Discounting a Bill of Exchange:
Learning Objectives:
-
Make journal entries in the books of creditor
and debtors at the time of discounting of bill of exchange.
If the holder of a bill is need of money
before the due date of the bill he may sell it to the bank. The bank (buyer)
will give cash fir it in consideration of a small charge. This is called
discounting the bill. The amount deducted by bank of the bill from the face
value of the bill is called "discount". The discount is usually calculated
at a certain rate per annum on the amount of the bill. The accounting
entries will be:
Creditor's Books
| (a) When a bill of
exchange is discounted. |
| Bank account (discounted
value) [Dr.] |
| Discount account (amount
of discount) [Dr.] |
|
To Bills receivable account
[Cr.] |
Debtor's Books:
The acceptor has no concern with the
discounting of the bill. He has to pay it on the due date to the holder.
Whoever he may be. There will be no journal entry for discounting of the
bill of exchange.
Example:
X draws a three month bill for $2,000 on Y
on the 1st January, 1991 for the value received. Y accepts it and returns it
to X, who discounts it on 4th January, 1991 with his bank at 6 per cent per
annum. Y pays acceptance on the due date.
Record the transactions in the books of X
and Y.
Journal Entries in the Books of X
| 1991 |
|
|
$ |
$ |
| Jan. 1 |
Bills
receivable account |
|
2,000 |
|
| |
To Y |
|
|
2,000 |
| |
(Acceptance
received) |
|
|
|
| |
|
|
|
|
| Jan. 4 |
Bank account |
|
1,970 |
|
|
Discount
account |
|
30* |
|
|
To Bills receivable account |
|
|
2,000 |
|
(Bill
discounted at bank) |
|
|
|
|
|
|
|
|
*Calculation
of discount: 2000 × 6/10 × 3/12
Journal Entries in the Books of Y
| 1991 |
|
|
$ |
$ |
| Jan. 1 |
X |
|
2,000 |
|
| |
To Bills payable account |
|
|
2,000 |
| |
(Acceptance
given) |
|
|
|
| |
|
|
|
|
| Apr. 2 |
Bills payable
account |
|
2,000 |
|
|
To Cash account |
|
|
2,000 |
|
(Acceptance
paid) |
|
|
|
|
|
|
|
|
|
