Meaning of Bill of Exchange

According to the Negotiable Instruments Act 1881, ‘a bill of exchange is defined as 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, or to the order of a certain person or to the bearer of the instrument.’

Features of Bill of Exchange

 It is important to have a bill of exchange in writing

 It must contain a confirm order to make a payment and not just the request
 The order should not have any condition
 The bill of exchange amount should be definite
 Fixed date for the amount to be paid
 The bill must be signed by both the drawee and the drawer
 The amount stated on the bill should be paid on-demand or on the expiry of a fixed time
 The amount is paid to the beneficiary of the bill, specific person, or against a definite order

Types of Bill of Exchange

 Documentary Bill- In this, the bill of exchange is supported by the relevant documents that
confirm the genuineness of sale or transaction that took place between the seller and buyer.
 Demand Bill- This bill is payable when it demanded. The bill does not have a fixed date of
payment, therefore, the bill has to be cleared whenever presented.
 Usance Bill- It is a time-bound bill which means the payment has to be made within the given
time period and time.
 Inland Bill- An Inland bill is payable only in one country and not in any other foreign
country. This bill is opposite to foreign bill.
 Clean Bill- This bill does not have any proof of a document, so the interest is comparatively
higher than the other bills.
 Foreign Bill- A bill that can be paid outside India is termed as a foreign bill. Two examples of
a foreign bill are an export bill and import bill.
 Accommodation Bill- A bill that is sponsored, drawn, accepted without any condition is
known as an accommodation bill.
 Trade Bill- This kind of bill is specially related only to trade.
 Supply Bill- The bill that is withdrawn by the supplier or contractor from the government
department is known as the supply bill.

Advantages of Bill of Exchange

 Legal Document- It is a legal document, and if the drawee fails to make the payment it will be
easier for the drawer to recover the amount legally.
 Discounting Facility- The bill bearer has to wait till the due date of the bill to receive the
payment and it from the bank before its due date.
 Endorsement Possible- This bill of exchange can be exchanged from one individual to another
for the adjustment of the debt.

Bill of Exchange Format

In the above-mentioned bill of exchange format, Kunal Singh is the drawer as well as the payee of the
bill.

Parties of Bill of Exchange

A bill of exchange has three parties:

(1) Drawer:

 The drawer is the maker of a bill of exchange.

 The bill is signed by Drawer.
 A creditor who is entitled to receive payment from the debtor can draw a bill of exchange.

(2) Drawee:

 Drawee is the person upon whom the bill of exchange is drawn.

 Drawee is the debtor who has to pay the money to the drawer.
 He is also known as ‘Acceptor’.

(3) Payee:

 The payee is the person to whom payment has to be made.

 The payee may be the drawer himself or a third party.

Importance of Promissory note in Bill of Exchange

According to the Negotiable Instruments Act 1881, the meaning of promissory note is ‘an instrument
in writing (not being a banknote or a currency note), containing an unconditional undertaking signed
by the maker, to pay a certain sum of money only to or to the order of a certain person, or to the
bearer of the instrument. However, according to the Reserve Bank of India Act, a promissory note
payable to bearer is illegal. Therefore, a promissory note cannot be made payable to the bearer.’

What is Promissory Note

The promissory note is defined as an instrument in writing (not being a banknote or a currency note),
containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to
or to the order of a certain person, or to the bearer of the instrument.

Parties to a Promissory Note

There Are Two Parties to a Promissory Note:

(1) Maker OR Drawer:

 Maker is the person who makes or draws the promissory note.

 Who promises to pay a certain sum as specified in the promissory note.
 He is also called the ‘Promisor’.

(2) Payee:

The payee is the person in whose favour the promissory note is drawn.

The above mentioned is the concept, that is elucidated in detail about ‘Bill of Exchange’ for the
Commerce students.

Important Terms:

Q.1 Define the Terms:

(a) Term of Bill or Period of Bill;

(B) Due Date;

(C) Days of Grace; and

(D) Date of Maturity.

Answer:

(a) Term of Bill or It is the time period between the date on which a bill is drawn and the date
Period of Bill on which it is payable.

(B) Due Date It is the date on which the payment of the bill is due.

