Bills Collection

What is a bill?

What is meant by collection of bills?

What is the process for bill collection?

Bills are nothing but bills of exchange. As per the Negotiable Instruments Act 1881, a bill of
exchange is “ an instrument in writing containing an unconditional order, signed by the
maker, directing a certain person(1) to pay a certain amount of money only to, or to the order
of a certain person(2) or the bearer of the instrument”. Firstly let us understand bills and in
what way it is used in business. When a person signs a bill it is a legal evidence of debt and
this person will be known as drawer or creditor. The person to whom it is addressed to
would be the drawee or debtor. The drawee needs to acknowledge the bill in writing and
this is known as acceptance of a bill. When the bill is paid on its due date it is known as
discharge of bill. If a bill is both drawn on and payable at the same country it would be
payable in the same currency. This is known as an inland bill. If it drawn in one country and
accepted and payable at another country it is known as foreign bill. A “Hundi” is a bill of
exchange written in a local Indian language governed by local customs and usage. Sample of
a bill of exchange is appended here below:

Stam
Bangalore
p
Rs.20000/- (Rupees Twenty Thousand only) 01st
Jan 2010

Please pay to Mr Kalpesh Shah, or bearer, three months after date, a

sum of Rs.20000/- (Rupees Twenty Thousand only) for value received

To, Signed

Mr Dharmesh Shah

As you can see in the above specimen, there are three entities involved i.e. Mr Yogesh Shah
(Drawer) is intructing Mr Dharmesh Shah(drawee) to pay a specific amount (Rs.20000/-) on
a specific date (1st Apr, 2010) to Mr Kalpesh Shah. Both parties must have trust on Mr
Dharmesh, since he would be playing an important role here ensuring that the money is
received by the correct recipient. We can also assume that Mr Yogesh has availed of some
goods or services for which he is availing credit facility being provided by Kalpesh.

Kalpesh has sold his goods on credit and is ensured of receiving the money for on 1st April.
He can also transfer this bill of exchange to set off some other debt that he owes to someone
else. Kalpesh will need to sign on the back of the bill and mention that he has received full
value. The other person too needs to sign it and then he gets full rights to receive this money
on 1st Apr 2010. This is known as negotiating a bill and the signing is known as
endorsement of a bill. Hence depending on various factors a bill of exchange can be
negotiated many number of times before its final discharge. Each person who negotiates the
bill will need to endorse it on its reverse. In some cases Kalpesh may not want to keep this
bill with him till maturity. For safety reason he will give it to his banker with instructions that
it should be retained with him (the banker) till maturity and realised on the due date. This is
known as bill collection. The banker would be collecting some amount as charges for this
being his service charges and also the cost of sending the bill to the drawee. Kalpesh may
also ask his banker for an advance payment against this bill. Depending on the banker-
customer relationship, the banker may provide this facility to Kalpesh but in addition to his
usual charges, the banker will also charge interest for the number of days he is out of funds.
This is known as bill discounting. There could also be cases where the drawee has refused to
accept the bill or has accepted the bill but refuses to make payment. This is known as
dishonour of a bill. In case of dishonour of a bill by non acceptance, the holder has right to
recourse against the drawer and endorser (if any). In case of dishonour by non payment, the
holder has right to recourse against all parties to the bill including the drawee. There could
also be cases wherein the acceptor, requests the drawer for more time instead of dishonour. In
this case a new bill would be drawn mentioning the extended timeline. The acceptor needs to
pay interest for this additional time. This is known as renewal of a bill. There could also be
cases where the acceptor is ready to make payment before the due date to the holder. The
acceptor would expect some discount or rebate for this. This is known as retiring of a bill.
Now let us look at the accounting entries to be passed at various stages. For the purpose of
accounting bills are classified into two heads:

1. Bills receivable

2. Bills payable

In the business context, a bill of exchange is treated as bill receivable by the entity who is
entitled to receive the sum due in it. When we draw a bill or receive it by endorsement from
our debtors it is our bills receivable and on maturity (if it is held up to that time) we will
receive the specified amount from the acceptor

Bill payable is regarded as bills payable by the person who has to pay it on the due date. If we
accept a bill and become liable to pay it on its maturity is our bills payable.

