NCERT Solutions Class 11 Accountancy Chapter 8 Bills of Exchange

Question 1. Name any two types of commonly used negotiable instruments.
Answer: Bills of exchange and cheques serve as two of the most frequently utilized negotiable instruments in commercial transactions.
In simple words: Bills of exchange and cheques are two common written documents used in business to make payments.

Exam Tip: State both instruments clearly, as they are standard legal documents covered under the Negotiable Instruments Act.

Question 2. Write two points of distinction between bills of exchange and promissory note.
Answer: The key differences between a bill of exchange and a promissory note are detailed below:

In simple words: A bill of exchange is an order to pay involving three people, while a promissory note is a promise to pay involving two people.
Exam Tip: Highlighting the difference between an 'order to pay' and a 'promise to pay' is crucial for securing full marks in distinction questions.

Question 3. State any four essential features of bill of exchange.
Answer: The primary characteristics of a bill of exchange include the following:

1. It must be prepared in writing as a directive to pay.
2. The directive given to the drawee for making the payment must not have any conditions attached.
3. Both the sum of money to be paid and the specific payment date must be clearly defined and fixed.
4. The person who draws the bill (the drawer) must sign the document.
5. The drawee must formally accept the bill by placing their signature on it.
6. Payment of the designated sum must be made either when demanded or after a specific time duration ends.
7. The sum mentioned can be paid to a specific individual, to their designated order, or to the person holding the document.
8. The instrument must bear the appropriate revenue stamps according to legal regulations.

In simple words: A bill of exchange is a written, signed, and stamped order to pay a fixed amount of money on a set date without any conditions.
Exam Tip: Do not forget to mention that the bill must be in writing and must be accepted by the drawee to become legally binding.

Question 4. State the three parties involved in a bill of exchange.
Answer: The three key parties associated with a bill of exchange are:

1. Drawer: The creator of the bill who has provided credit to another party. This individual is legally authorized to collect the payment from the acceptor.
2. Drawee: The person upon whom the bill is written for formal acceptance. This party received credit from the drawer and carries the liability to clear the payment.
3. Payee: The recipient who gets the final payment from the drawee. In most common cases, the drawer themselves acts as the payee.

In simple words: The drawer makes the bill, the drawee is the one who has to pay it, and the payee is the person who gets the money.
Exam Tip: Note that while there are three distinct roles, the drawer and payee are frequently the same entity in practical accounting.

Question 5. What is meant by maturity of a bill of exchange?
Answer: The date of maturity represents the final day of payment, which is determined by adding three extra days of grace to the nominal due date of the instrument. It is important to remember that no grace days are given when a bill is payable immediately on demand or at sight. If the tenure is expressed in days, the calculation is done on a day basis; if in months, it is determined by calendar months. Should the final maturity date coincide with a public holiday, the due date is adjusted to the preceding business day.
In simple words: Maturity is the final date when the bill must be paid, which you find by adding three extra days (called grace days) to the due date.

Exam Tip: Always remember the rule for public holidays - the maturity date shifts to the previous business day, not the next one.

Question 6. What is meant by dishonour of a bill of exchange?
Answer: Dishonour occurs when the drawee fails or refuses to pay the required amount on the specified maturity date. This non-payment reinstates the debtor's liability to the creditor.

The entries made for recording this event in the accounting books are:

In the books of drawer:

In the books of drawee:

In simple words: Dishonour means the person who promised to pay the bill fails to make the payment when the due date arrives.
Exam Tip: Ensure you reverse the original entry of receiving/accepting the bill to restore the debtor-creditor relationship upon dishonour.

Question 7. Name the parties to a promissory note
Answer: There are two primary parties to a promissory note:

1. Maker: The individual who drafts the note and gives a formal promise to clear the stated sum.
2. Payee: The beneficiary who is designated to collect the final payment.

In simple words: A promissory note has only two parties: the maker who promises to pay, and the payee who gets the money.
Exam Tip: Unlike a bill of exchange which has three parties, a promissory note always has only two parties.

Question 8. What is meant by acceptance of a bill of exchange?
Answer: Formally, a bill of exchange is an unconditional order in writing from a creditor directing a debtor to pay a specified sum at a certain date. For this document to become legally valid, the debtor must give their consent. The process of the debtor signing the bill to agree to its terms is called acceptance, which converts the draft into a legally binding document.
In simple words: Acceptance is when the debtor signs the bill of exchange to officially agree that they will pay the amount on the due date.

Exam Tip: Emphasize that a bill is just a draft and holds no legal value until the drawee signs their acceptance on it.

Question 9. What is noting of a bill of exchange?
Answer: When a bill is dishonoured due to non-payment, the holder can obtain official legal proof of this default. This is done by having the dishonour formally recorded by an authorized official called a notary public. The fee paid to this official for recording and protesting the dishonour is known as noting charges.
In simple words: Noting is the official process where an authorized government officer (notary public) records that a bill was not paid, providing legal proof of the dishonour.

Exam Tip: Remember that noting charges are initially paid by the holder of the bill, but are ultimately recovered from the drawee (acceptor) who caused the dishonour.

Question 10. What is meant by renewal of a bill of exchange?
Answer: If the drawee anticipates an inability to clear the bill on maturity due to a lack of funds, they can request the drawer for additional time. If the drawer consents, the old bill is cancelled, and a fresh bill is drafted for the extended period. This arrangement is termed renewal, and the new bill often incorporates interest charges for the extra time granted.
In simple words: Renewal is when the debtor cannot pay on time, so they ask for more time, and a brand-new bill is written (often including extra interest) to replace the old one.

Exam Tip: Note that renewal involves two main steps: the cancellation of the old bill and the creation of a new bill with interest.

Question 11. Give the performa of a Bills Receivable Book.
Answer: The template for a Bills Receivable Book is provided below:

In simple words: The Bills Receivable Book is a special journal used to record all details of the bills of exchange received from debtors in one place.
Exam Tip: Draw all column headings carefully, especially columns like "Drawer", "Acceptor", "Due Date", and "Amount" which are essential.

