Fundamentals of Financial and Cost Accounting · Bills of Exchange

Retaining, Discounting, Endorsing and Collecting Bills

Updated 10 October 2026 · Fact-checked

After a drawer receives an accepted bill, it can be retained till maturity, discounted with a bank for cash less discount, endorsed to a creditor in settlement of a debt, or sent to a bank for collection. Each choice has its own journal entry. Bills Receivable Account is credited at full face value on discounting and endorsement.

Understand Retaining, Discounting, Endorsing and Collecting Bills

A bill of exchange that you receive from a customer after acceptance is an asset. You record it in Bills Receivable Account. What you do with it next decides the entry.

You have four choices. You can retain it and present it on the due date. You can discount it with a bank before the due date and get cash now, minus the bank's charge. You can endorse it to a creditor, so the creditor gets the right to collect and your debt is cleared. Or you can send it to the bank for collection, where the bank collects on the due date and may charge a fee.

In discounting, the bank charges interest for the unexpired period. This is discount. It is a loss to you, so you debit Discount Account (an expense). The bank pays you the face value less discount.

In endorsement, no cash moves. You settle a creditor with a bill. Bills Receivable is credited and the creditor's account is debited with the amount of the bill.

In all cases, the bill stops being your asset once it is discounted or endorsed, so Bills Receivable is credited then. If the bill is later dishonoured, the person who now holds it claims from you, and you revive the liability.

Key formulas to remember

Discount on a bill: Discount = Face value of bill × Rate of discount % p.a. × Unexpired period (in years); First count the nominal due date from the bill date and the term. Add 3 days of grace to get the legal due date. Then count the actual days from the discounting date to the legal due date and use days ÷ 365. Use months ÷ 12 only where the question gives the period in months.
Cash received from bank: Net proceeds = Face value of bill − Discount (− bank charges, if any); Bank charges, if given, are also debited to the expense account.
Retaining till maturity: Bank A/c Dr; To Bills Receivable A/c (on due date); Entry on receipt of acceptance: Bills Receivable A/c Dr; To Debtor A/c.
Discounting entry: Bank A/c Dr (net proceeds); Discount A/c Dr; To Bills Receivable A/c (face value); The credit to Bills Receivable is the full face value of the bill.
Endorsement entry: Creditor A/c Dr; To Bills Receivable A/c; Debit the creditor with the bill's face value if it settles the debt in full.
Sent for collection: Bills Sent for Collection A/c Dr; To Bills Receivable A/c. On collection: Bank A/c Dr; Collection charges A/c Dr; To Bills Sent for Collection A/c; Some books credit Bills Receivable only on actual collection. Treatment varies, so follow the question's wording. The first entry is optional.

How to solve Retaining, Discounting, Endorsing and Collecting Bills questions

Use this order for any question on handling of bills.

1Read who holds the bill and what has been done with it: retained, discounted, endorsed or sent for collection.
2Write the entry on receiving the accepted bill: Bills Receivable A/c Dr; To Debtor A/c.
3Find the nominal due date by counting the term from the date of the bill. Add 3 days of grace to get the legal due date.
4For discounting, count the actual days from the discounting date to the legal due date. This is the unexpired period.
5Calculate discount using face value × rate × days ÷ 365 (or months ÷ 12 where months are given). Then subtract it from face value to get cash received.
6Pass the entry: Bank Dr and Discount Dr against Bills Receivable Cr at face value.
7For endorsement, debit the creditor and credit Bills Receivable. For retaining, debit Bank on the due date.
8If the question mentions dishonour, reverse the entry by debiting the party who has to pay you back.

Quickest way: Four-line check for bill handling MCQs

When to use it: Use when an MCQ asks for the amount of discount, cash received, or which account is debited.

Retain: debit Bank on the due date, no discount.
Discount: Bank gets face value less discount; Discount A/c is a loss.
Endorse: no cash, no discount. The creditor's account is debited.
Count unexpired days from discounting date to the legal due date, not the nominal due date.
Check the options: a wrong option often shows net proceeds as the credit to Bills Receivable, but on discounting the credit is the full face value.

