CMA Foundation · Fundamentals of Financial and Cost Accounting

Bills of Exchange: CMA Foundation FFCA Chapter Guide

A bill of exchange is a written order by the drawer telling the drawee to pay a fixed sum on a set date to a named person. It becomes a bill once the drawee accepts it. To solve questions, find the due date, pick the correct books, then pass entries for retaining, discounting, endorsing, collecting or dishonour.

What this chapter covers

This chapter covers the bill of exchange as a credit instrument. You learn who the drawer, drawee and payee are, how to find the due date, and how each party records the bill in its books. A bill can be kept until due, discounted with a bank, endorsed to a creditor, or sent for collection. It can also be dishonoured, renewed, or drawn as an accommodation bill.

The chapter is mostly journal entries and simple calculations. You need clean debit and credit logic for debtors, creditors, Bills Receivable and Bills Payable. If those basics are weak, revise them first. The same rules apply to every transaction in this chapter.

It connects to journal entries, ledger accounts, final accounts and rectification of errors in Paper 2. Bills Receivable and Bills Payable also appear on the balance sheet. Every question in the exam is an MCQ, so you must be quick at spotting the right entry, the due date and the amount of discount.

Bills of Exchange is a compact chapter with a clear pattern. The same few entries repeat, so once you learn them you can answer most MCQs in under a minute. That saves time for harder numerical questions elsewhere in the 50-question paper. There is no negative marking, so even when you are unsure, you can eliminate wrong options and pick one. A small set of rules, such as days of grace, discount on the full bill value, and who gets debited on dishonour, decides most answers. This makes it a strong chapter for scoring reliably with modest effort.

Bills of Exchange: topics in the order to study them

1Bills of Exchange: Meaning, Features and PartiesStart with the definition and the roles of drawer, drawee and payee, because every entry depends on knowing who is who.
2Maturity Date, Days of Grace and Term of BillDue date calculation is needed in almost every later question, so learn it before any accounting entries.
3Accounting Treatment of Bills in Books of Drawer and DraweeBasic entries on drawing, acceptance and payment form the base for all other bill transactions.
4Retaining, Discounting, Endorsing and Collecting BillsThese are the options open to the holder, and each builds on the basic entries you have just learned.
5Dishonour of Bills, Noting Charges and RenewalDishonour reverses earlier entries, so you need the normal flow clear before you study the exceptions.
6Insolvency of Acceptor and Accommodation BillsThese are the hardest cases, with partial recovery and shared bills, so take them last.

How to prepare Bills of Exchange

Treat this chapter as a set of patterns. Learn the logic of each entry, then practise MCQs until the choice of entry becomes automatic.

Write down the three parties and what each one does. Then draw a simple line diagram of a bill moving from drawer to drawee to payee.
Practise due date questions on their own. Add the term in months or days, then add 3 days of grace, and check month ends carefully.
Learn the basic entries for the drawer and the drawee side by side, so you see that the drawer's Bills Receivable matches the drawee's Bills Payable.
For each holder option, write the entry in one line: retain, discount, endorse, collect. Note that discount is charged on the full face value of the bill for the unexpired period.
Study dishonour as a reversal: the drawee's personal account is debited again and the bill account is credited. Add noting charges where the question gives them.
Solve mixed MCQs under a timer of about one minute each. Check whether the question asks for the drawer's books or the drawee's books before you read the options.
In the last days, redo only the questions you got wrong and recite the key rules from memory.

Common mistakes in Bills of Exchange

Forgetting to add the 3 days of grace when finding the due date.
Fix: Make it a habit to add 3 days every time, unless the bill is payable on demand or the question says otherwise.
Calculating discount on the amount received instead of the full face value.
Fix: Always use the full bill value, the rate and the unexpired period, then subtract the discount from the face value to get the bank amount.
Passing entries in the wrong person's books.
Fix: Before you read the options, underline whose books the question asks for. Remember Bills Receivable belongs to the drawer and Bills Payable to the drawee.
Debiting the bank on dishonour of a discounted bill.
Fix: On dishonour of a discounted bill, the drawer pays the bank the full face value plus any noting charges. The entry is: Dr Drawee A/c (face value plus noting charges), Cr Bank A/c. Bills Receivable is not credited again, because it was already credited at discounting. The discount already charged is not reversed.
Ignoring noting charges or treating them as an expense of the wrong party.
Fix: Add noting charges to the amount owed by the drawee when the drawer pays them, and check the question for who bears the charge.
Treating accommodation bills as normal trade bills.
Fix: Read who needs the funds and who is only helping. Record entries through the personal accounts of the parties, not through sales or purchases.

Last-day revision: Bills of Exchange

A bill of exchange is drawn by the drawer and must be accepted by the drawee to be binding.
The drawer is the creditor who writes the bill; the drawee is the debtor who accepts it.
Due date = date of the bill plus the term plus 3 days of grace, when the bill is not payable on demand.
Under Section 25 of the NI Act, if the due date is a public holiday, the bill is due on the preceding business day; if it is an emergency holiday, it falls due on the next working day. Days of grace do not apply to bills payable on demand or at sight.
Drawer records Bills Receivable; drawee records Bills Payable.
On acceptance, the drawer debits Bills Receivable and credits the drawee; the drawee debits the drawer and credits Bills Payable.
Discount is calculated on the full face value of the bill for the period from the date of discounting to the due date.
On discounting, the drawer debits Bank and Discount, and credits Bills Receivable.
On endorsement, the holder debits the creditor and credits Bills Receivable.
On dishonour, in the drawer's books: - Retained bill: Dr Drawee (bill amount plus noting charges), Cr Bills Receivable (bill amount) and Cr Cash/Bank (noting charges paid). - Discounted bill: Dr Drawee (face value plus noting charges), Cr Bank (total paid to the bank). - Endorsed bill: Dr Drawee (bill amount plus noting charges), Cr Endorsee (bill amount) and Cr Cash/Bank (noting charges paid by the drawer). In the drawee's books, debit Bills Payable and credit the drawer; if the drawee bears the noting charges, add them to the amount credited to the drawer.
On insolvency of the acceptor, first treat the bill as dishonoured: Dr Acceptor, Cr Bills Receivable (if retained), Bank (if discounted) or Endorsee (if endorsed). Then the holder (or the drawer, if the bill was discounted or endorsed and the drawer has to pay) debits Bank for the amount received from the estate and Bad Debts for the unpaid part, and credits the acceptor.
An accommodation bill is drawn to help a party raise funds, with no real trade behind it.

Bills of Exchange practice questions

Bills of Exchange in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Bills of Exchange: frequently asked questions

How many days of grace are allowed on a bill of exchange?

Three days of grace are added to the term of a time bill when you find the due date. Bills payable on demand have no days of grace. Always check the wording of the question.

What is the difference between discounting and endorsing a bill?

In discounting, you sell the bill to a bank before the due date and receive cash less discount. In endorsement, you hand the bill over to a creditor to settle your debt, so no cash or discount is involved.

Is Bills of Exchange a high-scoring chapter for the CMA Foundation exam?

It is a good chapter to prepare well because the entries follow fixed patterns. With regular practice, you can answer these MCQs quickly and accurately. The paper has no negative marking, so always attempt every question.

What happens to the accounts when a bill is dishonoured?

The earlier entry is reversed. The drawee's personal account is debited again for the bill amount and any noting charges, and the account where the bill was held or discounted is credited. The debt then stands as an ordinary debt, unless the bill is renewed.