(C) Days of Grace These are the three extra days added to the period of bill.

(D) Date of Maturity The date which comes after adding three days of grace to the period of bill.

Q.2 Briefly Explain the Terms :

(a) Discounting of Bill

(B) Endorsement of Bill; and

(C) Bill Sent for Collection.

Answer:

(a) Discounting of Bill  It means encashment of bill before the date of its maturity.
  The bank deducts its charges from the bill.

 Endorsement means the transfer of bill or promissory note to

another person.
(B) Endorsement of Bill
 It is transferred on account of the settlement of debts and dues.

 When a bill is sent to the bank for collection with instruction, that it
will be retained till the maturity date.
(C) Bill Sent for
 Bill will be realized on its due date. It is known as ‘Bill sent for
Collection
collection’.

Q.3 Briefly Explain the Terms

(a) Dishonour of Bill;

(B) Noting of a Bill; and

(C) Nothing Charges.

Answer:

 When payment is not made by the acceptor of the bill on its due date. It is
(a) Dishonour known as ‘Dishonor of Bill’.
of Bill  Non-payment may be due to insufficient balance or insolvency.

 On dishonour of a bill, when this fact is brought to the notice of a Notary

(B) Noting of a Public, it is termed as ‘Noting of a bill’.
Bill  Notary public charges to record or take a noting of dishonour.

(C) Noting  It is the fee paid to the Notary Public for noting of dishonour of a bill.
Charges
Q.4 What Do You Mean by Retiring of a Bill and Renewal of a Bill?
Answer:

 When the Drawee pays the bill before its due date, It is termed as the
retirement of a bill.
(a) Retiring of  It happens with the mutual understanding between the Drawer and the
a Bill Drawee.
 To encourage Retiring of the bill, the holder allows some discount called
Rebate on the bill amount from the date of retiring the bill to the maturity.

 When the holder of a bill is not in a position to meet the bill on its due date,
Drawee approaches the Drawer with a request of extension of time for
payment.
(B) Renewal of
 If Drawer agrees, the old bill is cancelled and a fresh bill with the new terms
a Bill
of payment is drawn and duly accepted and delivered. This is called Renewal
of the Bill.

Important Points Regarding Due Date or Date of Maturity

Q.1 Briefly Explain the Following Situations Related to Due Date of a Bill.

(a) When the Period of Bill is Given in Months

(B) When the Period of Bill is Given in Days

(C) When Maturity Date Falls on a Public Holiday

(D) When the Maturity Date Has Been Declared as Emergency Holiday
Answer:
 In this case, the maturity date is calculated according to
calendar months.
 Ignoring the number of days in a month.
 3 days of the Grace period are added.
(a) When the Period of Bill is
Given in Months For example: – if a bill dated 4th May, 2017is payable 3 months after
date:-

= Then the maturity date will be 4th August 2017 + 3 Days of Grace =
7 August 2017.
 The maturity date will be calculated in days,
 This excludes the date of transaction but includes the date of
payment.
 3 days of the Grace period are added in this case also.
(B) When the Period of Bill is
 For example: -if a bill dated 5th June 2017 is payable after 65
Given in Days
days, then the maturity date will be:-

=25 Days of June + 31 Days of July + 9 Days of August + 3 Days of

Grace=12th August 2017
 If the due date of the bill is on the national holiday,
 Then the maturity day of the bill shall be the preceding
business day.
(C) When Maturity Date Falls on a  Example:-If due date of the bill falls on 26th January
National Holiday (Republic Day), then its due date will be 25th January.
 If the due date is 15th August (Independence Day), then the
due date will be 14th August.

 If the due date of the bill is declared as an emergency

holiday,
 Then the due date of the bill shall be after 1 day from the
(D) When the Maturity Date Has
date of maturity.
Been Declared as Emergency
 Example:- if the due date of a bill is 25th July and it is
Holiday
declared as an emergency holiday, then the due date will be
26th July.

Q.2 What Do You Mean by the Following Terms-

(a) Maturity Date in Case of ‘bill at Sight’ or ‘instrument Payable on Demand’.

(B) Maturity Date in Case of ‘bill After Date’.