In other words, bills receivable by one party will be bills payable by another. Let us look at a
few accounting entries to be done in various circumstances.

When it is collected directly without involving a bank

In the books of Kalpesh Shah

on 1st Jan 2010

Bills Receivable-being goods sold on credit to Yogesh (Dr) Rs.20000/-

 To Dharmesh Shah A/c (Cr) Rs.20000/-

On 1st Apr 2010 (assuming amount received in cash)

Cash A/c – being cash received from Dharmesh Shah (Dr) Rs.20000/-

Bills Receivable A/c (Cr) Rs.20000/-

In the books of Yogesh Shah

On 1st Jan 2010

Dharmesh Shah A/c being goods received on credit from Kalpesh (Dr) Rs.20000/-

Bills payable A/c (Cr) Rs.20000/-

On 1st Apr 2010

Bills payble A/c –being cash paid to Dharmesh Shah(Dr) Rs.20000/-

Cash A/c (Cr) Rs.20000/-

Kalpesh avails the bills collection facility of a bank.

In the books of Kalpesh Shah

on 1st Jan 2010

Bills Receivable-being goods sold on credit to Yogesh (Dr) Rs.20000/-

To Dharmesh Shah A/c (Cr) Rs.20000/-

On 1st Jan 2010

Bill Collection A/c-being bill sent for collection (Dr) Rs.20000/-

Bills Receivable A/c (Cr) Rs.20000/-

On 1st Apr 2010

Bank A/c (Dr) Rs.19990/-

Bank Charges (Dr) Rs. 10/-

Bill Collection A/c (Cr) Rs.20000/-

In the books of the Bank

On 1st Apr 2010

Cash A/c-being bills discharged from Dharmesh (Dr) Rs.20000/-

Kalpesh A/c (Cr) Rs.19990/-

To Service Charges Rs. 10/-

Kalpesh avails the bill discounting facility at the bank.

In the books of Kalpesh Shah

on 1st Jan 2010

Bills Receivable-being goods sold on credit to Yogesh (Dr) Rs.20000/-

To Dharmesh Shah A/c (Cr) Rs.20000/-

On 1st Jan 2010

Bank A/c (Dr) Rs.19890/-

Bank Charges (Dr) Rs. 110/-

Bill Receivable A/c-being bill discounted(Cr) Rs.20000/-

In the books of the Bank

On 1st Jan 2010

Bills Discounted A/c (Dr) Rs.20000/-

To Service Charges (Cr) Rs. 10/-

To Interest on Bills collected A/c (Cr) Rs. 100/-

To Kalpesh A/c (Cr) Rs.19890/-

On 1st Apr 2010

Cash A/c (being bill discharged from Dharmesh) Rs.20000/-

To Bills Discounted A/c Rs.20000/-

Note: In both cases there would not be any change in the books account of Yogesh
because he is only concerned with making payment on the due date.
Now let us look at bills of exchange in bank. In the above examples we saw how banks play
an important role in collection/discounting of bills. We can also say that all cheques are bills
of exchange but all bills of exchanges are not cheques. We have already seen the definition of
a bill of exchange as per NI Act . In the context of a cheque

1. “maker” will be the issuer of the cheque or the account holder

2. “certain person (1)” will be the banker

3. “certain person (2)” will be the person who has to receive the money

4. “bearer” will be another person deriving the right given to him by “certain person (2)”

We can also conclude that it has to be signed, the amount has to be specified without any
ambiguity and there cannot be any conditions for payment. We can also be sure on the point
that it a mechanism for movement of money from one entity to another.

