Accounting · Bills of Exchange and Promissory Notes

Renewal of Bills and Insolvency of Acceptor: Journal Entries and Solved Problems

Updated 1 October 2026

Renewal means the drawee cannot pay a bill on its due date, so the old bill is cancelled and a new one is accepted, usually with interest added. If the acceptor becomes insolvent, only part of the amount is recovered and the unrecovered balance is written off as bad debts. Record each stage with its own entry.

Understand Renewal of Bills and Insolvency of Acceptor

A bill of exchange is a promise to pay on a fixed date. Sometimes the drawee (acceptor) cannot pay on that date. He asks the drawer for more time. If the drawer agrees, the old bill is cancelled and a new bill is drawn and accepted for a later date. This is called renewal.

The drawer usually charges interest for the extra time. The new bill is therefore for a larger amount than the old bill. The drawee may also pay part of the old bill in cash. Then the new bill is drawn only for the balance plus interest.

The key idea: renewal is two things in books. First, you cancel the old bill as if it was dishonoured. Second, you record the new bill as a fresh bill. Interest is an income for the drawer and an expense for the drawee.

Insolvency of the acceptor is a different situation. The acceptor is declared unable to pay his debts. When a bill is dishonoured for this reason, the drawer receives only a part of the amount, for example 60 paise in the rupee. The rest is a loss, written off as bad debts. The drawee's books show the reverse: the liability is wiped off and the unpaid part is a gain.

If the bill was discounted with a bank or endorsed to a creditor, the drawer must also pay the bank or creditor when the bill is dishonoured. Then he claims the dividend from the insolvent estate.

Key rules to remember

Amount of new bill: New bill = Old bill − Cash paid on renewal + Interest on the new period; If no cash is paid, deduct nothing. Interest is added to the new bill amount, not paid separately, unless the question says it is paid in cash.
Interest on renewal: Interest = Amount (balance) × Rate ÷ 100 × Period in months ÷ 12; Calculate on the balance remaining after part payment, unless the question says otherwise. Use the period of extension.
Loss on insolvency: Bad debt = Bill amount − Amount received as dividend; Dividend = bill amount × rupees received per rupee. For 40 paise in the rupee, dividend is 40% of the amount.
Drawer's entry on renewal (books of drawer): 1. Acceptor A/c Dr (old bill); To Bills Receivable A/c (old bill). 2. Cash A/c Dr (cash received); To Acceptor A/c. 3. Acceptor A/c Dr (interest); To Interest A/c. 4. Bills Receivable A/c Dr (new bill); To Acceptor A/c (new bill).; Pass the cash entry as its own step, only if cash is received. Entries 1 and 3 can be combined into one compound entry (Acceptor A/c Dr old bill + interest), but separate entries are clearer and safer for step marks.
Drawee's entry on renewal (books of drawee): 1. Bills Payable A/c Dr (old bill); To Drawer A/c. 2. Drawer A/c Dr (cash paid); To Cash A/c. 3. Interest A/c Dr; To Drawer A/c (interest). 4. Drawer A/c Dr (new bill); To Bills Payable A/c (new bill).; These mirror the drawer's entries. Pass entry 2 only if cash is paid on renewal. Interest is an expense for the drawee, so it is debited to Interest A/c.

How to solve Renewal of Bills and Insolvency of Acceptor questions

Use this method for any renewal or insolvency question. Decide first whose books you must write.

1Identify whose books are asked: drawer (bill receivable) or drawee (bill payable).
2Note the old bill amount, due date, any cash paid, rate of interest and renewal period.
3Calculate interest on the balance for the extension period.
4Find the new bill amount: old bill − cash paid + interest.
5Pass the cancellation entry: debit the party with the old bill amount, credit Bills Receivable or debit Bills Payable.
6Pass the entry for interest: debit the party and credit Interest Account for the drawer, or debit Interest and credit the party for the drawee.
7Pass the entry for cash received or paid, if any, and then the entry for the new bill.
8For insolvency: pass the dishonour entry for the full amount, then the cash received as dividend, and write off the balance as bad debts (drawer) or transfer to the insolvent's gain (drawee).

Quickest way: Party account as the running total

When to use it: Use it when a question has renewal with part payment and interest in a single go, and time is short.

Write the party's account in a quick T-form on the side.
Debit side: old bill amount and interest. Credit side: cash received and new bill.
If both sides tally, your entries and the new bill amount are correct.
Then write only the journal entries, each with a short narration. Cash received is its own entry: Cash A/c Dr; To Acceptor A/c. Step marks come from the entries and working notes.
Show interest working as a working note below the journal. Do not skip it.