(C) Maturity Date in Case of ‘bill After Sight’.

Answer:
 The bill at sight becomes due for
payment as soon as, it is presented for
payment.
 In case of ‘Instrument payable on
(a) Maturity Date in Case of ‘bill at Sight’ or ‘instrument
demand’, No time for payment is
Payable on Demand’.
mentioned.
 Such Bills are not entitled to the Days
of Grace. `

 In the case of ‘Bill after date,’ the time

for payment is mentioned.
(B) Maturity Date in Case of ‘bill After Date’.  Three Days of Grace is allowed on
such a bill.

 In case of ‘Bill after Sight, payable at a

fixed period ‘after sight’, and
 the period begins from the date of
(C) Maturity Date in Case of ‘bill After Sight’. accepting the bill.
 Three Days of Grace is allowed on
such a bill.

Accounting Treatment of Bill of Exchange or Promissory Note

Q.1 What Are the Options Available to the Holder of the Bill?
Answer:
1. Bill can be Retained till the date of Maturity
2. Bill can be discounted with the bank
The Holder of the Bill Can Use It in
3. Bill can be Endorsed or Negotiated in favour of Creditor
Either of the Following Ways
4. Bill can be sent to Bank for collection

Q.2 What Do You Mean by Bills Receivable and Bills Payable?

Answer:
 For the person who draws the bill of exchange and is
entitled to receive its payment is known as Bill
Receivable.
(a) Bills Receivable or B/R
 The drawer of the bill will show B/R on the assets side
of the Balance Sheet.

 For the person who accepts the bill, and is liable to make
its payment, is known as Bills Payable.
(B) Bills Payable or B/P  The Drawee of the bill will show B/P on the liabilities
side of the Balance Sheet.

When Bill Is Discounted With the Bank

Q.1 When Bill is Discounted With the Bank. Give the Necessary Journal Entries in the Books of
Drawer and Drawee.
Answer:
  Discounting of the bill means encashing the bill before the date of its maturity.
 Bank charges an amount (Discounting charges) from the bill amount.

Renewal of Bill

Q.1 What Do You Mean by Renewal of a Bill?

Answer:
 When the acceptor is not in his capacity to pay his bill on the due date.
 He may request the drawer of the bill to cancel the original bill and draw a new
Renewal of
Bill in place of the old Bill.
Bill
 If drawer agrees and a new bill is drawn, it is known as Renewal of a Bill.

Dishonour of a Bill

Q.1 What Do You Mean by Dishonour of Bill?

Answer:
 A bill is said to be dishonoured when the drawee fails to make the payment
on the date of maturity.
Dishonour of a  The bill may get dishonoured when the drawee does not have sufficient
Bill funds to pay the bill or he becomes insolvent.
 In this situation, the liability of the acceptor is restored.

Accommodation Bill

Q.1 Explain the Concept of Accommodation Bill.

Answer:
 Accommodation bill is drawn and accepted for the
purpose of mutual help.
 It is accepted by the drawee to accommodate the drawer.
 Hence, the drawee is called the ‘Accommodating Party’
Accommodation Bill
and the drawer is called the ‘Accommodation Party’.
 Accounting entries are made for accommodation bills in
the same manner as for other bills.

Q.2 Distinguish Between an Accommodation Bill and a Trade Bill.

Answer:
Basis Trade Bills Accommodation Bills
These bills are drawn to
These bills are drawn to help someone in need of
Objectives facilitate the trade transactions of
financial assistance.
sale and purchases of goods.
There is a definite consideration
Consideration These bills are drawn without consideration.
for which the bill is accepted.
Extension of Trade bills are a form of credit
These bills are not a form of credit extension.
Credit extension.
When trade bills are discounted,
When these bills are discounted, the proceeds
Proceeds the proceeds remain with the
may be shared by two parties in an agreed ratio.
holder.
 In case of dishonour of these bills, the drawer
If trade bills are dishonoured, the cannot file a suit against the drawee.
Recovery amount may be recovered easily
through the court.

