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

Sharma Ltd discounted a bill of Rs 40,000 with its bank at a discount of Rs 1,000. What is the journal entry in Sharma Ltd's books on discounting?

Bank A/c is debited Rs 39,000 and Discount A/c is debited Rs 1,000, with Bills Receivable A/c credited Rs 40,000. The bank pays the face value less discount, the discount is an expense, and the bill leaves the books at full face value.

  1. ABank A/c Dr 39,000; Discount A/c Dr 1,000; To Bills Receivable A/c 40,000Correct
  2. BBank A/c Dr 40,000; To Bills Receivable A/c 40,000
  3. CBank A/c Dr 41,000; To Bills Receivable A/c 40,000; To Discount A/c 1,000
  4. DBank A/c Dr 39,000; To Bills Receivable A/c 39,000

Explanation

The bank credits only the net amount, 40,000 - 1,000 = 39,000. The discount of Rs 1,000 is a financial expense debited to Discount A/c, and Bills Receivable is credited at its full face value of 40,000. Debits 39,000 + 1,000 equal the credit of 40,000.

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