Financial Accounting · Bills of Exchange

Discounting, Endorsement and Collection of Bills of Exchange

Updated 10 October 2026 · Fact-checked

Discounting means the holder of a bill sells it to a bank before maturity and receives the amount less discount. Endorsement means the holder passes the bill to a creditor in settlement of a debt. Collection means the bank collects the bill on the due date. Record the cash, discount or creditor settled at each stage.

Understand Discounting, Endorsement and Collection of Bills

A bill of exchange is a written order to pay a fixed sum on a fixed date. A drawer who holds an accepted bill (a bill receivable) has three choices: keep it until the due date, use it before the due date, or hand it to a bank for collection.

Discounting is when you sell the bill to your bank before it falls due. The bank pays you the face value less a discount, which is interest for the unexpired period. You get cash today, and the bank collects from the acceptor on the due date. The discount is a financial expense (a loss) for you.

Endorsement is when you sign the back of the bill and hand it over to a third party, usually a creditor, to settle what you owe. No cash moves. Your bills receivable falls and your creditor's balance falls by the same amount. The creditor can then keep the bill, discount it or endorse it onward.

Collection means you give the bill to the bank to collect on the due date. The bank may charge a collection fee. Until the money comes in, the bill is still your asset. If the bill is dishonoured after discounting or endorsement, the liability comes back to you. This is why such bills carry a contingent liability until maturity.

Key rules to remember

Bank discount: Discount = Face value of bill × Rate of discount ÷ 100 × Unexpired period (in years or months ÷ 12); Always charged on the face value of the bill, not on the amount you receive. Use days ÷ 365 if the question gives days.
Net proceeds from discounting: Cash received = Face value − Discount (− any bank charges); Debit Bank with this amount.
Discounting entry: Bank A/c Dr (net proceeds); Discount on Bills A/c Dr (discount); To Bills Receivable A/c (face value); Discount is an expense of the discounting period, even if the bill matures later.
Endorsement entry: Creditor's A/c Dr; To Bills Receivable A/c (face value); If the creditor is paid less or more than the bill, adjust the balance in cash or in the creditor's account.
Collection entry: Without a fee: Bank A/c Dr; To Bills Receivable A/c. With a fee deducted: Bank A/c Dr (face value − fee); Bank Charges A/c Dr (fee); To Bills Receivable A/c (face value).; A bill held with the bank for collection is still a bill receivable until the bank credits you.
Unexpired period: Unexpired period = Date of maturity − Date of discounting; Under the Negotiable Instruments Act, 1881 (section 22), three days of grace are added to the due date of bills payable after a period (not on demand), unless the question states otherwise.

How to solve Discounting, Endorsement and Collection of Bills questions

Use this method for any question on discounting, endorsement or collection. Decide which of the three actions was taken and whose books you are writing in.

1Fix the books: find out whether you are in the books of the drawer (holder) or the drawee (acceptor), and whether the bill is receivable or payable.
2Note the face value, date of drawing, period, grace days and the date of the transaction.
3Find the due date by adding the period and 3 days of grace, then the unexpired period from the date of discounting.
4Calculate the discount on the face value for the unexpired period. Deduct it, and any bank charges, to get net proceeds.
5Write the entry for the action: discounting, endorsement or collection. Always credit Bills Receivable at face value.
6If the bill is dishonoured later, reverse the entry: debit the acceptor (or the endorsee's account) with the bill amount and charges, and credit Bank or Bills Receivable as the case requires.
7Check that the total debits equal the total credits and that discount has gone to the Profit and Loss Account.

Quickest way: Three-line entry check

When to use it: Use it for MCQs and for the first reading of a long problem.

Ask: did cash come in, did a creditor get settled, or did the bank only collect?
Cash in with a discount means Bank Dr, Discount Dr, Bills Receivable Cr. Creditor settled means Creditor Dr, Bills Receivable Cr. Collection only means Bank Dr, Bills Receivable Cr.
Compute the discount as face value × rate × time, and verify that Bank plus Discount equals face value.

Common mistakes in Discounting, Endorsement and Collection of Bills

Calculating discount on the amount received instead of the face value.
Students think the bank discounts only the cash it pays.
Fix: Banks charge discount on the face value for the unexpired period. Work out the discount first, then subtract it.
Using the full bill period instead of the unexpired period.
The date of discounting is missed in the question.
Fix: Count from the discounting date to the due date. The due date includes 3 days of grace unless told otherwise.
Debiting Bank with the full face value when a bill is discounted.
Students forget that the bank keeps the discount.
Fix: Debit Bank with net proceeds and debit Discount on Bills for the difference. Both together equal the face value.
Passing a cash entry when a bill is endorsed.
Students link all settlements with Bank or Cash.
Fix: No cash is involved. Debit the creditor and credit Bills Receivable.
Crediting Bills Receivable with the net proceeds after discounting.
Students confuse what was received with what the bill is worth.
Fix: Bills Receivable is always credited with the face value. The bill's value does not change because of the discount.
Ignoring the dishonour of a discounted or endorsed bill.
Students treat the transfer as final.
Fix: If the acceptor fails to pay, the holder who discounted or endorsed becomes liable. Debit the acceptor (or the endorsee, in the endorser's books) with the bill amount and charges, and credit Bank.

