Docstoc

Bills of Exchange

Document Sample
Bills of Exchange Powered By Docstoc
					Accounting For Bills of Exchange:
Learning Objectives:

   1.   Define and explain bills of exchange.
   2.   What are its advantages?
   3.   How does a bill differ from a promissory note?
   4.   How a bill of exchange functions?
   5.   What are the accounting treatments of drawing, accepting, discounting, and paying a
        bill?

Our present day business transactions are mostly conducted on credit basis. It means that
the buyer of goods pays the price of goods purchased within a fixed time after the date of
the transaction.

On the other hand the seller has to wait for his money. In many cases the seller cannot
afford to do so. He desires payment at the time of selling the goods; but the buyer is not in
a position to pay. Then how the matter can be settled so that both the buyer and seller are
satisfied? The bill of exchange is one of the means of doing this.

Definition and Explanation of bill of exchange:

A bill of exchange has been defined as an unconditional order in writing addressed by one
person to another; signed by the person giving it, requiring, the person to whom it is
addressed to pay on demand or at a fixed or determinable future time, a certain sum in
money to or to the order of a specified person or to bearer. Click here to read full article.

Advantages of a Bills of Exchange

How a Bill of Exchange Functions

In order to fully grasp the transactions relating to bill of exchange we thoroughly learn the
procedure. Click here to read full article.

Promissory Note

Difference between Bill of Exchange and Promissory Note

Difference Between Bill of Exchange and Cheque/Check

Recording Transactions of Bill of Exchange:

For the purpose of accounting, bills are classified under two heads, Bills receivable and Bills
payable Click here to read full article.

Drawing, Acceptance, and Payment of Bill of Exchange:
When a bill is written it is known as "drawing" a bill. The person who draws it is the creditor
and the person to whom it is addressed is the debtor. The creditor and the debtor are also
known as the drawer and the drawee respectively. Click here to read full article.

Discounting of Bill of Exchange:

If the holder of a bill is need of money before the due date of the bill he may sell it to the
bank. The bank (buyer) will give cash fir it in consideration of a small charge. This is called
discounting the bill. The amount deducted by bank of the bill from the face value of the bill
is called "discount". Click here to read full article.

Bills of Exchange for Collection:

When a person receives a bill, he may keep it till the date of maturity in order to receive the
full amount. But in order to ensure safety, he may send it to his bank with the instructions
that the bill should be retained till maturity and should be realized on that date. This does
not mean discounting of bill. Click here to read full article.

Endorsement of a Bill of Exchange:

When a bill of exchange is negotiated i.e., transferred from one person to another person so
as to constitute the transferee the holder of a bill, each person through whose hands it
passes, must write his name on the back of the bill. This is known as the "endorsement of a
bill of exchange". Click here to to read full article.

Dishonor of a Bill of Exchange:

A bill of exchange is said to be dishonoured when the drawee refuses to accept or make
payment on the bill. A bill may be dishonoured by non-acceptance or non-payment. Click
here to read full article.

Renewal of a Bill of Exchange:

When the acceptor of a bill finds himself unable to make payment of the bill on the due
date; he may request the drawer of the bill, before it is due, to cancel the original bill and
draw on him a new bill for an extended period. This is called renewing a bill of exchange.
Click here to read full article.

Retiring of a Bill of Exchange:

Retiring a bill means making payment before the date of maturity. When the acceptor of a
bill is prepared to make the payment of the bill before the due date, he may ask the holder
to accept the payment, provided he receives some rebate or discount for the unexpired
period. Click here to read full article.

Accommodation Bill of Exchange:

An accommodation bill of exchange is a bill of exchange which has been drawn for the
mutual financial accommodation of the parties involved. Generally it is drawn not for value
received. In order to oblige friends, many times bills are drawn, accepted and endorsed by
businessmen without any consideration. Click here to read full article.
Insolvency of the Acceptor in a Bill of Exchange:

Insolvency of a person means that he is unable to pay his liabilities. This will mean that bill
accepted by him will be dishonoured. Therefore, when it is known that a person has become
insolvent, entry for dishonour of his acceptance should be passed, Later something may be
received from his estate. Click here to read full article.