Question 12. Give the performa of a Bills Payable Book.
Answer: The template for a Bills Payable Book is provided below:

In simple words: The Bills Payable Book is a special journal where a business records all details of the bills it has accepted and needs to pay.
Exam Tip: Ensure the column headers for Bills Payable (such as "Payee" and "Given To Whom") are distinct from those in the Bills Receivable book.

Question 13. What is retirement of a bill of exchange?
Answer: Retirement occurs when the drawee settles the amount of the bill prior to its scheduled maturity date. To encourage such early settlement, the holder of the bill may offer a concession or discount, which is referred to as a rebate.

Entry in the books of the holder of the bill:

Entry in the books of the acceptor (drawee) of the bill:

In simple words: Retirement means paying off the bill before its actual due date, which often earns the debtor a small discount called a rebate.
Exam Tip: Remember that rebate is an expense (loss) for the holder, so it is debited, while it is a gain for the drawee, so it is credited.

Question 14. Give the meaning of rebate.
Answer: A rebate is a financial incentive or discount granted by the holder of a bill to the drawee when the drawee requests and completes payment before the official maturity date.
In simple words: A rebate is a discount given to a debtor for paying their bill earlier than the actual due date.

Exam Tip: Distinguish rebate from trade discount and cash discount; a rebate is specifically related to the early retirement of a bill of exchange.

Question 15. Give the performa of a Bill of Exchange.
Answer: The specimen format for a Bill of Exchange is presented below:

In simple words: This is a visual template showing how a standard bill of exchange is drafted, including the amount, stamp, duration, party names, and signatures.
Exam Tip: When drawing a specimen bill of exchange in exams, always include the Stamp box, the specific amount in figures and words, and the names of the drawer and drawee.

Long Answer Type Questions

Question 1. A bill of exchange must contain “an unconditional promise to pay”. Do you agree with a statement?
Answer: No, the statement is incorrect because a bill of exchange contains an unconditional order to pay, not a promise to pay. Under the Negotiable Instruments Act, 1981, a bill of exchange is defined as an instrument in writing that carries an unconditional instruction signed by the creator, directing a specific party to pay a set amount of money only to, or to the order of, a designated individual or the bearer.

This definition highlights that a bill of exchange acts as an absolute order to make payment. There must be no clauses or contingencies attached to this mandate, and the drawee is fully bound to clear the dues. All essential factors - such as the specific amount, the date of payment, and the involved parties - must be stated clearly and unconditionally.
In simple words: No, a bill of exchange is an order (command) to pay, not a promise. A promise to pay is what you find in a promissory note.

Exam Tip: Be very careful with the terminology - remember that a Bill is an order to pay, while a Promissory Note is a promise to pay.

Question 2. Briefly explain the effects of dishonour and noting of a bill of exchange.
Answer: Dishonour of a bill occurs when the drawee fails to pay the specified sum on its maturity date. Upon dishonour, the initial payment arrangement becomes void, which restores the acceptor's liability to the creditor.

The accounting entry in the books of the drawer is:

The accounting entry in the books of the drawee is:

Noting charges represent the fee paid to a notary public to obtain legal authentication of the dishonour.

The effect of noting charges in the drawer's books:

The effect of noting charges in the drawee's books:

In simple words: Dishonour means the debtor failed to pay on the due date. Noting is getting a government officer to record this failure, and the fees for this are charged to the defaulting debtor.

Exam Tip: When showing the journal entry for dishonour with noting charges in the books of the drawer, combine the bills receivable and noting charges credit entries into a single compound entry.

Question 3. Explain briefly the procedure of calculating the date of maturity of a bill of exchange? Give example.
Answer: To calculate the maturity date of a bill, follow these steps:

1. Identify the nominal due date based on the term of the bill.
2. Add exactly three days of grace to this nominal date.
3. The resulting date is the final date of maturity.

The rules for adding grace days vary according to different scenarios:

• If the bill is payable on demand or "at sight," no grace days are allowed.
• If the term is expressed in months, calculate the due date using calendar months.
• If the term is given in days, calculate using the precise count of days, leaving out the date of transaction but including the actual payment date.
• If the maturity date happens to fall on a Sunday or a declared public holiday, the due date is shifted to the immediate preceding business day. For instance, if a bill's calculated maturity is August 15, 2015, the actual maturity date becomes August 14, 2015.
• In the event of an unexpected or emergency holiday being declared under the Negotiable Instruments Act, 1881, the maturity date is extended to the immediate following working day.

In simple words: To find when a bill must be paid, add three "grace days" to its nominal due date. If that day is a regular holiday, pay a day early; if it is an unexpected emergency holiday, pay a day later.

Exam Tip: Remember the distinction between pre-planned public holidays (previous day) and sudden emergency holidays (next day), as examiners love to test this.

Question 4. Distinguish between bill of exchange and promissory note.
Answer: The primary distinctions between a bill of exchange and a promissory note are shown below:

In simple words: A bill of exchange is an order to pay drawn by a creditor and needs acceptance, whereas a promissory note is a promise to pay made by a debtor and does not need acceptance.

Exam Tip: Drawing a neat distinction table with clear bases of difference such as parties, nature, and maker ensures maximum marks.

Question 5. Briefly explain the purpose and benefits of retiring a bill of exchange to the debtor and the creditor.
Answer: Retirement of a bill happens when the drawee settles the payment before the actual maturity date. To incentivize this early payment, the holder of the bill typically offers a concession known as a rebate.

Benefits to both parties:

• For the Debtor (Drawee): The debtor benefits by clearing their liability early and saving money through the rebate received, which is recorded as a gain.
• For the Creditor (Holder): The creditor benefits by getting access to funds earlier than expected, reducing the risk of default, even though they allow a rebate which is treated as a loss.

The journal entries to record this are:

In the books of the holder (creditor):

In the books of the drawee (debtor):

In simple words: Retiring a bill means the debtor pays it off early, which helps them save money via a discount (rebate) and helps the creditor get cash sooner.

Exam Tip: Clearly show that rebate is debited in the drawer's books (as an expense) and credited in the drawee's books (as an income).

