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CA Foundation · Accounting · Bills of Exchange and Promissory Notes

Sharma drew a 4-month bill of ₹1,20,000 on Gupta, discounted it with his bank at 9% p.a. and received the proceeds. On the due date Gupta dishonours it, and the bank debits Sharma's account with the bill amount and ₹500 of noting charges. What is the debit to Gupta's account in Sharma's books, and by how much does Sharma's bank balance fall at dishonour?

Gupta's account is debited with ₹1,20,500 and the bank balance falls by ₹1,20,500. The bank recovers the full face value of ₹1,20,000 plus ₹500 noting charges, and the discount already charged earlier is not reversed.

  1. AGupta ₹1,20,000; bank falls by ₹1,20,000
  2. BGupta ₹1,20,500; bank falls by ₹1,20,500Correct
  3. CGupta ₹1,20,500; bank falls by ₹1,20,000
  4. DGupta ₹1,16,400; bank falls by ₹1,20,500

Explanation

Discount is a cost already booked at the time of discounting and is not reversed. At dishonour, the bank recovers the full face value plus noting charges: 1,20,000 + 500 = ₹1,20,500. Sharma debits Gupta with ₹1,20,500 and credits Bank with the same. Using the discounted value ignores that the bank recovers the full amount.

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