Journal Entries in the books of Drawer

1. Drawer receives a bill accepted by drawee

Bill receivable account Dr.

To Drawee account

2. Drawee pays the bill on due date

Cash account Dr.

To B/R account

or

2. Drawee dishonours the bill on due date

Drawee account Dr.

To B/R account

3. If noting charges are paid by drawer

Drawer account Dr.

To Cash account

Journal Entries in the books of Drawee or Debtor

1. Drawer receives a bill accepted by drawee

Drawer account Dr.

To Bill payable account

2. Drawee pays the bill on due date

B/P Dr.

To cash account
or

2. Drawee dishonours the bill on due date

B/P account Dr.

To Drawer account

3. If noting charges are paid by drawer

Noting Charges account Dr.

To Drawer account


BOE example

There are three transactions which have taken place:

     1. Mr. X sold goods to Mr. Y worth $10,000 on credit basis.
     2. Mr. X drew a bill of exchange on Mr. Y for 90 days for $10,000.
     3. On the due date the bill was presented to Mr. Y and he honored the bill (met his obligation on the
        due date)

Journal Entries:

Now we shall see how these transactions are recorded in journal of Mr. X and Mr. Y.

                                               Mr. X's Journal

Transaction No.1

Mr. X sold goods to Mr. Y for $10,000 on credit. The journal entry is:

 1st Jan.   Y A/c                     Dr.                         10,000
  2005         Sales A/c                                                         10,000
            (Goods sold on credit)



Transaction No. 2

Mr. Y drew a bill on Mr. X for 90 days. The journal entry is:

 1st Jan.   Bill receivable A/c         Dr.                       10,000
  2005          Y A/c                                                            10,000
            (Acceptance received from Mr. Y)



Transaction No. 3

On the due date acceptor honors the bill. The journal entry is:
  4 April.   Cash/Bank A/c            Dr.                            10,000
   2005         Bill receivable A/c                                           10,000
             (Received cash on presentation of bill)



                                                       Mr. Y's Journal

Transaction No.1

Bought goods from Mr. X for $ 10,000. The journal entry is:

 1st Jan.    Purchases A/c                     Dr.                   10,000
  2005          X A/c                                                         10,000
             (Goods purchased on credit)



Transaction No. 2

Acceptance given to Mr. X instead of paying him cash. The journal entry is:

 1st Jan.    X A/c             Dr.                                   10,000
  2005          Bill payable A/c                                              10,000
             (Acceptance given to Mr. X)



Transaction No. 3

Acceptance is met (paid of due date). The journal entry is:

       4 April.       Bill payable A/c           Dr.
        2005              Cash A/c
                      (Acceptance is paid in cash)
    In Oracle R 12 Bills of Exchange
   Account Receivables

    A bill of exchange (BOE) is an agreement between two parties in which one party promises to
    pay the other a specific amount for goods or services at a future date. The date on which payment
    is due is known as the maturity date. In Receivables, bills of exchange are similar to receipts:
    you can enter them either manually or automatically and apply, reverse, confirm, clear, and risk–
    eliminate them.



    1. Use the Automatic Receipts program to automatically create bills of exchange and apply them
    to specific transactions. Use the Receipts window to manually enter bills of exchange and then
    apply them to one or more open debit items in the Applications window.

    2. You determine the required processing steps and numbering information for your bills of
    exchange by defining a bill of exchange receipt class. As with automatic receipts, bills of
    exchange generated by the Automatic Receipts program require confirmation only if you check
    the Require Confirmation check box when you define the receipt class in the Receipt Classes
    window.

    3. The remittance method determines the accounting entries Receivables generates for your bills
    of exchange, regardless of the creation method.

    To help you track and manage bills of exchange, Receivables enables you to:

          clearly distinguish receipts from bills of exchange in Receivables windows
          view the total amount of risk created by bills of exchange and regular receipts
          view all bills of exchange or receipts at risk using variable selection criteria, such as
           customer name, maturity date, and remittance bank information
          view the total amount of receipts and bills of exchange at risk for a specific customer or
           for all customers

				
DOCUMENT INFO
Shared By:
Tags:
Stats:
views:34
posted:12/4/2012
language:
pages:6