Question 6. Explain briefly the purpose and advantages of maintaining of a Bills receivable book.
Answer: The Bills Receivable Book is a specialized subsidiary book designed to record all details of the bills of exchange received from debtors, such as the acceptor's name, bill date, maturity date, and value.

Key advantages of maintaining this book include:

1. Centralized Information: All essential details of every bill, including its value, due date, and the acceptor's identity, are stored in a single location for quick reference.
2. Prevention of Fraud: Storing all transaction details together minimizes the chances of manipulation or fraudulent activities.
3. Enhanced Accountability: The staff member in charge of maintaining this register is fully responsible for its accuracy, making it easier to pinpoint and correct mistakes.
4. Efficiency and Time Savings: Logging transactions in a specialized book is much faster and more streamlined than writing individual journal entries for each bill.

In simple words: A Bills Receivable Book keeps all information about bills from debtors in one place, which saves time, prevents fraud, and makes finding details easy.

Exam Tip: List at least three distinct advantages such as time-saving, fraud prevention, and ready availability of details to get full credit.

Question 7. Briefly explain the benefits of maintaining a bills payable book and state how is its posting is done in the ledger.
Answer: A Bills Payable Book is a specialized ledger used to keep track of all bills of exchange accepted in favor of creditors. It stores crucial information, including the value of the bill, date of acceptance, due date, and the creditor's name.

Key advantages of maintaining this book include:

1. Convenient Reference: It aggregates all details of accepted bills in one place, making retrieval quick and straightforward.
2. Fraud Mitigation: Recording all details systematically helps prevent unauthorized entries or alterations.
3. Time Efficiency: Entering transactions directly in a specialized book is much faster than passing standard journal entries.
4. Accountability: Assigning a specific accountant to maintain this book makes it easier to trace and rectify accounting errors.

Posting in the Ledger:
The total of the Bills Payable Book is posted periodically (usually at the end of the month) to the credit side of the Bills Payable Account in the ledger. Simultaneously, the individual accounts of the creditors are debited with their respective accepted bill amounts.
In simple words: The Bills Payable Book stores all details of bills we need to pay, and we post the monthly total to the credit of the Bills Payable Account, while debiting individual creditors.

Exam Tip: Do not forget to explain the double-entry posting mechanism: credit the Bills Payable Account in total, and debit individual creditors' accounts.

Numerical Questions

Question 1. On Jan 01, 2015 Rao sold goods Rs. 10,000 to Reddy. Half of the payment was made immediately and for the remaining half Rao drew a bill of exchange upon Reddy payable after 30 days. Reddy accepted the bill and returned it to Rao. On the due date Rao presented the bill to Reddy and received the payment. Journalise the above transactions in the books Rao and prepare of Rao’s account in the books of Reddy.
Answer: The necessary journal entries and ledger account are presented below:

In the Books of Rao (Journal Entries):

In the Books of Reddy (Rao's Account):

In simple words: Rao sells goods of Rs. 10,000 to Reddy. Reddy pays Rs. 5,000 in cash and accepts a bill of Rs. 5,000, which he pays on February 3.

Exam Tip: Calculate the due date carefully: January has 31 days, so 30 days from Jan 1 is Jan 31. Adding 3 grace days gives February 3.

Question 2. On Jan 01, 2015, Shankar purchased goods from Parvati for Rs. 8,000 and immediately drew a promissory note in favour of Parvati payable after 3 months. On the date of maturity of the promissory note, the Government of India declared holiday under the Negotiable Instrument Act 1881. Since, Parvati was unaware about the provision of the law regarding the date of maturity of the bill, she handed over the bill to her lawyer, who duly presented the bill and received the payment. The amount of the bill was handed over by the lawyer to Parvati immediately. Record the necessary Journal entries in the books of Parvati and Shankar.
Answer: The necessary journal entries in the books of both Parvati and Shankar are shown below:

In the Books of Parvati (Journal Entries):

In the Books of Shankar (Journal Entries):

In simple words: Shankar buys goods from Parvati and gives a 3-month promissory note. Due to a public holiday on the maturity date, payment is legally made on April 5.

Exam Tip: When a government holiday is declared on the due date under the Negotiable Instruments Act, the maturity date shifts to the next working day.

Question 3. Vishal sold goods for Rs. 7,000 to Manju on Jan 05, 2015 and drew upon her a bill of exchange payable after 2 months. Manju accepted Vishal’s draft and handed over the same to Vishal after acceptance. Vishal immediately discounted the bill with his bank @12% p.a. On the due date Manju met her acceptance. Journalise the above transactions in the books of Vishal and Manju.
Answer: The necessary journal entries for recording the transactions in the books of both Vishal and Manju are:

In the Books of Vishal (Journal Entries):

Note: On payment of the bill on maturity, no entry will be made in the books of Vishal.

In the Books of Manju (Journal Entries):

In simple words: Vishal sells goods and draws a bill which is accepted by Manju. Vishal gets the money early from his bank by paying a small discounting fee, and Manju pays the bank on the due date.

Exam Tip: Since the bill was discounted with the bank, the drawer (Vishal) does not pass any journal entry when the bill is finally paid on maturity.

Question 4. On Feb 01, 2015, John purchased goods for Rs. 15,000 from Jimmi. He immediately made a payment of Rs. 5,000 by cheque and for the balance accepted the bill of exchange drawn upon him by Jimmi. The bill of exchange was payable after 40 days. Five days before the maturity of the bill, Jimmi sent the same to his bank for collection. The bank duly presented the bill to John on the due date who met the bill. The bank informed the same to Jimmi. Prepare John’s account in the books of Jimmi and Jimmi’s account in the books of John.
Answer:
In the Books of Jimmi - Journal Entries

John's Account (In the Books of Jimmi)

In the Books of John - Journal Entries

Jimmi's Account (In the Books of John)

In simple words: When John buys goods, he pays Rs. 5,000 immediately by cheque and accepts a bill of exchange for the remaining Rs. 10,000. On maturity, John's bank pays Rs. 10,000 to Jimmi's bank, completing the transaction.