Worked examples

Example 1

Ravi Traders holds a 3-month bill of ₹60,000 drawn on Mehta & Sons on 1 January 2026 and accepted the same day. On 4 February 2026 Ravi discounted it with the bank at 12% per annum. Pass the journal entries in the books of Ravi Traders (take 3 days of grace and a 365-day year).

Show the solution

Due date: 3 months from 1 January 2026 is 1 April 2026. Add 3 days of grace to get 4 April 2026.
Unexpired period: 4 Feb to 4 Apr 2026 = 24 + 31 + 4 = 59 days (February 2026 has 28 days). That is 24 days from 4 Feb to 28 Feb, 31 days from 28 Feb to 31 March and 4 days from 31 March to 4 April.
Discount: 60,000 × 12 ÷ 100 = 7,200 a year. 7,200 × 59 ÷ 365 = 4,24,800 ÷ 365 = 1,163.84, which rounds to ₹1,164.
Net proceeds: 60,000 − 1,164 = ₹58,836.
Entry: Bank A/c Dr ₹58,836; Discount on Bills A/c Dr ₹1,164; To Bills Receivable A/c ₹60,000. Check: 58,836 + 1,164 = 60,000.

Answer: Bank A/c Dr ₹58,836; Discount on Bills A/c Dr ₹1,164; To Bills Receivable A/c ₹60,000.

Example 2

Kiran & Co. received a ₹40,000 bill from Sharma Bros., due on 15 May 2026 (grace days already included). On 10 March 2026, it endorsed the bill to its supplier Joshi Ltd., to whom it owed ₹50,000. On 15 March 2026, Joshi Ltd. discounted the bill with its bank at 12% per annum for the unexpired period of 2 months (15 March to 15 May). The bill was met on the due date. Pass entries in the books of Kiran & Co. and Joshi Ltd.

Show the solution

Kiran & Co. on 10 March: the bill is endorsed to its creditor, so no cash moves. Joshi Ltd. A/c Dr ₹40,000; To Bills Receivable A/c ₹40,000.
In Kiran's books, Joshi Ltd. A/c had a credit balance of ₹50,000. The ₹40,000 debit reduces it, so Joshi Ltd.'s account now shows a credit balance of ₹10,000, which Kiran & Co. still has to pay.
Joshi Ltd. on 10 March: Joshi is the supplier, so Kiran & Co. is its debtor. Bills Receivable A/c Dr ₹40,000; To Kiran & Co. A/c ₹40,000. In Joshi's books, Kiran & Co.'s account had a debit balance of ₹50,000. After the credit it shows a debit balance of ₹10,000.
Discount for Joshi Ltd.: 40,000 × 12 ÷ 100 × 2 ÷ 12 = ₹800. Net proceeds: 40,000 − 800 = ₹39,200.
Joshi Ltd. on 15 March (discounting): Bank A/c Dr ₹39,200; Discount on Bills A/c Dr ₹800; To Bills Receivable A/c ₹40,000. Check: 39,200 + 800 = 40,000.
On the due date the bill is paid by Sharma Bros. to the bank. No entry is needed in either firm's books, because Bills Receivable has already been cleared. The contingent liability of Joshi Ltd. as the discounter ends.

Answer: Kiran & Co.: Joshi Ltd. A/c Dr ₹40,000; To Bills Receivable A/c ₹40,000. Joshi Ltd.'s account in Kiran's books now shows a credit balance of ₹10,000. Joshi Ltd.: Bills Receivable A/c Dr ₹40,000; To Kiran & Co. A/c ₹40,000, then Bank A/c Dr ₹39,200; Discount on Bills A/c Dr ₹800; To Bills Receivable A/c ₹40,000. Kiran & Co.'s account in Joshi's books shows a debit balance of ₹10,000. No entry on the due date.

Exam tips

Read the date of discounting carefully. The unexpired period drives the whole calculation, so show how you counted the days.
Write the working for discount as a separate line. The calculation earns step marks even if the final entry slips.
In MCQs, check whether the question asks for net proceeds, the discount or the face value. Options often include the other two.
Remember the dishonour twist. A question may continue with the bill being dishonoured, so be ready to reverse the entry with noting or bank charges.
State the books you are writing in at the top of your answer. An entry in the wrong set of books earns no marks.

Practice questions from Bills of Exchange

Discounting, Endorsement and Collection of Bills: frequently asked questions

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

In discounting you sell the bill to a bank and receive cash less a discount. In endorsement you hand the bill to a creditor to settle your debt, and no cash moves. Both remove the bill from your Bills Receivable, and both leave you liable if the acceptor fails to pay.

How do you calculate bank discount on a bill of exchange?

Multiply the face value by the rate of discount and by the unexpired period in years. For example, ₹60,000 at 12% for 2 months is 60,000 × 12 ÷ 100 × 2 ÷ 12 = ₹1,200. Net proceeds are face value less discount.

Is discount on bills an income or an expense?

For the holder who discounts the bill, it is an expense and a loss. It is a financial charge debited to the Profit and Loss Account. It is not shared with the acceptor, who pays only the face value.

What is the entry when a bill is sent to the bank for collection?

Many questions do not require an entry at the time of sending. When the bank collects, debit Bank and credit Bills Receivable. If the bank deducts a collection fee, debit Bank with the net amount received (face value less fee), debit Bank Charges with the fee, and credit Bills Receivable with the face value.