Lesson

Bills of Exchange

Learn how a written promise to pay later is recorded in accounting.

Understand Bills Receivable, Bills Payable, acceptance, maturity, honour, dishonour, discounting, endorsement, and renewal at a beginner level.

Beginner12-15 min

Concept explanation

Understand the idea first

What is a Bill of Exchange?

A Bill of Exchange is a written document in which one person orders another person to pay a certain amount on a future date.

Sometimes goods are sold on credit.

The seller wants written proof that the buyer will pay later.

So the seller prepares a Bill of Exchange and the buyer accepts it.

Example: Riya sells goods to Raju for Rs.10,000 on credit.

Instead of waiting without proof, Riya draws a bill on Raju.

Raju accepts the bill and promises to pay Rs.10,000 after 3 months.

Simple line: Bill of Exchange is a written promise for future payment.

Why Bills of Exchange are used

Bills of Exchange give written proof of credit sale.

They fix the amount payable.

They fix the date of payment.

They make the buyer's promise stronger.

The seller can use the bill to get money earlier from bank.

The bill can be endorsed to another person.

It helps businesses manage credit transactions.

Memory line: A bill makes credit payment more clear and secure.

Simple story

Riya runs a stationery shop.

She sells goods to Raju for Rs.20,000 on credit.

Riya wants to be sure that Raju will pay after 2 months.

So Riya prepares a Bill of Exchange.

The bill says Raju will pay Rs.20,000 after 2 months.

Raju signs and accepts the bill.

For Riya, this bill is Bills Receivable because she will receive money.

For Raju, this bill is Bills Payable because he has to pay money.

This makes the credit transaction clearer.

Important parties

Drawer is the person who prepares the bill.

Example: Riya sells goods and draws the bill.

Simple line: Drawer is the person who will receive money.

Drawee is the person who accepts the bill and has to pay.

Example: Raju accepts the bill.

Simple line: Drawee is the person who has to pay.

Payee is the person who receives the money.

Usually the drawer is the payee, but sometimes the bill may be payable to another person.

Simple line: Payee is the person who gets the payment.

Bills Receivable and Bills Payable

For the seller, the bill is Bills Receivable because the seller will receive money.

For the buyer, the bill is Bills Payable because the buyer has to pay money.

Example: Riya sells goods to Raju Rs.10,000 and Raju accepts a bill.

In Riya's books, it is Bills Receivable A/c.

In Raju's books, it is Bills Payable A/c.

Simple memory line: Receivable means money will come. Payable means money has to go.

Important terms

Term of bill means the time after which the bill will be paid.

Example: bill payable after 3 months.

Due date means the date on which payment should be made.

Maturity means the bill becomes due for payment.

Acceptance means the drawee signs the bill and agrees to pay.

Dishonour means the drawee does not pay on maturity.

Noting charges are charges paid to prove that the bill was dishonoured.

Main situations in Bills of Exchange

Bill accepted: buyer accepts the bill.

Bill retained till maturity: seller keeps the bill until due date.

Bill discounted with bank: seller gives bill to bank and receives money before due date after bank deducts discount.

Bill endorsed: seller transfers bill to a creditor.

Bill sent for collection: seller sends bill to bank to collect money on due date.

Bill honoured: drawee pays on due date.

Bill dishonoured: drawee fails to pay on due date.

Bill renewed: old bill is cancelled and new bill is accepted.

Simple comparison table

Bills of Exchange situations

Situation	Meaning	Main Account
Bill received	Seller will receive money	Bills Receivable
Bill accepted	Buyer promises to pay	Bills Payable
Bill honoured	Payment made on due date	Bank/Cash
Bill discounted	Bill used to get money early	Bank + Discounting Charges
Bill endorsed	Bill transferred to creditor	Creditor A/c
Bill dishonoured	Payment not made	Drawee/Debtor A/c
Bill renewed	Old bill cancelled, new bill accepted	Bills Receivable/Bills Payable

Memory line: Bills Receivable is used by the person who will receive money. Bills Payable is used by the person who has to pay.

