Financial Accounting · Bills of Exchange

Dishonour of Bills, Noting Charges and Renewal

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 with the bill amount plus noting charges and credits Bills Receivable (or Bank if discounted, or the endorsee if endorsed). A renewal cancels the old bill and replaces it with a new one, adding interest and deducting any part payment.

Understand Dishonour of Bills, Noting Charges and Renewal

A bill of exchange is a promise to pay on a fixed date. Dishonour means the drawee does not pay on that date. The bill stops being a bill and becomes an ordinary debt again. The drawee's personal account is revived.

When a bill is dishonoured, the holder may get it noted by a notary public. The notary records the refusal to pay and charges a fee. This fee is the noting charges. It is recoverable from the drawee, so it is added to the drawee's debt. If the drawer pays it, the drawer debits the drawee. If the drawee is expected to bear it, it is not an expense of the drawer as long as it is recovered from the drawee.

Who is out of pocket depends on where the bill is. If the drawer holds it, nothing was received, so Bills Receivable is credited. If the drawer discounted it, the bank gave cash earlier. On dishonour the bank takes the money back from the drawer, so Bank is credited. If the drawer endorsed it to a creditor, that creditor's account is credited, because the debt to the creditor revives.

Often the drawee cannot pay and asks for more time. Then the old bill is cancelled and a new bill is drawn. The drawee usually pays part of the old amount in cash, pays interest for the extra period, and accepts a new bill for the balance plus interest. Treat this as two events: first the dishonour of the old bill, then the acceptance of the new one.

The drawee's books mirror this. The drawee debits Bills Payable when the bill is cancelled, credits the drawer, and then records the new bill. Interest is an expense for the drawee and an income for the drawer.

Key rules to remember

Dishonour entry (bill held by drawer): Drawee A/c Dr. (bill amount + noting charges); to Bills Receivable A/c; to Cash/Bank A/c (noting charges); Use when the drawer kept the bill till the due date.
Dishonour entry (bill discounted): Drawee A/c Dr. (bill amount + noting charges); to Bank A/c (bill amount); to Cash A/c (noting charges paid by drawer); If the bank itself charges the noting charges, credit Bank with the bill amount plus those charges and there is no cash credit. Discount already charged stays as an expense. Do not reverse it. Debit the drawee with noting charges only if they are to be recovered from the drawee.
Dishonour entry (bill endorsed): Drawee A/c Dr.; to Endorsee's A/c; The endorsee's account is credited, and the debt to that party revives.
Noting charges borne by drawer: Noting Charges A/c Dr.; to Cash/Bank A/c; Use only if the question says the drawer bears them. Otherwise charge the drawee as in the dishonour entry.
Renewal: new bill amount: New bill = Old bill amount + noting charges (if included) − cash paid on account + interest on the stated base for the new bill period; State clearly which items are included and the base on which interest is charged.
Renewal entries: (1) Drawee Dr.; to Bills Receivable (cancel old bill). (2) Cash Dr.; to Drawee (part payment). (3) Drawee Dr.; to Interest A/c. (4) Bills Receivable Dr.; to Drawee (new bill).; Drawee's books show the mirror entries with Bills Payable and Interest paid.
Simple interest: Interest = Principal × Rate ÷ 100 × Time (in years); For months, use Time = months ÷ 12.

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

Use this order for any dishonour or renewal question, from the drawer's side or the drawee's side.

1Find who holds the bill on the due date: drawer, bank (discounted), or endorsee. This decides which account you credit.
2Note the bill amount and any noting charges. Check who paid the noting charges.
3Pass the dishonour entry: debit the drawee with the bill amount plus noting charges, and credit Bills Receivable, Bank or the endorsee.
4If the bill is renewed, check whether cash is paid, how much, and the interest rate and period.
5Calculate interest on the amount that remains outstanding for the new period. Then work out the new bill amount.
6Pass the renewal entries one by one: cancel the old bill, record part payment, record interest, record the new bill.
7Check the drawee's account. Before you record the new bill, its balance should equal the new bill amount. After you record the new bill, the account closes to nil.
8Write the entries in the books asked for (drawer, drawee or both) with a short narration.

Quickest way: Drawee account as the control

When to use it: Use this in renewal problems with part payment and interest, when time is short.

Open a rough drawee account. Debit it with the old bill and noting charges.
Credit the cash received on account.
Work out the balance outstanding. Calculate interest on the base given in the question for the new bill period, and debit it.
The new bill equals the balance outstanding plus this interest.
Write the entries from the account. Dr. side: old bill plus noting charges, interest. Cr. side: cash, new bill.

