received A/c ₹600.

Answer: Rebate = ₹600; cash paid = ₹59,400. Meena: Cash Dr 59,400, Rebate Allowed Dr 600, To Bills Receivable 60,000. Karan: Bills Payable Dr 60,000, To Cash 59,400, To Rebate Received 600.

Exam tips

Write a clear heading for each party's books. Examiners give step marks for correct accounts even if one figure is wrong.
Always state your assumption on who bears noting charges when the question is silent.
Show the rebate calculation in a separate working note. It earns marks even if the entry has a slip.
Check the bill's history before writing any dishonour entry. Held, endorsed and discounted bills have different credits.
Keep narrations short, such as 'Being bill dishonoured and noting charges paid'.

Practice questions from Bills of Exchange and Promissory Notes

Dishonour, Noting Charges and Retiring of Bills: frequently asked questions

What is the difference between dishonour and noting of a bill?

Dishonour is the failure of the drawee to pay or accept the bill. Noting is the step where a notary public records that fact, for a fee. Noting follows dishonour and helps prove it later.

Who pays the noting charges?

They are normally recovered from the drawee, because the drawee caused the dishonour. So the holder debits the drawee with them. If the holder bears them, they are an expense.

Is the discount on a discounted bill reversed when it is dishonoured?

No. The discount was already charged as an expense when the bill was discounted. On dishonour, you only debit the drawee and credit the bank for the amount it claims.

Who gets the benefit of rebate on retirement of a bill?

The drawee who pays early gets the benefit. It is a gain for the drawee, shown as rebate or discount received. It is a loss for the holder, shown as rebate or discount allowed.