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Retiring of a Bill of Exchange:

Learning Objectives:

  1. Make journal entries in the books of drawer and drawee when a bill of exchange is retired before it maturity.

Definition and Explanation:

Retiring a bill means making payment before the date of maturity. When the acceptor of a bill is prepared to make the payment of the bill before the due date, he may ask the holder to accept the payment, provided he receives some rebate or discount for the unexpired period. Such a rebate or discount is an expense to the party receiving the payment and gain to the party making the payment.

Journal entries:

Creditor's Books:

Cash account (actual amount received) [Dr]
Rebate account (rebate granted) [Dr]
     To Bill receivable account [Cr]

Debtor's Books:

Bill payable account [Dr]
     To cash account [Cr]
     To Rebate account  [Cr]

Example:

A sells goods for $1,000 to B and draw a bill at three months for the amount. B accepts it and returns to A. B retires his acceptance under a rebate of $10.

Record the transactions in the books of A and B.

Solution:

Journal Entries in the Books of A

B   1,000  
     To sales account     1,000
(Goods sold on credit)      
     
Bills receivable account   1,000  
     To B     1,000
(Acceptance received)      
     
Cash account   990  
rebate account   10 1,000
     To Bills receivable account      
(Amount of the bill received and rebate allowed)      

Journal Entries in the Books of B

Purchases account   1,000  
     To A     1,000
(Goods purchased on credit)      
     
A   1,000  
     To Bills payable     1,000
(Acceptance received)      
     
Bills payable account   1,000  
     To Cash account     990
     To rebate account     10
(Acceptance retired under rebate)      

Example 2:

A bill for $600 is drawn by B & Co. on C and accepted by the latter payable at his bank. Show what entries should be passed in the books of B & Co. under each of the following circumstances:

  1. If they retain the bill till the due date and then realized it on the maturity.
  2. If they discounted it with their bank for $580
  3. If they endorsed it over to their creditors M & Co. in settlement of their debt.
  4. If they sent the same to their bank for collection.

State what further entries would be passed in the books of B & Co. in each of the above cases if the bill was dishonored on the due date.

Solution:

Journal Entries in the Books of B & Co.

1 Bill receivable account   600  
       To C     600
  (Acceptance received)      
 
     
  Cash account   600  
       To bill receivable account     600
  (Payment of the bill received)      
 
     
2 Bills receivable account   600  
       To C     600
  (Acceptance received)      
 
     
  Bank account   580  
  Discount account   20  
       To Bills receivable account     600
  (Bill discounted)      
 
     
3 Bills receivable account   600  
       To C     600
  (Acceptance received)      
 
     
  M & Co   600  
       To Bills receivable account     600
  (Bill endorsed)      
 
     
4 Bill receivable account   600  
       To C     600
  (Acceptance received)      
 
     
  Bank for collection account   600  
       To Bill receivable account     600
  (Bill sent for collection)      

When the bill is dishonoured the following further entries would be passed in each of the circumstances:

1 C   600  
       To Bills receivable account     600
  (Bill dishonoured)      
 
     
2 C   600  
       To Bank account     600
  (Bill dishonoured)      
 
     
3 C   600  
       To M & Co.     600
  (Bill dishonoured)      
 
     
4 C   600  
       To Bank for collection     600
  (Bill dishonoured)      
 
     

You may also be interested in other articles from "accounting for bills of exchange page" chapter:

  1. Definition and Explanation of Bill of Exchange
  2. Advantages of a Bills of Exchange
  3. How a Bill of Exchange Functions
  4. Promissory Note
  5. Difference between Bill of Exchange and Promissory Note
  6. Difference Between Bill of Exchange and Cheque/Check
  7. Recording Transactions of Bill of Exchange
  8. Drawing, Acceptance, and Payment of Bill of Exchange
  9. Discounting of Bill of Exchange
  10. Bills of Exchange for Collection
  11. Endorsement of a Bill of Exchange
  12. Dishonour of a Bill of Exchange
  13. Renewal of a Bill of Exchange
  14. Retiring of a Bill of Exchange
  15. Accommodation Bill of Exchange
  16. Insolvency of the Acceptor in a Bill of Exchange
 

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■ Journal
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■ Accounting For Bills of Exchange
■ Subdivision of Journal
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■ Single Entry System/Accounting From Incomplete Records
■ Accounting For Non-Trading Concerns
■ Accounting for Consignment / Consignment Accounts
■ Accounting for Joint Ventures
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