Common mistakes in Dishonour of Bills, Noting Charges and Renewal

Crediting Bills Receivable when the bill was already discounted.
Students treat every dishonour alike.
Fix: If the bill was discounted, the bank has the bill. Credit Bank. If it was endorsed, credit the endorsee.
Reversing the discount on dishonour of a discounted bill.
They think dishonour cancels the earlier transaction fully.
Fix: Discount was a cost of getting cash early. It stays as an expense. Only the bill amount and noting charges are recovered from the drawee.
Treating noting charges as the drawer's expense when the drawee is to bear them.
Students see cash going out and debit an expense.
Fix: Noting charges are recoverable from the drawee. Debit the drawee unless the question says the drawer bears them.
Calculating interest on the old bill amount instead of the balance after part payment.
They do not remove the cash payment before applying the rate.
Fix: Interest runs on the amount outstanding for the new period. Read the question to see the base. If it is unclear, state your assumption.
Forgetting to cancel the old bill before recording the new one.
They jump straight to the new bill.
Fix: Always pass the dishonour or cancellation entry first, so the drawee's account is revived, then pass the new bill entry.
Using months as years in the interest formula.
Rushed arithmetic.
Fix: Write Time as months ÷ 12 every time, such as 3 ÷ 12 for three months.

Worked examples

Example 1

On 1 January 2027, Rohan Traders drew a 3-month bill for ₹60,000 on Mehta & Co., which accepted it. Rohan Traders kept it until the due date. The bill was dishonoured on the due date. Noting charges were ₹500, paid by Rohan Traders. Pass the entries in the books of Rohan Traders.

Show the solution

The drawer holds the bill, so credit Bills Receivable.
Dishonour entry: Mehta & Co. Dr. ₹60,500; to Bills Receivable ₹60,000; to Cash ₹500.
Noting charges are recoverable from the drawee, so they are added to the drawee's account.

Answer: Mehta & Co. A/c Dr. ₹60,500; to Bills Receivable A/c ₹60,000; to Cash A/c ₹500. Mehta & Co. now owes ₹60,500.

Example 2

Anil drew a bill for ₹40,000 on Sunil for 2 months. Sunil could not pay on the due date and the bill was dishonoured. Noting charges were ₹200, paid by Anil and recoverable from Sunil. Sunil paid ₹10,000 in cash and accepted a new 3-month bill for the balance plus interest at 12% per annum for 3 months on the balance of ₹30,200 (bill + noting charges − cash). Show the entries in Anil's books and the amount of the new bill.

Show the solution

Amount due after dishonour: ₹40,000 + ₹200 = ₹40,200.
Cash paid: ₹10,000. Balance = ₹40,200 − ₹10,000 = ₹30,200.
Interest = ₹30,200 × 12 ÷ 100 × 3 ÷ 12 = ₹906.
New bill = ₹30,200 + ₹906 = ₹31,106.
Entry 1, dishonour: Sunil Dr. ₹40,200; to Bills Receivable ₹40,000; to Cash ₹200.
Entry 2, part payment: Cash Dr. ₹10,000; to Sunil ₹10,000.
Entry 3, interest: Sunil Dr. ₹906; to Interest Received ₹906.
Entry 4, new bill: Bills Receivable Dr. ₹31,106; to Sunil ₹31,106.
Check: before the new bill is recorded, Sunil's account has debits of ₹40,200 + ₹906 = ₹41,106 and credits of ₹10,000, so the balance is ₹31,106, which equals the new bill. After the new bill is credited, credits total ₹10,000 + ₹31,106 = ₹41,106 and the account closes to nil.

Answer: The new bill is ₹31,106. Interest of ₹906 is income for Anil. Sunil's account shows a balance of ₹31,106 before the new bill is recorded and closes to nil after the four entries.

Exam tips

Read where the bill is: with the drawer, discounted or endorsed. Most marks are lost by crediting the wrong account.
Write each entry separately with a narration. Examiners give step marks for each correct entry.
Show interest working as a separate line, with rate, base and time. A wrong base can still earn marks for the method.
In MCQs, check the debit side first. The drawee is almost always debited on dishonour.
If the question asks for both books, write the drawer and drawee entries side by side to avoid missing the mirror entries.

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 is the journal entry when a bill is dishonoured?

Debit the drawee's account with the bill amount plus noting charges. Credit Bills Receivable if you hold the bill, Bank if it was discounted, or the endorsee if it was endorsed. Credit Cash for noting charges you paid.

Who bears the noting charges?

The drawee normally bears them, since the dishonour is the drawee's default. So the drawer debits the drawee for them. If the question says the drawer bears them, debit Noting Charges as an expense.

What happens to discount when a discounted bill is dishonoured?

The discount already charged remains an expense in the drawer's books. You do not reverse it. The bank recovers the full bill amount from the drawer, and the drawer recovers it from the drawee.

How do I calculate the new bill amount in a renewal?

Start with the old bill amount and add noting charges if given. Subtract cash paid, then add interest for the new period on the base stated in the question. The result is the new bill. Check it by making sure the drawee's account closes to nil.