Exam Tip: Calculate maturity dates carefully. For a 40-day bill drawn on February 01, adding 40 days plus 3 days of grace determines March 16 as the final due date.

Question 5. On Jan 15, 2015, Kartar Sold goods for Rs. 30,000 to Bhagwan and drew upon him three bills of exchanges of Rs. 10,000 each payable after one month, two month, and three months respectively. The first bill was retained by Kartar till its maturity. The second bill was endorsed by him in favour of his Cr. or Ratna and the third bill was discounted by him immediately @ 6% p.a. All the bills were met by Bhagwan. Journalise the above transactions in the books of Kartar and Bhagwan. Also prepare ledger accounts in books of Kartar and Bhagwan.
Answer:
In the Books of Kartar - Journal Entries

Bhagwan's Account (In the Books of Kartar)

Ratna's Account (In the Books of Kartar)

Bills Receivable Account (In the Books of Kartar)

Cash Account (In the Books of Kartar)

Bank Account (In the Books of Kartar)

In the Books of Bhagwan - Journal Entries

Kartar's Account (In the Books of Bhagwan)

Bills Payable Account (In the Books of Bhagwan)

Cash Account (In the Books of Bhagwan)

Bank Account (In the Books of Bhagwan)

In simple words: Kartar sells goods to Bhagwan and draws three separate bills of Rs. 10,000 each. Kartar manages each bill differently - keeping the first, transferring the second to a creditor (Ratna), and discounting the third at the bank. Bhagwan pays all three bills on their respective due dates.

Exam Tip: Calculate discounting charges correctly based on the formula: Amount of Bill x Rate of Discount x (Unexpired Period / 12). For the third bill, this is Rs. 10,000 x 6% x 3/12 = Rs. 150.

Question 6. On Jan. 01, 2015 Arun sold goods for Rs. 30,000 to Sunil. 50% of the payment was made immediately by Sunil on which Arun allowed a cash discount of 2%. For the balance Sunil drew a promissory note in favour of Arun payable after 20 days. Since, the date of maturity of bill was a public holiday; Arun presented the bill on a day, as per the provisions of Negotiable Instrument Act which was met by Sunil. State the date on which the bill was presented by Arun for payment and jounalise the above transactions in the books of Arun and Sunil.
Answer:
According to the Negotiable Instruments Act, if the final maturity date of a bill lands on a public holiday, the due date shifts to the immediately preceding business day.
To calculate this:
We add 20 days to January 01, 2015, which brings us to January 21, 2015.
Next, we add the standard 3 days of grace, giving a tentative maturity date of January 24, 2015.
Since January 24 is a public holiday, the actual due date becomes the prior working day, which is January 23, 2015.

In the Books of Arun - Journal Entries

In the Books of Sunil - Journal Entries

In simple words: Sunil buys goods and pays half immediately, which earns him a 2% discount. For the other half, he gives a 20-day note. Since the due date is a public holiday, it is paid one day earlier on January 23.

Exam Tip: Calculate cash discount only on the portion paid in cash (50% of Rs. 30,000 = Rs. 15,000). For maturity, if the final day is a public holiday, remember to shift the due date to the preceding business day.

Question 7. Darshan sold goods for Rs. 40,000 to Varun on 8.1.2015 and drew upon him a bill of exchange payable after two months. Varun accepted the bill and returned the same to Darshan. On the due date the bill was met by Varun. Record the necessary Journal entries in the books of Darshan and Varun in the following circumstances.
1. When the bill was retained by Darshan till the date of its maturity.
2. When Darshan immediately discounted the bill @ 6% p.a. with his bank.
3. When the bill was endorsed immediately by Darshan in favour of his Cr. or Suresh.
4. When three days before its maturity, the bill was sent by Darshan to his bank for collection.
Answer:
Case i: When the bill was retained by Darshan till the date of its maturity.

In the Books of Darshan - Journal Entries

In the Books of Varun - Journal Entries

Case ii: When Darshan immediately discounted the bill @ 6% p.a. with his bank.

In the Books of Darshan - Journal Entries

In the Books of Varun - Journal Entries

Case iii: When the bill was endorsed immediately by Darshan in favour of his Cr. or Suresh.

In the Books of Darshan - Journal Entries

In the Books of Varun - Journal Entries

Case iv: When three days before its maturity, the bill was sent by Darshan to his bank for collection.

In the Books of Darshan - Journal Entries

In the Books of Varun - Journal Entries

In simple words: Darshan sells goods to Varun, who accepts a two-month bill of Rs. 40,000. Depending on the scenario, Darshan either waits until the due date to collect, discounts it early with a bank, gives it to Suresh to clear a debt, or asks his bank to collect it for him.

Exam Tip: Notice that Varun's entries do not change across the first three cases and are nearly identical in the fourth. The drawee (Varun) is only concerned with accepting the bill and paying it at maturity, regardless of what the drawer (Darshan) does with it in between.

Question 8. Bansal Traders allow a trade discount of 10% on the list price of the goods purchased from them. Mohan traders, who runs a retail shop made the following purchases from Bansal Traders

For all the purchases Mohan Traders drew promissory note in favour of Bansal Traders payable after 30 days. The promissory note for the sale of Dec. 21, 2015 was retained by Bansal Traders with them till the date of its maturity. The promissory note drawn on 26.12.2015 was discounted by Bansal Traders from their bank at 12% p.a. The promissory note drawn on Dec. 28, 2015 was endorsed by Bansal Traders in favour of their Cr. or Dream Soaps in full settlement of a purchase amounting to Rs. 1,900. On 25.1.2015 Bansal Traders sent the promissory note drawn on Dec. 31, 2015 to their bank for collection. All the promissory notes were met by Mohan Traders Record the necessary journal entries for the above transactions in the books of Bansal Traders and Mohan Traders and prepare Mohan Traders account in the books of Bansal Traders and Bansal Traders account in the books of Mohan Traders
Answer:
Book of Bansal Traders
Journal Entries

In the books of Bansal Traders
Mohan Trader's Account

Books of Mohan Trader's
Journal Entries

In the book of Mohan Traders
Bansal Trader's Account

In simple words: When purchases are made with a trade discount, we only record the net amount (list price less trade discount) in our books. When bills or promissory notes are drawn, discounted, or endorsed, we adjust the respective Bills Receivable or Bills Payable accounts and record any bank charges, interest, or discounts received during settlement.

