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

Ravi draws a bill for ₹50,000 on Sunil, who accepts it. Ravi discounts it with his bank for ₹48,500, and Sunil is declared insolvent before the due date. The bank has to be paid in full by Ravi. What is the effect of this dishonour on Ravi's records at the date of dishonour, ignoring Sunil's estate payment?

Ravi debits the acceptor Sunil's account with the full face value of ₹50,000 and credits Bank with ₹50,000, because the bank recovers the whole bill amount on dishonour. The earlier discount of ₹1,500 stays as an expense and is not reversed.

  1. ARavi debits Sunil's account with ₹50,000 and credits Bank with ₹50,000Correct
  2. BRavi debits Sunil's account with ₹48,500 and credits Bank with ₹48,500
  3. CRavi debits Bills Receivable with ₹50,000 and credits Sunil with ₹50,000
  4. DRavi debits Discount account with ₹1,500 and credits Sunil with ₹1,500

Explanation

On dishonour of a discounted bill the drawer must pay the bank the full face value of ₹50,000. The entry is Dr Sunil (acceptor) ₹50,000 and Cr Bank ₹50,000. The discount of ₹1,500 was already charged as an expense when the bill was discounted, so it is not reversed. The option using ₹48,500 ignores that the bank claims the full face value.

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