CMA Intermediate · Financial Accounting

Bills of Exchange for CMA Inter Financial Accounting

A **bill of exchange** is a written, signed order by the drawer telling the drawee to pay a fixed sum on demand or on a fixed date. To solve questions, identify who is drawer, drawee and payee, pass entries for each party at every event, then post to the ledger accounts.

What this chapter covers

This chapter covers how credit transactions are settled through a written instrument. You learn what a bill is, who the parties are, and how each party records the bill when it is drawn, accepted, discounted, endorsed, collected, dishonoured, renewed or the acceptor becomes insolvent.

The core skill is writing the entries from both sides. The drawer books Bills Receivable and the drawee books Bills Payable. Every event changes the entries, so you must track what happens to the bill at each stage.

The chapter links to other parts of the paper. It builds on journal, ledger and subsidiary books, feeds into debtors and creditors, and is tested in rectification, bank reconciliation and final accounts through bills outstanding at the year end. Clear bill entries make those later chapters easier.

Bills of Exchange is a high-scoring chapter because the rules are fixed and the numerical questions follow patterns. If you know the entries for each event, you can score full marks on journal and ledger questions. It also appears in the MCQs, where a single wrong debit or credit costs 2 marks. Written questions often combine several events on one bill, such as discounting followed by dishonour and renewal, so step marks depend on a clean entry for each stage. The effort is moderate and the return is reliable.

Bills of Exchange: topics in the order to study them

1Bills of Exchange: Meaning and FeaturesStart here to learn the parties, the terms and the difference from a promissory note, since every later entry depends on them.
2Accounting Treatment of Bills: Drawer and Drawee EntriesThese are the base entries for drawing and acceptance, and every later event builds on them.
3Discounting, Endorsement and Collection of BillsStudy this next because it shows what happens to a bill before maturity and how the drawer's records change.
4Dishonour of Bills, Noting Charges and RenewalDishonour reverses earlier entries, so you need the normal entries first; renewal then adds interest and new bills.
5Insolvency of Acceptor and Accommodation BillsThese are special cases with part payment, loss and shared proceeds, so learn them once the standard flow is clear.
6Bills Receivable and Payable Books and Ledger AccountsFinish with the books and ledger accounts, which tie all events together and give you practice on full problems.

How to prepare Bills of Exchange

Treat this chapter as a sequence of events on one bill. Practise the entries until you can write them without hesitation, then move to mixed problems.

Draw a timeline for one bill from drawing to maturity and write which entry each party passes at each point.
Learn the drawer entries and the drawee entries side by side so you do not mix Bills Receivable with Bills Payable.
Practise discounting questions by first computing the discount on the bill amount for the unexpired period, then the net cash received.
Solve dishonour and renewal problems in order: reverse the original entry, add noting charges and interest, then record the new bill.
For insolvency, work out the amount received from the estate as a percentage, then book the balance as a loss or bad debt.
Prepare the Bills Receivable and Bills Payable accounts in ledger form from a list of events, checking that each balance matches the bills in hand.
Attempt MCQs on which account to debit or credit, and time yourself on one full written problem each week.

Common mistakes in Bills of Exchange

Debiting Bills Payable in the drawer's books or Bills Receivable in the drawee's books.
Fix: Underline the party in the question first. The drawer holds a Bills Receivable; the drawee owes a Bills Payable.
Computing the discount for the full term of the bill.
Fix: Count only the days from the discounting date to the due date, and apply the rate to the bill amount.
Crediting Bills Receivable on dishonour of a discounted bill.
Fix: For a discounted bill, the dishonour entry is Drawee A/c Dr (bill amount plus noting/bank charges) to Bank A/c Cr, since the bill left Bills Receivable at discounting.
Leaving out noting charges or charging them to the wrong account.
Fix: Read every line of the question and add noting charges to the amount debited to the party who must bear them.
Writing off the whole amount on insolvency instead of only the unpaid part.
Fix: First record the cash received, then transfer only the remaining balance to bad debts or loss.
Ledger balances that do not match the bills in hand at the end.
Fix: List every bill with its status and tick it off while posting, then check the closing balance against bills still held.

Last-day revision: Bills of Exchange

The drawer writes and signs the bill; the drawee accepts it and pays on maturity.
On acceptance, the drawer debits Bills Receivable and credits the drawee's personal account.
On acceptance, the drawee debits the drawer's personal account and credits Bills Payable.
Discounting with a bank: debit Bank A/c for the net amount received and Discount A/c for the discount, and credit Bills Receivable A/c at the full face value of the bill. Never credit only the net amount.
Endorsement to a creditor: debit the creditor, credit Bills Receivable.
On maturity, the drawer debits Bank and credits Bills Receivable; the drawee debits Bills Payable and credits Bank.
On dishonour, the drawer debits the drawee and credits Bills Receivable if the bill is held, Bank if it was discounted, or the endorsee's account if it was endorsed. The amount debited includes any noting charges.
Noting charges are normally recovered from the drawee, so they are debited to the drawee's account.
In renewal, the old bill is cancelled and a new bill is drawn for the amount due plus any interest.
When the acceptor is insolvent, record the dividend received from the estate, then write off the unpaid balance as bad debt. If the bill was discounted or endorsed, the drawer pays the bank or endorsee and then receives the dividend.
An accommodation bill is not for a trade sale. The drawee accepts it to accommodate the drawer (or both parties) without receiving any consideration. The proceeds are shared as agreed, and each party who receives proceeds must remit the amount at maturity.
Check the date: the discount is calculated only for the period from the discounting date to maturity.

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

Is Bills of Exchange important for the CMA Inter Financial Accounting exam?

Yes. It is a standard chapter with fixed entry patterns, so it suits both MCQs and journal or ledger problems. Learn it well and the marks are dependable.

What is the difference between discounting and endorsing a bill?

In discounting, you sell the bill to a bank before maturity and receive cash less a discount. In endorsement, you transfer the bill to a creditor to settle a debt, so no cash or discount is involved.

How do I handle renewal of a bill in a numerical question?

First cancel the old bill (drawer: Acceptor Dr, Bills Receivable Cr). Debit the acceptor with interest and noting charges. Receive any part payment in cash and draw the new bill for the balance.

Should I show working notes for discount calculations?

Yes. Show the discount calculation as a working note, since examiners give step marks for method even if a later figure is wrong.