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CMA Foundation · Fundamentals of Financial and Cost Accounting · Bills of Exchange

Mehta Traders drew a bill of Rs 40,000 on Rao & Co., which Rao accepted. Mehta Traders immediately endorsed the bill to its supplier Shah Bros. in full settlement of the Rs 40,000 owed to him. What is the entry in the books of Mehta Traders?

Mehta Traders debits Shah Bros. A/c and credits Bills Receivable A/c with Rs 40,000. Endorsing the bill passes the receivable to the supplier, which wipes out the amount Mehta owed to Shah Bros. No bills payable arises because Mehta did not accept any bill.

  1. ABills Receivable A/c Dr 40,000 To Shah Bros. A/c 40,000
  2. BShah Bros. A/c Dr 40,000 To Bills Receivable A/c 40,000Correct
  3. CShah Bros. A/c Dr 40,000 To Rao & Co. A/c 40,000
  4. DBills Payable A/c Dr 40,000 To Bills Receivable A/c 40,000

Explanation

Endorsement transfers the asset (bill receivable) to the creditor, and Mehta's liability to Shah Bros. is extinguished. So Shah Bros. is debited and Bills Receivable credited by Rs 40,000. Crediting Rao would be wrong because Rao's account was already settled by the bill on acceptance.

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