UNIT-II: CONSIGNMENT ACCOUNTS: Consignment – Meaning – Features– Proforma invoice -

Account sales – Del credet recommission-Accounting treatment in the books of the consignor and
the consignee Valuation of consignment stock –Treatment of Normal and abnormal Loss - Invoice of
goods at a price higher than the cost price. (Including problems)

Consignment Overview

Consignment occurs when goods are sent by their owner (the consignor) to an agent (the consignee),
who undertakes to sell the goods. The consignor continues to own the goods until they are sold, so the
goods appear as inventory in the accounting records of the consignor, not the consignee.

Consignment Accounting - Initial Transfer of Goods

When the consignor sends goods to the consignee, there is no need to create an accounting entry
related to the physical movement of goods. It is usually sufficient to record the change in location
within the inventory record keeping system of the consignor. In addition, the consignor should
consider the following maintenance activities:

 Periodically send a statement to the consignee, stating the inventory that should be on the
consignee's premises. The consignee can use this statement to conduct a periodic
reconciliation of the actual amount on hand to the consignor's records.
 Request from the consignee a statement of on-hand inventory at the end of each accounting
period when the consignor is conducting a physical inventory count. The consignor
incorporates this information into its inventory records to arrive at a fully valued ending
inventory balance.
 It may also be useful to occasionally conduct an audit of the inventory reported by the
consignee.

From the consignee's perspective, there is no need to record the consigned inventory, since it is owned
by the consignor. It may be useful to keep a separate record of all consigned inventory, for
reconciliation and insurance purposes.

Consignment Accounting - Sale of Goods by Consignee

When the consignee eventually sells the consigned goods, it pays the consignor a prearranged sale
amount. The consignor records this prearranged amount with a debit to cash and a credit to sales. It
also purges the related amount of inventory from its records with a debit to cost of goods sold and a
credit to inventory. A profit or loss on the sale transaction will arise from these two entries.

Depending upon the arrangement with the consignee, the consignor may pay a commission to the
consignee for making the sale. If so, this is a debit to commission expense and a credit to accounts
payable.

From the consignee's perspective, a sale transaction triggers a payment to the consignor for the
consigned goods that were sold. There will also be a sale transaction to record the sale of goods to the
third party, which is a debit to cash or accounts receivable and a credit to sales.
How to Calculate Value of Unsold Stock (With Formula)

If all the goods are not sold by the Consignee within the accounting period, then the unsold stock is
brought into account by the Consignor. As usual, the unsold stock in the hands of the consignee
should be valued on cost price or market price whichever is less.

Here the cost means the cost at the moment when the goods reached the Consignee’s godown. The
cost includes by adding proportionate non-recurring expenses incurred by the consignor as well as the
consignee.

It is calculated as follows:

(a) The proportionate Cost Price and

(b) Proportionate direct expenses i.e. the expenses incurred by the Consignor and Consignee till the
goods reached the godown of the Consignee.

Expenses incurred by the Consignee after the goods have been brought to the shop/godown are not
considered. Correct profit or loss can be ascertained by the proper valuation of unsold stock which is
credited to Consignment Account.

Value of unsold stock = Cost Price of Closing Stock + Proportionate non-Recurring Expenses

The Consignor usually maintains three accounts:

1. Consignment Account:

It is a nominal account. It is in fact a Special Trading and Profit and Loss Account. The balance, in
this Account, represents either profit or loss on consignment which is finally transferred to General
Profit and Loss Account.

2. Consignee’s Personal Account:

It is a personal account. It is mainly prepared to ascertain the amount due from the Consignee.

3. Goods Sent on Consignment Account:

It is a real account. It is closed by transferring its balance to Purchase Account or sometimes credit
side of Trading Account.

Mr. Ram Manohar of Bombay sent 100 bicycles, which cost Rs 900 each, to Gopal of Madras on
consignment basis. Ram Manohar paid freight of Rs 1,200, Cartage Rs 300 and Insurance Rs 400. In
Madras, Gopal has spent Rs 100 as cartage, loading and unloading Rs 50.

The bicycles have been kept in a godown at a rent of Rs 100 p.m. At the end of accounting period, 20
bicycles remained unsold. The selling price of the bicycle is Rs 1,000 at Madras. What should be the
value of stock unsold?
Consignment Transaction at Cost Price Method (Accounting Entries)!