Exam Tip: Always remember to deduct trade discount from the list price before making any journal entries, as trade discount is not recorded separately in the ledger accounts.

Question 9. Vimal purchased goods Rs. 25,000 from Kamal on Jan 15, 2015 and accepted a bill of exchange drawn upon him by Kamal payable after two months. On the date of the maturity the bill was duly presented for payment. Vimal dishonoured the bill. Record the necessary journal entries in the books of Kamal and Vimal when:
(i) The bill was retained by Kamal till the date of its maturity.
(ii) The bill was immediately discounted by Kamal with his bank @ 6% p.a.
(iii) The bill was endorsed by Kamal in favour of his Cr.orSharad.
(iv) Five days before its maturity the bill was sent by Kamal to his bank for collection.
Answer:
Case i: When the bill was retained by Kamal till the date of its maturity
In the Books of Kamal
Journal Entries

In the Books of Vimal
Journal Entries

Case ii: When the bill was discounted by Kamal immediately with his bank @ 6% p.a.

In the Books of Kamal
Journal Entries

In the Books of Vimal
Journal Entries

Case iii: When the bill was endorsed to his creditor Sharad

In the Books of Kamal
Journal Entries

In the Books of Vimal
Journal Entries

Case iv: When the bill was sent by Kamal to his bank for collection a few days before its maturity

In the Books of Kamal
Journal Entries

In the Books of Vimal
Journal Entries

In simple words: When a bill of exchange is dishonoured, we reverse the original entry. The drawer debits the drawee's account again because they are still a debtor, and credits the corresponding account where the bill was held (Bills Receivable, Bank, Creditor, or Bill Sent for Collection).

Exam Tip: When a bill is dishonoured, the entry in the acceptor's (drawee's) books remains identical across all cases: debit Bills Payable and credit the drawer. The drawer's entries, however, vary depending on who holds the bill at maturity.

Question 10. Ravi sold goods for Rs. 40,000 to Sudershan on Feb 13, 2015. He drew four bills of exchange upon Sudershan. The first bill was for Rs. 5,000 payable after one month. The second bill was for Rs. 10,000 payable after 40 days; the third bill was for Rs. 12,000 payable after three months and fourth bill was for the balance amount payable after 19 days. Sudershan accepted all the bills and returned the same to Ravi. Ravi discounted the first bill with his bank at 6% p.a. He endorsed the second bill to his Cr. or Mustaq for the full settlement of a debt of Rs. 10,200. The third bill was kept by Ravi with him till the date of maturity. Five days before the maturity of the fourth bill, Ravi sent the bill to his bank for collection. All the four bills were dishonoured by Sudarshan on maturity. Sudershan settled Ravi’s claim in cash three days after the dishonour of each bill along with interest @12% p.a. for the terms of the bills. You are requested to record the necessary journal entries in the books to Ravi, Sudershan, Mustaq and bank for the above transaction. Also prepare Sudershan’s account and Mustaq’s account in the books of Ravi.
Answer:
Books of Ravi
Journal Entries

Ledger
Sudershan's Account

Mustaq's Account

Book of Sudershan
Journal Entries

Book of Mustaq
Journal

Book of Bank
Journal

In simple words: In this scenario, multiple bills of exchange are drawn for a single sale. When each bill is dishonoured, the drawer charges interest for the bill's term and recovers both the bill amount and the interest from the drawee in cash shortly after the dishonour.

Exam Tip: Be careful with the calculation of interest for days vs. months. When calculating interest for days (like 19 or 40 days), divide by 365, but for months (like 1 or 3 months), divide by 12. Also, remember that when an endorsed bill is dishonoured, the discount previously allowed is reversed.

Question 11. On Jan 01, 2015 Neha sold goods for Rs. 20,000 to Muskan and drew upon her a bill of exchange payable after two months. One month before the maturity of the bill Muskan approached Neha to accept the payment against the bill at a rebate @ 12% p.a. Neha agreed to the request of Muskan and Muskan retired the bill under the agreed rate of rebate. Journalise the above transaction in the books of Neha and Muskan.
Answer:
Journal in the Books of Neha

Journal in the Books of Muskan

In simple words: When Muskan settled the bill one month early, Neha allowed her a discount (rebate) calculated at 12% per year for that one month. This reduced the payment to Rs. 19,800, with a rebate of Rs. 200 recorded by both parties.

Exam Tip: Always calculate the rebate duration carefully. The total bill period is two months, but it was paid one month before the maturity date, making the rebate period exactly one month.

Question 12. On Jan 15, 2015 Raghu sold goods worth Rs. 35,000 to Devendra and drew up to the latter three bills of exchanges. The first bill was for Rs. 5,000 payable after one month, the second bill was for Rs. 20,000 payable after three months and third bill for balance amount for 4 months. Raghu endorsed the first bill in favour of his Cr. or Dewan in full settlement of a debt of Rs. 5,200. The second bill was discounted by Raghu @ 6% p.a. and the third bill was retained by Raghu till the date of maturity. Devendra dishonoured the bill on maturity and the bank paid Rs. 30 as noting charges. Four days before the maturity of the third bill Raghu, sent the same for collection to his bank. The third bill was also dishonoured by Devendra and the bank paid Rs. 200 as noting charges. Five days after the dishonour of the bill Devendra paid the entire amount due to Raghu along with interest Rs. 1,000 for this purpose Devendra obtained a short term loan from his bank. You are requested to record the necessary journal entries in the books of Raghu Devendra and Dewan and also prepare Devendra’s account in Raghu’s books and Raghu’s account in Devendra’s account.
Answer:
Journal in the Books of Raghu

Devendra's Account (in books of Raghu)

Journal in the Books of Devendra

Raghu's Account (in books of Devendra)

Journal in the Books of Dewan

In simple words: Multiple bills were issued for credit sales. The first bill was endorsed to Dewan and paid on time. The second and third bills were dishonoured. These dishonours, noting charges, interest, and the final payment via a bank loan were recorded across all accounts.

