Bill Discounting with Bank Journal Entries

Many years ago, bill of exchange are so popular. That is the reason, it was added in Indian basic accounting books. Now, same Bill of exchange is check. Still, it is live as it is. First of all know about bill of exchange before learning this journal entries. Bill of exchange is order letter in which it is order to person to pay money to the holder of same bill of exchange or Bill Receivable. But sometime, bill receivable holder need money for promoting his business or personal use. So, he or she has facility to discount it from bank before maturity of bill.

For example, A sold goods to B on Credit. A bought good from C. A has written bill of exchange and gives it to C as the price of his bought goods. In this bill, A ordered to B to pay to the holder of Bill. Means, pay to C. But, C needs urgent money. So, C will discount it from Bank. So, accounting transactions will come whose journal entries are needed.

When C discounts the Bill from Bank

In the books of C

Bank Account Debit

Discounting Charge Account Debit

Bill  Receivable Account Credit


Logic of This Journal Entry


C received money, so, it has increased his current asset. Before maturity, he received money, so, he suffered the loss of some money in the form of discounting charges. So, discounting charges will be debit.

Discounting Charges = Bank will charge interest upto due date of bill + Also service commission

In the Books Drawee


Drawee is B

There will not journal entry of this.

At Maturity of Bill

In the books of C

No journal entry

In the books of B

Bill Payable Account Debit

Bank Account Credit

Logic of This Journal Entry

B's liability of bill payable has decreased by payment to bank. So, bill payable account will debit

Current asset of B has decreased with payment. So, bank account credit

Related : Bill of Exchange Accounting

Reference

11th Class Accounting eBook