Common mistakes in Retaining, Discounting, Endorsing and Collecting Bills

Crediting Bills Receivable with the net cash received on discounting.
Students think only the cash received matters.
Fix: Credit Bills Receivable with the full face value. The difference between that and the cash is Discount, debited separately.
Calculating discount on the unexpired period from the date of the bill.
The bill's own date is the most visible date in the question.
Fix: Count the period from the discounting date to the legal due date.
Ignoring days of grace.
Students stop at the nominal due date.
Fix: Add 3 days of grace to get the legal due date before counting the unexpired period.
Debiting Bank on endorsement.
Students mix up endorsement with discounting.
Fix: In endorsement no cash moves. Debit the creditor, credit Bills Receivable.
Treating discount as income.
The word discount is linked with discount received.
Fix: Discount on bills discounted with a bank is a cost to the drawer. It is a debit to Discount A/c.
Taking discount rate as a rate for the whole bill period.
The rate looks like a flat percentage.
Fix: The rate is per annum. Multiply by the unexpired period as a fraction of a year.

Worked examples

Example 1

Ravi Traders received an accepted bill of ₹60,000 from Mohan on 1 January, for 3 months. Ravi discounted it with the bank on 1 February at 12% p.a. Find the discount and cash received, and pass the entries in Ravi's books. Include 3 days of grace. Assume a non-leap year and round to the nearest rupee.

Show the solution

Receipt of bill: Bills Receivable A/c Dr ₹60,000; To Mohan ₹60,000.
Nominal due date is 1 April. Adding 3 days of grace, the legal due date is 4 April.
Unexpired period from 1 February to 4 April = 28 (February) + 31 (March) + 3 = 62 days.
Discount = 60,000 × 12% × 62 ÷ 365 = 4,46,400 ÷ 365 = ₹1,223 (rounded).
Cash received = 60,000 − 1,223 = ₹58,777.
Discounting entry: Bank A/c Dr ₹58,777; Discount A/c Dr ₹1,223; To Bills Receivable A/c ₹60,000.

Answer: Discount ₹1,223; cash received ₹58,777. Bills Receivable is credited with ₹60,000.

Example 2

Seema Stores received a bill of ₹25,000 from Anil. She endorsed it to her supplier Vijay in full settlement of a ₹25,000 debt. Later, the bill was retained by Vijay and paid on maturity. Pass the entries in Seema's books.

Show the solution

On receipt of the bill: Bills Receivable A/c Dr ₹25,000; To Anil ₹25,000.
On endorsement to Vijay: Vijay A/c Dr ₹25,000; To Bills Receivable A/c ₹25,000.
No cash entry follows in Seema's books, because Vijay collects the bill from Anil on maturity.

Answer: Two entries only: Bills Receivable Dr to Anil, then Vijay Dr to Bills Receivable, each for ₹25,000. No bank entry and no discount.

Exam tips

Always check whether the question says discounting, endorsing or collecting before choosing the debit account.
Compute discount as a fraction of a year. A 12% rate for 2 months is 2% of the face value.
MCQs often ask for net proceeds. Subtract discount from face value, then also any bank charges if mentioned.
Remember that Bills Receivable is credited at the full face value on discounting and on endorsement. For bills sent for collection, treatment varies, so follow the question's wording.
Scan the options for a value that equals face value minus discount to confirm your cash figure quickly.

Practice questions from Bills of Exchange

Retaining, Discounting, Endorsing and Collecting Bills: frequently asked questions

What is the journal entry for discounting a bill of exchange?

Debit Bank A/c with the cash received and Discount A/c with the discount. Credit Bills Receivable A/c with the full face value of the bill. The discount is a loss to the drawer.

How do you calculate discount on a bill of exchange?

Multiply face value by the annual rate and by the unexpired period as a fraction of a year. The unexpired period runs from the discounting date to the legal due date, which includes 3 days of grace.

What is the difference between discounting and endorsement of a bill?

In discounting you sell the bill to a bank for cash less discount. In endorsement you pass the bill to a creditor to settle a debt, with no cash and no discount. Both entries credit Bills Receivable.

What is the journal entry for endorsement of a bill?

Debit the creditor's account and credit Bills Receivable A/c with the bill amount. If the bill is less than the debt, the creditor stays debited only for the bill amount, and the balance is paid separately.