Bill of Exchange for Collection:
Learning Objectives:
-
Make journal entries in the books of creditor,
debtor, and that of bank when a bill of exchange is sent to the bank 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 realised on that date.
This does not mean discounting of bill. The bank will not credit the
customer or client until the amount is actually realised. If the bill is
sent to the bank with such instructions it is know as "bill sent for
collection". It will be recorded in the books of the creditor as under:
Creditor's Books
| (a) When a bill of
exchange is sent to the bank for collection: |
| Bank for collection account [Dr.] |
|
To Bills receivable account
[Cr.] |
| (b) On receipt of
information from the bank as to collection of the bill on the due date: |
| Bank account [Dr.] |
|
To Bank for collection account [Cr.] |
| |
Debtor's Books:
No entries are recorded in debtor's books. He
has no concern with collection of bills.
Banker's Books:
If the bill is received by bank from its
customer for collection, there will be no entry until the bill is collected,
when the bill is collected, the following entry will be passed:
| Cash account [Dr.] |
|
To Customer's personal account [Cr.] |
|
To Collection Charges account [Cr.] |
Example:
P sold goods worth $1,000 to Q on credit
for which a bill was drawn by P on Q. It was duly accepted by Q. P sent the
bill to his banker for collection and the bank charged $5 for collecting the
bill. The bill was met by Q on the due date.
Record the above transactions in the books
of P, Q and Bank.
Journal Entries in the Books of P
| |
|
$ |
$ |
| Q |
|
1,000 |
|
|
To Sales account |
|
|
1,000 |
| (Goods sold on
credit) |
|
|
|
|
|
|
|
| Bills
receivable account |
|
1,000 |
|
|
To Q |
|
|
1,000 |
| (Acceptance
received) |
|
|
|
|
|
|
|
| Bank for
collection account |
|
1,000 |
|
|
To Bills receivable account |
|
|
1,000 |
| (Bill sent to
bank for collection) |
|
|
|
|
|
|
|
| Bank account |
|
995 |
|
| Bank charges
account |
|
5 |
|
|
To Bank for collection account |
|
|
1,000 |
| (acceptance
collected by the bank) |
|
|
|
|
|
|
|
Journal Entries in the Books of Q
| |
|
$ |
$ |
| Purchases
account |
|
1,000 |
|
|
To P |
|
|
1,000 |
| (Acceptance
given) |
|
|
|
|
|
|
|
| P |
|
1,000 |
|
|
To Bills payable account |
|
|
1,000 |
| (Acceptance
given) |
|
|
|
|
|
|
|
| Bills payable
account |
|
1,000 |
|
|
To Cash account |
|
|
1,000 |
| (Bill paid) |
|
|
|
|
|
|
|
Journal Entries in the Books of Bank
| Cash account |
|
1,000 |
|
|
To P |
|
|
995 |
|
To Collection charges account |
|
|
5 |
| (Being the proceeds
of a bill is collected) |
|
|
|
Note: When the bill is
received by the banker from P for collection, there will be no entry in the
books of the bank until the bill is collected.
|