Common mistakes in Renewal of Bills and Insolvency of Acceptor

Calculating interest on the full old bill even when part payment is made.
Students rush to the formula and ignore the cash paid.
Fix: Subtract cash paid first and charge interest only on the balance, unless the question clearly says otherwise.
Treating interest as part of the old bill and crediting Bills Receivable with it.
Interest looks like part of the new amount, so it gets merged.
Fix: Credit Bills Receivable only with the old bill. Credit Interest Account separately.
Forgetting to cancel the old bill and recording only the new one.
Students think a new bill replaces the old one automatically.
Fix: Always pass the cancellation entry first. Both old and new bills must appear in the books.
Writing off the full bill as bad debts on insolvency.
The word insolvent suggests nothing is recovered.
Fix: Bad debt is only the unrecovered part. Debit Cash for the dividend received, then Bad Debts for the balance.
Mixing drawer and drawee entries.
Both sides use similar accounts, and the question may not name the books clearly.
Fix: Write at the top whether it is the drawer's or drawee's book. The drawee has Bills Payable and Interest as an expense.

Worked examples

Example 1

On 1 January 2024, Ravi accepted a bill of ₹20,000 drawn by Mohan for 3 months. Before the due date, Ravi paid ₹5,000 in cash and requested renewal for 2 months, with interest at 12% per annum on the balance. A new bill was drawn and accepted. Pass journal entries in the books of Mohan.

Show the solution

Balance after cash = ₹20,000 − ₹5,000 = ₹15,000.
Interest = ₹15,000 × 12 ÷ 100 × 2 ÷ 12 = ₹300.
New bill = ₹15,000 + ₹300 = ₹15,300.
Entry 1 (cancel old bill): Ravi A/c Dr ₹20,000; To Bills Receivable A/c ₹20,000.
Entry 2 (cash received): Cash A/c Dr ₹5,000; To Ravi A/c ₹5,000.
Entry 3 (interest due): Ravi A/c Dr ₹300; To Interest A/c ₹300.
Entry 4 (new bill): Bills Receivable A/c Dr ₹15,300; To Ravi A/c ₹15,300.
Check: Ravi A/c debit = ₹20,000 + ₹300 = ₹20,300; credit = ₹5,000 + ₹15,300 = ₹20,300. It tallies.

Answer: New bill is ₹15,300. Interest of ₹300 is credited to Interest Account in Mohan's books, and Ravi's account closes to nil.

Example 2

Seema drew a bill of ₹30,000 on Tara, who accepted it. Seema endorsed it to Uma. On the due date, Tara was declared insolvent and the bill was dishonoured. Seema paid Uma in full. Later, a dividend of 40 paise in the rupee was received from Tara's estate, and the rest was written off. Pass entries in Seema's books.

Show the solution

Note: at the time of endorsement (before this question starts), Uma A/c was debited and Bills Receivable A/c was credited with ₹30,000. So Bills Receivable is not credited again at dishonour.
Dishonour: Tara A/c Dr ₹30,000; To Uma A/c ₹30,000. (Bill endorsed to Uma, so Seema owes Uma on dishonour.)
Payment to Uma: Uma A/c Dr ₹30,000; To Cash A/c ₹30,000.
Dividend = ₹30,000 × 40 ÷ 100 = ₹12,000.
Cash received: Cash A/c Dr ₹12,000; To Tara A/c ₹12,000.
Bad debt = ₹30,000 − ₹12,000 = ₹18,000.
Write off: Bad Debts A/c Dr ₹18,000; To Tara A/c ₹18,000.
Check: Tara A/c debit ₹30,000 = credit ₹12,000 + ₹18,000. It tallies.

Answer: Seema recovers ₹12,000 and bears a bad debt of ₹18,000. Tara's account is closed.

Exam tips

Read the question for whose books are asked. Many marks are lost by writing the wrong side.
Always show working notes for interest and new bill amount. Examiners give marks for them even if the final entry has an error.
If the question says interest is paid in cash, do not add it to the new bill. Drawer's books: Cash A/c Dr, To Interest A/c. Drawee's books: Interest A/c Dr, To Cash A/c.
In insolvency questions, check whether the bill was kept, discounted or endorsed. This decides who gets paid and who bears the loss.
Check that the party account balances to nil after all entries. It is a fast self-check.

Practice questions from Bills of Exchange and Promissory Notes

Renewal of Bills and Insolvency of Acceptor: frequently asked questions

What is the journal entry for renewal of a bill with interest?

In the drawer's books, debit the acceptor and credit Bills Receivable with the old bill. If cash is received, debit Cash and credit the acceptor. Debit the acceptor and credit Interest Account with the interest. Then debit Bills Receivable and credit the acceptor with the new bill amount.

On what amount is interest charged in renewal with part payment?

Interest is charged on the balance left after part payment, for the period of extension, unless the question says otherwise. The new bill equals this balance plus interest.

How is the loss on insolvency of the acceptor treated?

The amount actually received is shown as cash. The unrecovered balance is debited to Bad Debts Account in the drawer's books. In the drawee's books, it is a gain and is credited to Deficiency or Profit on insolvency.

Is renewal the same as dishonour of a bill?

No. Renewal is a mutual agreement to replace the bill, while dishonour is a failure to pay. In books, renewal starts like a dishonour, because the old bill is cancelled, but then a new bill is created.