Visual flow

Mental model

Credit sale

Bill drawn by seller

Bill accepted by buyer

Bills Receivable for seller

Bills Payable for buyer

Honoured or dishonoured on due date

Solved examples

See the rule in action

Example 1

Riya sells goods to Raju Rs.10,000 on credit.

In Riya's books:
Raju A/c Dr. Rs.10,000
To Sales A/c Rs.10,000

Raju becomes debtor.

Sales income is credited.

Example 2

Raju accepts a bill drawn by Riya for Rs.10,000.

In Riya's books:
Bills Receivable A/c Dr. Rs.10,000
To Raju A/c Rs.10,000
In Raju's books:
Riya A/c Dr. Rs.10,000
To Bills Payable A/c Rs.10,000

Raju's debt is converted into Bills Receivable for Riya.

Raju now has a Bills Payable liability.

Example 3

Bill is honoured on maturity and money is received by Riya.

In Riya's books:
Bank A/c Dr. Rs.10,000
To Bills Receivable A/c Rs.10,000
In Raju's books:
Bills Payable A/c Dr. Rs.10,000
To Bank A/c Rs.10,000

Riya receives money.

Raju pays the bill.

Example 4

Riya discounts a Rs.10,000 bill with bank. Bank discount Rs.500, cash received Rs.9,500.

Bank A/c Dr. Rs.9,500
Discounting Charges A/c Dr. Rs.500
To Bills Receivable A/c Rs.10,000

Riya receives money early.

The bank charges discount.

Example 5

Riya endorses the bill to Amit, a creditor.

Amit A/c Dr. Rs.10,000
To Bills Receivable A/c Rs.10,000

Riya uses the bill to settle Amit's amount.

Bills Receivable is transferred away.

Example 6

Bill is dishonoured.

Raju A/c Dr. Rs.10,000
To Bills Receivable A/c Rs.10,000

Raju did not pay.

His personal account becomes receivable again.

Example 7

Noting charges Rs.200 paid by Riya on dishonour.

Raju A/c Dr. Rs.200
To Bank A/c Rs.200

Raju is responsible for the bill dishonour cost.

Riya paid the charges through bank.

Example 8

Old bill Rs.10,000 is cancelled, Raju pays interest Rs.500 in cash, and a new bill is accepted.

Cancel old bill:
Raju A/c Dr. Rs.10,000
To Bills Receivable A/c Rs.10,000
Interest received:
Cash A/c Dr. Rs.500
To Interest Income A/c Rs.500
New bill accepted:
Bills Receivable A/c Dr. Rs.10,000
To Raju A/c Rs.10,000

The old bill is cancelled first.

Interest is received separately.

A new Bills Receivable is created.

Avoid these

Common Mistakes

Confusing Bills Receivable and Bills Payable

Thinking bill is cash immediately

Forgetting acceptance entry

Forgetting to cancel Bills Receivable on dishonour

Treating discounting charges as income

Confusing endorsement with payment by cash

Forgetting noting charges

Thinking renewal means old bill remains active

Confusing drawer and drawee

Recording only seller's entry but not understanding buyer's side

Practice prompts

Try It Yourself

Riya draws a bill on Raju for Rs.10,000 and Raju accepts. Expected: Riya records Bills Receivable. Raju records Bills Payable.

Bill of Rs.10,000 is honoured. Expected: Seller receives Bank/Cash and Bills Receivable is credited.

Bill of Rs.10,000 is discounted with bank for Rs.9,600. Expected: Bank Dr Rs.9,600, Discounting Charges Dr Rs.400, To Bills Receivable Rs.10,000.

Bill is endorsed to Amit. Expected: Amit A/c Dr / To Bills Receivable A/c.

Bill is dishonoured. Expected: Drawee/Debtor A/c Dr / To Bills Receivable A/c.

Noting charges Rs.300 paid by drawer. Expected: Drawee/Debtor A/c Dr / To Bank/Cash A/c.

Old bill is cancelled and new bill accepted. Expected: Cancel old Bills Receivable and create new Bills Receivable.

Who is the drawer? Expected: Person who draws/prepares the bill.

Who is the drawee? Expected: Person who accepts and pays the bill.

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