Fundamentals of Financial and Cost Accounting · Bills of Exchange

Dishonour of Bills, Noting Charges and Renewal Explained

Updated 10 October 2026 · Fact-checked

A bill is dishonoured when the drawee fails to pay on the due date. The drawer debits the drawee and credits Bills Receivable (or the bank or endorsee, if the bill was discounted or endorsed). Noting charges are added to the drawee's debt. On renewal, the old bill is cancelled and a new bill is drawn for the amount plus interest.

Understand Dishonour of Bills, Noting Charges and Renewal

A bill of exchange is a promise to pay on a fixed date. Sometimes the drawee cannot or will not pay on that date. The bill is then dishonoured. The bill is not a payment, so the drawee's debt comes back to life in the books.

For the drawer, dishonour means the drawee becomes a debtor again. You debit the Drawee's account and credit whoever held the bill: Bills Receivable if the drawer still had it, Bank if it was discounted, or the endorsee if it was endorsed. If the bank or endorsee charges extra, such as noting charges, the drawer pays those too and debits them to the drawee as well.

Noting charges are fees paid to a notary public, who formally records that the bill was presented and not paid. This record helps in legal action. The holder usually pays the charges first, and they are finally recovered from the drawee. They are not the drawer's loss unless the drawee cannot pay them.

For the drawee, the entry is the mirror image. Debit Bills Payable (the acceptance is cancelled) and credit the Drawer's account (the creditor). Add any noting charges borne by the drawee to the Drawer's account.

If the drawee asks for more time, the parties often renew the bill. The old bill is cancelled as if dishonoured, interest for the extra period is charged, and a new bill is drawn. If the drawee pays part cash on renewal, the new bill is only for the balance plus interest.

Key formulas to remember

Dishonour entry in drawer's books (bill retained): Drawee A/c Dr (bill amount) To Bills Receivable A/c; If noting charges are paid by the drawer, add them to the debit and credit Cash or Bank.
Dishonour of a discounted bill: Drawee A/c Dr To Bank A/c (bill amount + noting charges debited by the bank); Bank is credited with the face value plus any noting charges the bank debits, and the drawee is debited with the same total. Discount already allowed to the bank is not reversed. It stays as an expense.
Dishonour of an endorsed bill: Drawee A/c Dr To Endorsee A/c; Endorsee is the party to whom the bill was endorsed, and the drawer again owes them.
Drawee's books on dishonour: Bills Payable A/c Dr To Drawer A/c (cancelling the acceptance). If the drawee bears noting charges: Noting Charges A/c Dr To Drawer A/c; Noting charges borne by the drawee are added to the amount owed to the drawer.
Interest on renewal: Interest = Amount × Rate ÷ 100 × Months ÷ 12; Use the period of extension and the rate given. Check whether the rate is per annum.
Amount of new bill: New bill = Old bill + Interest + Noting charges (if included) − Cash paid on renewal; Cash paid first reduces what is owed, then the balance goes into the new bill.
Renewal entries (drawer): 1) Drawee A/c Dr To Bills Receivable A/c 2) Drawee A/c Dr To Interest Received A/c (income) 3) Cash A/c Dr To Drawee A/c (part payment) 4) Bills Receivable A/c Dr To Drawee A/c (new bill); The drawee's account should net to zero after the new bill is recorded.

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

Work through every dishonour or renewal question in the same order. Do it from one side only first, either the drawer's or the drawee's books, as asked.

1Identify whose books are asked for: drawer or drawee.
2Find what happened to the bill earlier: retained, discounted, endorsed or sent for collection. This decides the credit side of the dishonour entry.
3Write the dishonour entry: debit the drawee (in the drawer's books) for the bill amount plus any noting charges, and credit Bills Receivable, Bank or the endorsee.
4Add noting charges to the drawee's debt. Credit Cash or Bank if the drawer paid them.
5If renewal is mentioned, compute interest on the old bill for the extended period using the given rate.
6Subtract any cash paid on renewal. The balance, plus interest, forms the new bill.
7Write the entries for interest, cash received and the new bill. Check that the drawee's account closes to zero.
8For drawee's books, mirror every entry: Bills Payable and Drawer replace Bills Receivable and Drawee.

Quickest way: Three-line shortcut for MCQs

When to use it: Use this when an MCQ asks for the amount of the new bill, the interest, or the amount debited to the drawee.

Start with the old bill amount.
Add noting charges only if the question says they are recovered from the drawee or included in the new bill.
Add interest, then subtract any cash paid on renewal. The result is the new bill amount.
For a discounted bill, the bank is credited the full face value plus any noting charges the bank debits, not the net amount received at discounting. The drawee is debited with the same total.
Eliminate options that show discount reversed or a Cash credit when no cash was paid.