Exam Tip: Always debit the Noting Charges Account in the drawee's books (Devendra) as they are an expense to him. In the drawer's books (Raghu), debit the drawee's personal account instead, as these charges are recoverable from him.

Question 13. Vimal purchased goods Rs. 25,000 from Kamal on Jan 15, 2015 and accepted a bill of exchange drawn upon him by Kamal payable after two months. On the date of the maturity the bill was duly presented for payment. Vimal dishonoured the bill. Record the necessary journal entries in the books of Kamal and Vimal when:
i. The bill was retained by Kamal till the date of its maturity.
ii. The bill was immediately discounted by Kamal with his bank @ 6% p.a.
iii. The bill was endorsed by Kamal in favour of his Cr.orSharad.
iv. Five days before its maturity the bill was sent by Kamal to his bank for collection.
Answer:
Case i: The bill was retained by Kamal till the date of its maturity
Journal in the Books of Kamal

Journal in the Books of Vimal

Case ii: The bill was immediately discounted by Kamal with his bank @ 6% p.a.
Journal in the Books of Kamal

Journal in the Books of Vimal

Case iii: The bill was endorsed by Kamal in favour of his Cr. or Sharad
Journal in the Books of Kamal

Journal in the Books of Vimal

Case iv: Five days before its maturity the bill was sent by Kamal to his bank for collection
Journal in the Books of Kamal

Journal in the Books of Vimal

In simple words: This shows how dishonour of a bill of exchange is treated under four circumstances: retaining the bill, discounting it with bank, endorsing it to a creditor, or sending it for collection. In every case, Vimal's account is debited by Kamal to recover the amount.

Exam Tip: Note that in the drawee's books (Vimal), the dishonour entry remains identical across all four cases. The drawee always debits Bills Payable and credits the drawer's account (Kamal).

Question 14. Abdula sold goods to Tahir on Jan 17, 2015 for Rs. 18,000. He drew a bill of exchange for the same amount on Tahir for 45 days. On the same date Tahir accepted the bill and returned it to Abdulla. On the due date Abdulla presented the bill to Tahir which was dishonoured. Abdulla paid Rs. 40 as noting charges. Five days after the dishonour of his acceptance Tahir settled his debt by making a payment of Rs. 18,700 including interest and noting charges. Record the necessary journal entries in the books of Abdulla and Tahir. Also prepare Tahir’s account in the books of Abdulla and Abdulla’s account in the books of Tahir.
Answer:
Journal in the Books of Abdula

Tahir's Account (in books of Abdula)

Journal in the Books of Tahir

Abdulla's Account (in books of Tahir)

In simple words: When Tahir's bill of Rs. 18,000 was dishonoured on the maturity date (March 6), Abdulla paid Rs. 40 in noting charges. Five days later, Tahir settled his account by paying the principal, noting charges, and Rs. 660 as interest.

Exam Tip: Be precise when computing the due date for a term given in days. From January 17, 45 days is calculated as: 14 days remaining in January, 28 days in February, and 3 days in March. Adding 3 days of grace gives the due date as March 6.

Question 15. Asha sold goods worth Rs. 19,000 to Nisha on March 02, 2015. Rs. 4,000 were paid by Nisha immediately and for the balance she accepted a bill of exchange drawn upon her by Asha payable after three months. Asha discounted the bill immediately with her bank. On the due date Nisha dishonoured the bill and the bank paid Rs. 30 as noting charges. Record the necessary journal entries in the books of Asha and Nisha. Note: In this question rate of discount is not given, the rate of discount (6% p.a.) has been assumed.
Answer:
Journal in the Books of Asha

Journal in the Books of Nisha

In simple words: Asha sold goods of Rs. 19,000, received Rs. 4,000 in cash, and got a bill of Rs. 15,000. She got cash early from her bank at a discount. On the due date, Nisha defaulted, forcing the bank to recover the bill amount and Rs. 30 noting charges from Asha, who then debited Nisha's account for the total.

Exam Tip: If the discount rate is not provided, you should mention the rate of interest/discount assumed in a clear note (e.g., 6% p.a.) so the examiner knows how you calculated the discounting charges.

Question 16. On Feb. 02, 2015, Verma purchased from Sharma goods for Rs. 17,500. Rs. 2,500 immediately and for the balance gave a promissory note to Sharma payable after 60 days. Sharma immediately endorsed the promissory note in favour of his Cr. or Gupta for the full settlement of a debt of Rs. 15,400. On the due date of the bill Gupta presented the bill to Verma which the latter dishonoured and Gupta paid Rs. 5,000 noting charges. On the same date Gupta informed Sharma about the dishonour of the bill. Sharma settled his debt to Gupta by cheque for Rs. 15,500 which includes noting charges and interest. Verma settled Sharma’s claim by cheque for the same amount. Record the necessary journal entries is the books of Sharma, Gupta and Verma for the above transaction and prepare Verma’s and Gupta’s accounts in the books of Sharma. Sharma’s account in the books of Verma. And also Sharma’s account in the books of Gupta. Note: In this question Rs. 5,000 is given as noting charges, there is mistake. Here Rs. 50 has been taken as noting charges instead of Rs. 5,000.
Answer:
Books of Sharma
Journal

Ledger Accounts in the books of Sharma
Verma's Account

Gupta's Account

Books of Verma
Journal

Ledger Account in the books of Verma
Sharma's Account

Books of Gupta
Journal

Ledger Account in the books of Gupta
Sharma's Account

In simple words: When a promissory note is dishonoured, the endorsee (Gupta) recovers the amount of the note plus noting charges from the endorser (Sharma). In turn, Sharma charges the debtor (Verma) for the note and noting charges, reversing any discount given earlier. Finally, payments are settled via bank transfers.

