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AccountingTreatmentofBillofExchange:
FinancialAccountingTopics
IntroductiontoAccounting
TransactionsandAccountingEquation
AnalysisofBusinessTransactions
Journal,LedgerandTrialBalance
AccountingforBillsofExchange
SpecialJournals
CashBook
BankReconciliationStatement
FinalAccounts
WorkSheet
CapitalandRevenueItems
ValuationofInventories
AccountsofNonprofitMakingOrganizations
StatementofCashFlows
AccountingRatiosAnalysis
Depreciation,ProvisionsandReserves
AccountingDictionary
FinancialCalculators
Inbusinessconcerns,numerousbillsofexchangearedrawnandaccepted.Specialjournalsareusedto
recordbillsofexchange,calledbillreceivablejournalandbillpayablejournal.Fromthesetwojournalsthe
totalsarepostedtobillsreceivableaccountandbillspayableaccountrespectively.
Everybillhastwodifferentaspects.Tothedrawerwhohassoldgoodsandwantstobepaidforthem,itisa
billreceivable,hehopestoreceivemoneyontheduedate.Suchbillsarerecordedinthebillsreceivable
journal.Itisasortofassetforthedrawerandasgoodasmoney.Totheacceptorofthebill,whohasbought
goodsoncreditandhasagreedtohonorthebillontheduedate,itisabillpayable.Theacceptormust
arrangeinduecoursethefundsavailabletohonorthebillwhenitfallsdue.Suchbillsarerecordedinthebills
payablejournal.
ExplanationwithanExample:
Wecanunderstandtheaccountingofbillsofexchangewiththehelpofanexample.Letussuppose,MrXisa
manufacturerofshoesandMr.Yisaretailtraderofshoes.Mr.Y(thebuyer)wishestobuyshoesfromthe
manufacturerbuthasnomoney.Heisagreedtoacceptabillofexchangefor90days,ifgoodsaresoldto
himoncreditbasis.Soboththepartiesagreed.Mr.XsuppliesgoodstoMr.Yworth$10,000fora90days
creditanddrawsuponhimabillforthefullvalueofgoodsfor90dayson1stJan.2005.
Theillustrationgivenabovecanbesummarizedbelow:
Mr.X
becomes
creditor
andMr.Y
becomes
debtor.
Acceptance
received
fromMr.Y.
ManagerialAccountingTopics
Therearethreetransactionswhichhavetakenplace:
1.Mr.XsoldgoodstoMr.Yworth$10,000oncreditbasis.
2.Mr.XdrewabillofexchangeonMr.Yfor90daysfor$10,000.
3.OntheduedatethebillwaspresentedtoMr.Yandhehonoredthebill(methisobligationonthedue
date)
JournalEntries:
NowweshallseehowthesetransactionsarerecordedinjournalofMr.XandMr.Y.
Mr.X'sJournal
TransactionNo.1
Mr.XsoldgoodstoMr.Yfor$10,000oncredit.Thejournalentryis:
YA/c Dr.
http://www.accountingexplanation.com/accounting_treatment_of_bills_of_exchange.htm
FinancialStatements
CostVolumeProfitRelationship
VariableCostingSystem
MaterialsandInventoryCostControl
ActivityBasedCostingSystem
StandardCostingandVarianceAnalysis
BalancedScorecard
CapitalInvestmentAnalysis/CapitalBudgeting
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1stJan.
2005
AccountingforaBillofExchange,JournalEntriesAccountingExplanation.com
YA/c Dr.
SalesA/c
(Goodssoldonc redit)
10,000
10,000
TransactionNo.2
Mr.YdrewabillonMr.Xfor90days.Thejournalentryis:
1stJan.
2005
10,000
10,000
TransactionNo.3
Ontheduedateacceptorhonorsthebill.Thejournalentryis:
4April.
2005
Cash/BankA/c Dr.
Billrec eivableA/c
(Rec eivedc ashonpresentationofbill)
10,000
10,000
Mr.Y'sJournal
TransactionNo.1
BoughtgoodsfromMr.Xfor$10,000.Thejournalentryis:
1stJan.
2005
10,000
10,000
TransactionNo.2
AcceptancegiventoMr.Xinsteadofpayinghimcash.Thejournalentryis:
1stJan.
2005
XA/c Dr.
BillpayableA/c
(Ac c eptanc egiventoMr.X)
10,000
10,000
TransactionNo.3
Acceptanceismet(paidofduedate).Thejournalentryis:
4April.
2005
BillpayableA/c Dr.
CashA/c
(Ac c eptanc eispaidinc ash)
10,000
10,000
DifferentUsesofaBillofExchange:
Intheaboveillustration,wejustdiscussedonlyoneuseofabillofexchangei.e.,thedrawerretainedthebill
withhimselftillduedateandthenpresentedtotheacceptor,whohonoredthebill(paidcashtothedrawer).
Everydrawerorreceiverofabillhasthreeoptionsforhim.
1.Hecanretainthebilltilltheduedate.(Asdiscussedabove).
2.Hecansendthebilltohisbankforcollection.Bankwillpresentthebillbeforedraweeonduedateand
willcollecttheamountfordrawer.Viewaccountingtreatmentforthisoptionon"BillofExchangeSent
toBankforCollection"page
3.Hecanendorsethebilltooneofhiscreditorsinsettlementofhisowndebts.Viewaccounting
treatmentforthisoptionon"EndorsementofBillofExchange"page
4.Hecandiscountitwithhisbankifheisinneedofmoneyandcannotwaittilltheduedate.View
accountingtreatmentforthisoptionon"DiscountingofaBillofExchange"page
Inthesamewayeveryacceptorhasfourpossibilities.
1.Hemaypaytheamountofbillonpresentation.(Asdiscussedabove).
2.Hemayrefusetohonorthebill.Itiscalleddishonorofabillofexchange.ReadDishonorofBillof
Exchange
3.Hemayrequestthedrawertorenewthebill(extendingtheperiodofpayment).ReadRenewalofBillof
Exchange
4.Hemaygetthebillretired.(payinghisobligationbeforetheduedate).ReadRetiringaBillofExchange
UnderRebate.
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Morestudymaterialfromthistopic:
Definitionandexplanationofbillofexchange
Typesandclassificationofbillofexchange
Accountingtreatmentofbillofexchange
http://www.accountingexplanation.com/accounting_treatment_of_bills_of_exchange.htm
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8/13/2016
AccountingforaBillofExchange,JournalEntriesAccountingExplanation.com
Discountingofabillofexchange
Endorsementofbillofexchange
Billofexchangesenttobankforcollection
Dishonorofbillofexchange
Renewalofbillofexchange
Insolvencyofoneparty
Retiringabillofexchangeunderrebate
Accommodationbillsofexchange
Billsreceivableandbillspayablebooks
Promissorynote
Questionsandanswers
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