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

Ramesh Traders accepted a bill of Rs 20,000 drawn by Suresh & Co. The bill was dishonoured on the due date, and the drawer paid noting charges of Rs 150 to the notary. Who bears the noting charges in the first instance, and how does Suresh & Co. record them?

The drawer pays the noting charges but they are caused by the acceptor's default, so the drawer debits the acceptor's account with Rs 150. This makes the amount recoverable from the acceptor, rather than treating it as the drawer's own expense.

  1. ASuresh & Co. pays them and debits Ramesh Traders' account with Rs 150Correct
  2. BSuresh & Co. pays them and debits its own Profit and Loss account
  3. CRamesh Traders credits Suresh & Co. as a gain
  4. DNoting charges are ignored in books until recovered in cash

Explanation

Noting charges are incurred because of the acceptor's default, so they are ultimately recoverable from the acceptor. The drawer pays them and debits the acceptor's account. Charging them to Profit and Loss immediately would treat a recoverable amount as the drawer's own expense.

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