The consignor wants to know two things which are:

(1) To ascertain profit or loss when goods on consignment sold by the consignee.

(2) To know the settlement of account by the consignee i. e. to know the amount due by or due to
consignee.

The consignment account is opened by the consignor to know profit or loss on each consignment.
Each consignment is distinguished from the other by naming it in respect to place, examples,
Consignment to Madras, Consignment to Bombay etc.

If there are a number of consignments in one place, then the name of the consignee is added to the
consignment account, for example: Consignment to Ramu Account, Consignment to Krishna Account
etc. For that, he opens a Consignment Account for each consignment.

It is revenue (Nominal) Account. It is a special Trading and Profit and Loss Account. Consignee
Account is prepared to know the amount due by or due to the Consignee. It is a personal account.

Journal Entries:

Following are the set of journal entries in the books of Consignor:

Consignment Account Dr

  To Goods Sent on Consignment A/c

(Being the cost of goods sent on Consignment)

(2) When Expenses are Incurred by the Consignor:

Consignment Account Dr.

  To Bank/Cash Account
(Being the expenses incurred on Consignment)

(3) When Advance is Received from Consignee:

Cash/Bank/Bill Receivable Account Dr.

To Consignee Account

(Being the amount of advance received from Consignee)

(4) When the Bill is Discounted by the Consignor with his Banker:

Bank Account Dr.

Discount Account Dr.

To Bills Receivable A/c

(Being the Bill is discounted)

Note: The Discount on Bills can be transferred to Profit and Loss Account or to the Consignment
Account. Since it is a cost of raising finance, it can be transferred to Profit and Loss Account.

After the Consignee sends the Account Sales:

(5) When the Gross Sales Proceeds are Reported by the Consignee:

Consignee Account Dr.

  To Consignment Account

(Being the gross sales proceeds reported by the Consignee)

(6) For Expenses Incurred by the Consignee:

Consignment Account Dr.

  To Consignee Account

(Being the expenses incurred by the Consignee)

(7) For Commission Payable to the Consignee:

Consignment Account Dr.

  To Consignee Account

(Being the Commission due to Consignee)

(8) For Unsold Stock Remaining with the Consignee:

Consignment Stock Account Dr.

To Consignee Account

(Being the value of unsold stock)

(9) For Transferring the Profit or Loss to Profit and Loss:

For Profit:

Consignment Account Dr.

To Profit and Loss Account

(Being the profit transferred to Profit & Loss Account)

For Loss:

Profit and Loss Account Dr.

  To Consignment Account

(Being the loss on consignment transferred to Profit & Loss A/c)

(10) For Settlement of Account by the Consignee:

Generally the balance amount is settled by the Consignee when he sends the Account Sales:

Bank/Cash/Bill Receivable Account Dr.

  To Consignee Account

(Being the amount due from Consignee is received)

(11) When Goods Sent on Consignment Account is Closed:

Goods sent on Consignment Account Dr.

  To Trading/Purchase Account

(Being the amount of goods sent on Consignment)

Note: If it is a manufacturing concern, then the Goods sent on Consignment account is closed by
transferring it to Trading Account. If it is a trading concern, then it is closed by transferring it to
Purchase Account.

7 Terms Used in Consignment Accounts

1. Proforma Invoice:

When the consignor sends the goods to the consignee, he forwards a statement showing the particulars
of goods such as quality, quantity, price, markings, packing etc. and this statement is called the
Proforma Invoice. But in case of regular sale, an invoice is prepared and sent along with the goods. It
implies that a sale has taken place.
2. Recurring and Non-recurring Expenses:

Consignor and consignee have to incur some expenses for dispatching and selling the goods. These
expenses of consignment are of two types: Non-Recurring Expenses and Recurring Expenses.

3. Non-recurring Expenses:

Non-recurring expenses are incurred for bringing the goods from the place of the consignor to the
place of the consignee. Hence, all the expenses incurred till the goods reach the godown of the
consignee are non-recurring expenses. These expenses are incurred only once on a particular con-
signment. It will increase the value of goods. These expenses are paid by the consignor or by the
consignee on behalf of the consignor.

