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

Sharma & Co. draws a bill for ₹60,000 on Verma Bros., who accept it. Sharma & Co. endorses it to Gupta Ltd. in full settlement of a ₹60,000 debt. What entry does Sharma & Co. pass on endorsement?

Sharma & Co. debits Gupta Ltd. ₹60,000 and credits Bills Receivable ₹60,000. The endorsement settles the amount owed to Gupta Ltd., reducing that liability, while the bill receivable asset is transferred out of its books.

  1. ADebit Gupta Ltd. ₹60,000; Credit Bills Receivable ₹60,000Correct
  2. BDebit Bills Receivable ₹60,000; Credit Gupta Ltd. ₹60,000
  3. CDebit Gupta Ltd. ₹60,000; Credit Verma Bros. ₹60,000
  4. DDebit Bills Payable ₹60,000; Credit Bills Receivable ₹60,000

Explanation

Sharma & Co. owes Gupta Ltd., so Gupta Ltd.'s account is debited as its liability is discharged. The bill receivable asset leaves the books, so Bills Receivable is credited. Reversing the entry would increase the asset instead.

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