The compilation of these Bill of Exchange Notes makes students exam preparation simpler and organised.
Renewal and Retiring of the Bill
A Bills of Exchange is an instrument in writing, containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, all the orders of the certain person or to the bearer of the instrument. Let us see about the renewal of bills of exchange.
When a person sells some good to a party, then he /she wants to take some written assurance that payment will be received within a specified period. Various types of negotiable instruments admit for this purpose, but the most commonly used instruments are bills of exchange.
Renewal of Bills of Exchange
Bills of exchange have some specified time period. Drawee/acceptor has to make payments within that specified time period to Drawer/maker. But sometimes when they are not able to pay for the bill on the due date then he/she may ask the drawer to extend the period of credit.
If the drawer agrees then the drawer may cancel the old bill and draw a fresh bill for the extended period which the acceptor accepts. Cancelling the old bill and drawing of a fresh bill for an extended period is called Renewal of Bill. For the extended period, the drawee is asked to pay interest which can be paid in cash or added to the amount of a new bill.
How to make entry of Renewal of Bills of Exchange
As when a new bill of exchange is issued, it affects both parties. Entry for renewal is passed in the books of the drawer as well as the acceptor. If the drawer has discounted or dishonoured bill, the same entries are made as for dishonour.
Thereafter second entry is passed for interest. Interest may be paid in cash by cheque. If interest is paid in cash, then the drawer debits the cash a/c and credits the interest a/c. If interest is paid by cheque then the drawer debits the bank a/c and credits interest a/c.
On the other hand, the acceptor debits the interest and credits the cash or bank a/c. For drawer, interest is the income and for acceptor, interest is an expense. Cash or cheque is received by the drawer and is paid by the acceptor.
If the acceptor does not pay interest on cash but agreed to pay later then instead of debiting cash/bank, the drawer debits the amount of the acceptor. Whereas acceptor credits the amount of drawer instead of cash/bank.
Because of the amount of interest drawer becomes the creditor and the acceptor becomes the debtor. Interest is debited and credited in the same way whether paid in cash or not. A third entry is for the renewal of the bill. If the dentist has been paid in the case then the bill of an amount of the new bill will be the same as that of the old bill. If interest is not paid in cash then a new bill will include the old bill amount and interest.
Renewal in case of Partial Payment
If the acceptor is unable to pay for the bill in full, he/she can also pay partially. In this case, a new bill will be for the remaining amount. Interest will then be charged on the remaining amount for the extended period of credit. The amount of the new bill will include unpaid amount, interest, and nothing charges if any.
The first main entry is made to cancel the old bill. A second entry is made for partial payment. The third entry is made for interest. And the fourth entry is for drawing and accepting the new bill.
Renewal in case of Dishonour of a Bill
Sometimes bills can be renewed by the drawer even after dishonour of the bill. In this case, the acceptor is the debtor of the drawer for the amount of bill, noting charges and interest. If interest and noting charges or paid in cash by the acceptor, the drawer debits cash/bank and credits the interest and noting charges a/c.
On the other hand, the acceptor debits the noting charges and interest a/c and credits the cash/ bank a/c. If these amounts are paid in cash, a fresh bill is drawn by the total of the old bill amount, interest, and noting charges.
Following entries are passed in this case:
In the book of Drawer
1. Entry for Cancellation of the Bill:
Acceptor’s Personal A/c………………. Dr
To Bills Receivable A/c
2. Entry for Receipt of Cash:
Cash A/c ……………………………………….Dr
To Acceptor’s Personal A/c
3. Entry for Interest Received:
Cash A/c ……………………………………….Dr
To Interest A/c
4. Entry for Interest not yet received but due:
Acceptor’s personal A/c ……………………Dr
To Interest A/c
5. Entry for New Acceptance:
Bills Receivable A/c ………………………….Dr
To Acceptor’s Personal A/c
In the books of Acceptor
1. Entry for Cancellation of Bill:
Bills Payable A/c …………………………….. Dr
To Drawer Personal A/c
2. Entry for part payment in cash:
Drawer’s Personal A/c………………………………… Dr
To Cash A/c
3. Entry for Interest Paid:
Interest A/c …………………………………………. Dr
To Cash A/c
4. Interest not paid:
Interest A/c …………………………………………. Dr
To Drawer’s Personal A/c
5. Entry for Accepting New Bill:
Drawer’s Personal A/c ……………………………. Dr
To Bills Payable A/c
Example:
Question:
A bill of Exchange is drawn by-
a. Debtor
b. Creditor
c. Holder
d. none of these
Answer:
The correct answer is “b”.
The creditor draws the bill of exchange. This bill has to be accepted before it becomes enforceable.