The abovementioned expenses do not occur again like the recurring expenses. These expenses are met
on the whole consignment. These expenses are added to the cost of the consignment so as to arrive at
the cost price of goods at the point of sale. Again these are taken into consideration when the value of
closing stock and abnormal losses are calculated.

4. Recurring Expenses:

These expenses are incurred after the goods have been received at consignee’s godown. These
expenses are incurred quite often and of recurring in nature. These expenses occur regularly at fixed
intervals. Generally these expenses are incurred after the goods have reached the place of business by
consignee. They are met by the consignor or consignee. These expenses do not increase the value of
goods.

5. Advance:

Sometimes, consignor may ask the consignee to pay an advance for the part of the value of goods
consigned. Consignee may send the advance in the form of a draft or cheque. If the consignee is not in
a position to advance money, a Bill may be drawn on consignee. Consignor discounts the Bill and gets
the money.

The amount of discount on the Bill may be debited to Consignment Account or debited to Discount
Account. Advance given by the consignee will be deducted from the sale proceeds.

6. Account Sales:

Periodically or when the goods consigned are sold by the consignee, the consignee will send to the
consignor a statement, which is called Account Sales, showing the amount received by way of sale of
goods, expenses incurred, commission charged, advance payment and balance due to the consignor
and the stock still in hand.

From the Account Sales, the consignor closes his entries in the books regarding the consignment for
that year. He can ascertain the profit or loss resulting from the transactions.

Following is the specimen of an Account sale:

Account sales differ from an invoice. Account sales are prepared and sent by a consignee to a
consigner. But invoice is prepared and sent by a seller to a buyer. In the case of an invoice, the two
parties are debtor and creditor. In the case of account sales, the relationship is that of a principal and
an agent.

7. Commission:

Consignor pays commission to Consignee for selling his goods. Commission is generally calculated at
fixed percentage of total sales as per terms laid down by the Consignor. These commissions may be
simple, or ordinary, special or overriding and Del credere. Ordinary commission is calculated as per
terms laid down by the consignor.

Generally it is calculated on the basis of total sales. Special commission is paid to give further
incentive for increasing the sales. Overriding commission is paid to consignee when he overrides the
specified amount of sales. The commission is also calculated on total sales.

Del Credere:
The consignee is not expected to sell the goods on credit. However, the consignee has the right to sell
the goods on credit, if consignor permits him to do so. Again if consignee makes credit sales and if
there incurs any loss by way of bad debts then such loss should be borne by the consignor.

To avoid such a loss, extra commission is given to the consignee, who is responsible for any bad
debts. This extra commission is called Del Credere commission. It is given for taking risk in credit
sales.

In such cases, consignor receives the gross sale proceeds, whether recovered or not. This is generally
calculated on total sales. Sometimes, del credere commission is restricted to credit sales only. In that
case it is calculated only on credit sales.

Difference between Consignment and Sales

Consignment:

1. Consignment means dispatching (forwarding) of goods from one person to another on a com-
mission basis.

2. Legal ownership is not passed on to the agent, but is within the consignor

3. The relationship between the consignor and consignee is that of a principal and an agent. The
reason is that the consignee sells goods on behalf of the consignor

4. The expenses incurred by the consignee when goods are consigned to him are met by the consignor

5. An order is not essential for consignment.

6. The contract of consignment must be in writing and it is called Consignment Deed.

7. The chief consideration of consignment is commission.

8. The risk of goods is not transferred to the consignee. It rests with the consignor

9. The goods sent on consignment may be called back by the consignor

10. The consignee has to send a statement of sales, called Account Sales, to the consignor

Sale:

1. Sale refers to the transfer of property from the seller to the buyer

2. Legal ownership of the goods is passed on to the buyer

3. The relationship between the seller and the buyer is that of creditors and debtors.

4. Expenses after sale are met by the buyer

5. An order is essential for sales.

6. As soon as the offer is accepted the contract of sale is complete. The contract may be oral or in
writing.
7. The chief consideration of a sale is profit.

8. The risk is transferred along with goods to the buyer

9. Calling back of sold goods is impossible.

10. The buyer need not send such statement.