Exam Tip: Always remember to reverse the discount allowed or discount received when a bill is dishonoured. The noting charges are ultimately borne by the party who accepted and failed to pay the bill (Verma).

Question 17. Lilly sold goods to Mathew on 1.3.2015 for Rs. 12,000 and drew upon Mathew a bill of exchange for the same amount payable after two months. Lilly immediately discounted the bill with her bank at 9% p.a. The maturity date of the bill was a non business day (holiday), therefore, Lilly had to present the bill as per the provisions of the Indian Instruments Act, 1881. The bill was dishonoured by Mathew and Lilly paid Rs. 45 as noting charges. Mathew settled the claim of Lilly five days after the dishonour of the bill by a cheque, which includes interest @ 12% for the term of the bill. Journalise the above transactions in the books of Lilly and Mathew and prepare Mathew’s account in the books of Lilly and Lilly’s account in the books of Mathew. Note: In this question, May 04 has been considered as holiday, so the date of maturity will be May 03, 2015 in place of May 04, 2015.
Answer:
Books of Lilly
Journal

Ledger Account in the books of Lilly
Mathew's Account

Books of Mathew
Journal

Ledger Account in the books of Mathew
Lilly's Account

In simple words: Lilly discounts Mathew's bill of exchange with the bank. Since the maturity falls on a public holiday, the due date shifts to the previous business day (May 03). Upon Mathew's failure to pay, the bank pays the noting charges, which are charged back to Mathew along with late payment interest before he settles the dues by cheque.

Exam Tip: Under the Negotiable Instruments Act, 1881, if the maturity day is a public holiday, the bill becomes due on the immediate preceding business day. Make sure you calculate the discounting charges and interest based on the exact term of the bill.

Question 18. Kapil purchased goods for Rs. 21,000 from Gaurav on 1.2.2015 and accepted a bill of exchange drawn by Gaurav for the same amount. The bill was payable after one month. On 25.2.2015 Gaurav sent the bill to his bank for collection. The bill was duly presented by the bank. Kapil dishonoured the bill and the bank paid Rs. 100 as noting charges. Record the necessary journal entries for the above transactions in the books of Kapil and Gaurav.
Answer:
Books of Gaurav
Journal

Book of Kapil
Journal

In simple words: Gaurav sends the bill to his bank for collection. On the due date, Kapil fails to pay. The bank registers the failure by paying Rs. 100 as noting charges, which are debited back to Kapil's account to show he now owes the entire Rs. 21,100.

Exam Tip: When a bill sent for collection is dishonoured, we debit the drawee (Kapil) and credit "Bills Sent for Collection A/c" along with "Bank A/c" for the noting charges paid by the bank.

Question 19. On Feb. 14, 2015 Rashmi sold good Rs. 7,500 to Alka. Alka paid Rs. 500 in cash and for the bank balance accepted a bill of exchange drawn upon her by Rashmi payable after two months. On Apr.10, 2015 Alka approached Rashmi to cancel the bill since she was short of funds. She further requested Rashmi to accept Rs. 2,000 in cash and draw a new bill for the balance including interest Rs. 500. Rashmi accepted Alka’s request and drew a new bill for the amount due payable after 2 months. The bill was accepted by Alka. The new bill was duly met by Alka on maturity. Record the necessary journal entries in the books of Rashmi and Alka and prepared Alka’s account in the books of Rashmi’s and Rashmi’s account in the books of Alka’s.
Answer:
Book of Rashmi
Journal

Ledger Account in the books of Rashmi
Alka's Account

Book of Alka
Journal

Ledger Account in the books of Alka
Rashmi's Account

In simple words: Alka requests Rashmi to cancel the original bill of Rs. 7,000. She pays Rs. 2,000 in cash. Rashmi charges Rs. 500 interest for the delay and draws a new bill for the balance of Rs. 5,500 (calculated as Rs. 7,000 - Rs. 2,000 + Rs. 500). The new bill is fully paid on maturity.

Exam Tip: When a bill is renewed, make sure to pass three distinct entries: cancellation of the old bill, cash received for part payment, interest due, and the drawing of the new bill incorporating the interest.

Question 20. Nikhil sold goods for Rs. 23,000 to Akhil on Dec. 01, 2015. He drew upon Akhil a bill of exchange for the same amount payable after 2 months. Akhil accepted the bill and sent it back to Nikhil. Nikhil discounted the bill immediately with his bank @12% p.a. On the due date Akhil dishonoured the bill of exchange and the bank paid Rs. 100 as noting charges. Akhil requested Nikhil to draw a new bill upon him with interest @10% p.a. which he agreed. The new bill was payable after two months. A week before the maturity of the second bill Akhil requested Nikhil to cancel the second bill. He further requested to accept Rs. 10,000 in cash immediately and drew a third bill upon him including interest of Rs. 500. Nikhil agreed to Akhil’s request. The third bill was payable after one month. Akhil met the third bill on its maturity. Record the necessary journal entries in the books of Nikhil and Akhil and also prepare Akhil’s account in the books of Nikhil and Nikhil’s account in the books of Akhil.
Answer:
Books of Nikhil
Journal

Ledger Account in the books of Nikhil
Akhil's Account

Books of Akhil
Journal

Ledger Account in the books of Akhil
Nikhil's Account

In simple words: Akhil's first bill gets discounted and then dishonoured on the due date. The second bill incorporates interest at 10% p.a. for two months. Akhil cancels this second bill early, paying Rs. 10,000 in cash, and accepts a third bill of Rs. 13,985 which includes a flat interest of Rs. 500. This final bill is met on maturity.

Exam Tip: Be careful with the interest calculations. For the second bill, interest is computed as \( 23,100 \times 10\% \times \frac{2}{12} = 385 \). For the third bill, a flat interest of Rs. 500 is directly provided, so no percentage-based calculation is needed.