Common mistakes in Dishonour of Bills, Noting Charges and Renewal

Crediting Bank with the discounted amount instead of the full bill value on dishonour.
Students remember the net cash received at discounting.
Fix: The bank recovers the full face value. Credit Bank with the bill amount plus any bank charges.
Reversing the discount charged earlier.
It feels natural to undo the whole discounting entry.
Fix: Discount is a finance cost already incurred. Leave it in the Discount account.
Treating noting charges as the drawer's expense in all cases.
The drawer pays the notary, so it looks like a drawer cost.
Fix: Charge noting charges to the drawee unless the question says the drawer bears them.
Calculating interest on the new bill amount.
The new bill is the figure at hand.
Fix: Interest is on the old bill (the amount outstanding), for the period of extension.
Forgetting to deduct cash paid on renewal before drawing the new bill.
Students rush to the interest step.
Fix: New bill = old bill + interest − cash paid. Check that the drawee's account balances to zero.
Mixing up drawer's and drawee's entries.
Both sides use similar words such as Bills Receivable and Bills Payable.
Fix: Underline which party's books are asked before writing any entry.

Worked examples

Example 1

Ravi Traders drew a bill of ₹40,000 on Mohan for 3 months. Ravi discounted it with the bank. On the due date Mohan failed to pay and the bank debited Ravi's account with ₹40,000 plus noting charges of ₹200. Pass the journal entry in Ravi's books.

Show the solution

The bill was discounted, so the bank is the party who recovers the money from Ravi.
Mohan becomes Ravi's debtor again for the bill amount and the noting charges.
Debit Mohan with ₹40,000 + ₹200 = ₹40,200.
Credit Bank with ₹40,200.

Answer: Mohan A/c Dr ₹40,200 To Bank A/c ₹40,200 (bill dishonoured and noting charges paid).

Example 2

Anil owes Sunita ₹30,000 on a 2-month bill. On the due date Anil cannot pay. He pays ₹10,000 in cash and accepts a new 3-month bill for the balance plus interest at 12% per annum on the amount of the old bill for 3 months. Show the entries in Sunita's books.

Show the solution

Dishonour of the old bill: debit Anil ₹30,000, credit Bills Receivable ₹30,000.
Interest = ₹30,000 × 12 ÷ 100 × 3 ÷ 12 = ₹900. Debit Anil ₹900, credit Interest Received A/c ₹900. Interest Received is an income of Sunita, not a payable.
Anil now owes ₹30,000 + ₹900 = ₹30,900.
Cash received ₹10,000: debit Cash, credit Anil.
Balance = ₹30,900 − ₹10,000 = ₹20,900. This is the new bill.
Debit Bills Receivable ₹20,900, credit Anil ₹20,900. Anil's account now closes to zero.

Answer: 1) Anil A/c Dr ₹30,000 To Bills Receivable A/c ₹30,000. 2) Anil A/c Dr ₹900 To Interest Received A/c ₹900. 3) Cash A/c Dr ₹10,000 To Anil A/c ₹10,000. 4) Bills Receivable A/c Dr ₹20,900 To Anil A/c ₹20,900. The new bill is ₹20,900.

Exam tips

Read how the bill was held earlier. Most MCQs are decided by this one fact.
Check the rate period: per annum or per month. Convert the months carefully.
Look for the phrase 'including interest' or 'noting charges borne by drawer'. It changes which account is debited.
Compute the new bill amount first. Then eliminate options that do not match, as the answer options usually differ in the interest or cash step.
Remember there is no negative marking. Answer every question, even after only eliminating two options.

Practice questions from Bills of Exchange

Dishonour of Bills, Noting Charges and Renewal in other exams

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

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

What are noting charges in a bill of exchange?

They are fees paid to a notary public who records that a bill was presented and not paid. They are normally recovered from the drawee, so the drawer debits the drawee's account with them.

What happens when a discounted bill is dishonoured?

The bank recovers the full bill amount from the drawer, plus any charges. The drawer debits the drawee and credits Bank. The discount earlier charged is not reversed.

How do you account for renewal of a bill with interest?

Cancel the old bill by debiting the drawee and crediting Bills Receivable. Charge interest to the drawee, record any cash received, and then record the new bill for the balance.

Is interest on renewal charged on the old bill or the new bill?

It is charged on the old bill amount for the extended period at the stated rate. The new bill is simply the old amount plus interest, less any cash paid.