Question 21. On Jan 01, 2015 Vibha sold goods worth Rs. 18,000 to Sudha and drew upon the latter a bill of exchange for the same amount payable after two months. Sudha accepted Vibha’s draft and returned the same to Vibha after acceptance. Vibha endorsed the bill immediately in favour of her Cr. or Geeta. Five days before the maturity of the bill Sudha requested Vibha to cancel the bill since she was short of funds. She further requested to draw a new bill upon her including interest of Rs. 200. Vibha accepted Sudha’s request. Vibha took the bill from Geeta by making the payment to her in cash and cancelled the same. Then she drew a new bill upon Sudha as agreed. The new bill was payable after one month. The new bill was duly met by Sudha on maturity. Record the necessary journal entries in the books of Vibha.
Answer:

In the Books of Vibha
Journal Entries

In simple words: Vibha sells goods to Sudha and gets a bill. She passes this bill to her creditor Geeta. When Sudha cannot pay, Vibha takes back the bill from Geeta by paying her cash, cancels the old bill, adds a Rs. 200 interest charge to Sudha's account, and draws a new one-month bill. Finally, Sudha pays the new bill on its due date.

Exam Tip: Always pay attention to the dates when a bill is cancelled before maturity. In this question, the initial 2-month bill drawn on January 1 would mature on March 4. Cancelling it five days before maturity puts the transaction date on February 27.

Question 22. Following was the position of debtor and Creditor of Gautam as on 1.1.2015.

The following transactions took place in the month of Jan 2015:
Jan 02 Drew on Babu at two months after date at full settlement for Rs.4,800. Babu accepted the bill and returned it on 5.1.2015.
Jan 04 Babu’s bill discounted for Rs.4,750.
Jan 08 Chanderkala sent a promissory note for Rs.8,000 payable three months after date.
Jan 10 Promissory note received from Chanderkala discounted for Rs.7,900.
Jan 12 Accepted Sheiba draft for the amount due payable two months after date.
Jan 22 Anita sent his promissory note payable after two months.
Jan 23 Anita’s promissory note endorsed in favour of Manju.
Jan 25 Accepted Anju’s draft payable after three months.
Jan 29 Kiran sent Rs.2,000 in cash and a promissory note for the balance payable after three months.
Record the above transactions in the proper subsidiary books.
Answer:

Bills Receivable Book

Bills Payable Book

Cash Book

Journal Proper

In simple words: The various transactions are recorded in the appropriate books. Bills of exchange are entered in the Bills Receivable or Bills Payable books. Cash transactions go into the Cash Book. Promissory notes and other adjustments, like discount entries, are recorded in the Journal Proper.

Exam Tip: Be careful not to enter promissory notes in the Bills Receivable or Bills Payable books. Promissory notes are recorded directly in the Journal Proper since they do not have separate parties like drawer and acceptor as seen in bills of exchange.

Question 23. On Jan. 01, 2015 Harsh accepted a month bill for Rs. 10,000 drawn on him by Tanu for latter’s benefit. Tanu discounted the bill on same day @ 8% p.a. On the due date Tanu sent a cheque to Harsh for honour the bill. Harsh duly honoured his acceptance. Record the journal entries in the Books of Tanu and Harsh.
Answer:

In the Books of Tanu
Journal Entries

In the Books of Harsh
Journal Entries

In simple words: Tanu draws a bill on Harsh for her own benefit and gets it discounted at her bank. On the maturity date, she transfers the cash to Harsh's bank account, and Harsh uses those funds to pay off the bank and honor his promise.

Exam Tip: Since this is an accommodation bill for the drawer's sole benefit, the entire discounting charge is borne by Tanu. Always verify that 3 grace days are added to find the correct maturity date (Jan 1 + 1 month + 3 days = Feb 4).

Question 24. Ritesh and Naina were in need of funds temporarily. On August 01, 2015 Ritesh drew upon Naina a bill for Rs. 12,000 for 4 months. Naina accepted the bill and returned to Ritesh. Ritesh discounted the Bill @ 8% p.a. Half amount of the discounted bill remitted to Naina. On due date, Ritesh sent the required sum to Naina, who met the bill. Journalise the transaction in the books of both the parties.
Answer:

In the Books of Ritesh
Journal Entries

In the Books of Naina
Journal Entries

In simple words: Ritesh and Naina draw a bill to share funds. Ritesh discounts the bill and immediately forwards half of the net cash and charges half of the bank fees to Naina. On the maturity date, Ritesh sends his remaining half of the cash to Naina, who then pays the full Rs. 12,000 to the bank.

Exam Tip: When sharing accommodation bill proceeds, remember that discounting charges must also be divided between both parties in the exact same proportion as they share the funds.

Question 25. On Jan. 01, 2014, Bhanu and Naman drew on each other a bill for Rs. 8,000 payable 3 months after the due date for their mutual benefit. On January 02 they discounted with their bank each other’s bill at 5% p.a. on the due date each met his own acceptance. Give journal entry in the books of Bhanu and Naman.
Answer:

In the Books of Bhanu
Journal Entries

In the Books of Naman
Journal Entries

In simple words: Since Bhanu and Naman draw bills on each other for equal amounts, each of them holds a Bills Receivable and a Bills Payable. Both parties discount their received bills at the bank and clear their own accepted bills when they mature.

Exam Tip: In dual mutual accommodation cases where identical amount bills are exchanged, both books will have parallel, mirrored entries. Ensure both parties record both the receipt and acceptance of the bills before discounting.

Question 26. On Nov. 01, 2014 Sonia drew a bill on Sunny for Rs. 15,000 for 3 months for mutual accommodation. Sunny accepts the bill and return it to Sonia. Sonia discounted the same with his bankers @ 6% p.a. The proceeds are shared between Sonia and Sunny in proportion of 2/3rd, 1/3rd respectively. On the due date Sonia remits his proportion to Sunny who fails to meet the bill and as a result Sonia has to meet it. Sunny give a fresh acceptance for the amount due to Sonia plus interest of Rs. 100. Sunny meet his second acceptance on due date. Record the necessary journal entries in the books of Sonia and Sunny.
Answer:

In the Books of Sonia
Journal Entries

In the Books of Sunny
Journal Entries