In India the most commonly used mode of money transfer is cheques. We issue cheques in
our day to day lives to many persons or entities for various goods and services received. The
receiver of the goods or services may be in a different geographical location than the provider
of the said goods and services. Hence, after having received the said goods or services, the
receiver needs to make payment for the goods and services received. This gives an
opportunity for bankers to come into the picture by providing their services in the form of bill
collection. In India the bill/cheque collection is done by banks only for their account holders.
The collection of cheques may be broadly classified into three types based on the location of
the maker and receiver. They would be as follows:

1. Local cheque

2. Outstation cheque

3. Foreign currency cheque

In case of a local cheque where both the drawer and payee have accounts in the same branch
of a bank, it is treated as a transfer cheque. This is known as intra branch transfer. With the
advent of Core Banking Services (CBS) wherein all branches of a particular bank are
interconnected, cheques drawn on different branches of same bank are also treated as
transfers. This is known as inter branch transfer. The subject of transfer is dealt with in a
separate chapter.

In case of cheques drawn on different banks in the same clearing location, it is known as
clearing cheque. This subject too is dealt with separately in the chapter relating to clearing.
Outstations Cheques: In case of an outstation cheque, it could be of two types.

1.Maker and receiver having account in different branches of same bank

2. Maker and receiver having account in different banks at different locations

In the first instance if the branches are connected using CBS it would be treated as inter
branch transfer. If not, the process flow would depend on the type of cheque. With the
advent of CBS, banks have started issuing cheques which would be payable at all branches of
the bank. This is known as a “Payable at par cheque”. If the instrument in question is a
payable at par cheque, it may be presented in local clearing and would follow the clearing
process as discussed in an earlier chapter. If it is not a payable at par cheque then it would
follow the collection process. The receiving branch would send the cheque to the branch of
the account holder. This branch would debit the customer account, make a Demand Draft
payable at the receivers location and send it back. The receiving branch would then send the
Demand Draft in local clearing and credit its customers account. The process would be same
in case of two branches of same bank not connected through CBS too. In this case there
would charges involved since the bank incurs cost in sending the instrument and making a
Demand Draft. Let us understand the process flow with an example

Mr Rajesh issues a cheque to Mr Kapil for Rs.1000/-. Mr Rajesh has an account with
Syndicate Bank, Richmond Road Branch, Bangalore and Mr Kapil has an account with
Canara Bank, Howrah Branch, Kolkatta. The cheque is deposited by Mr Kapil into his
account with a pay in slip.

At Syndicate Bank, Bangalore : An entry is made in cheque collection

register. The instrument is sent to Canara Bank, Kolkatta with
appropriate covering letter.

At Canara Bank,
Kolkatta : Is cheque in
order i.e. balance
YES available etc. NO

Debit customer’s account. Send cheque back to

Credit appropriate charges Syndicate Bank,
account and prepare DD Bangalore with
payable at Bangalore for appropriate cheque
balance amount. Send DD to return memo. Applicable
Syndicate Bank , Bangalore charges to be debited to

At Syndicate Bank , Bangalore : At Syndicate Bank, Bangalore:

Send DD in local clearing. Send cheque back to customer
Credit customer. Appropriate with the cheque return memo.
charges to be collected. Applicable charges to be debited
to customer A/c
 Finish

Now let us put the above example in the form of accounting entries.

At Syndicate Bank when the cheque is deposited

No entries are to be made at this point but the cheque details have to noted in the cheque
collection register and cheque would be sent to Canara Bank, Kolkatta with appropriate
covering letter.

___________________________________________________________________________

At Canara Bank Kolkatta (if cheque is not in order)

Kapil A/c -being chq no. 123456 returned for want of funds (Dr) Rs.35/-

Chq Return Charges A/c (Cr) Rs.25/-

Courier Charges (Cr) Rs.10/-

At Canara Bank, Kolkatta (if cheque is in order)

Kapil A/c chq no. 123456 fvg Mr Rajesh, Bangalore(Dr) Rs.1000/-

Courier Charges(Cr) Rs.10/-

Demand Draft Charges (Cr) Rs.20/-

Demand Draft A/c being DD fvg Syndicate Bank A/c Rajesh(Cr) Rs.970/-

___________________________________________________________________________

At Syndicate Bank (upon receipt of returned cheque)

Rajesh A/c being chq no123456 of Canara Bank, Kolkatta returned unpaid(Dr) Rs.10/-

Courier Charges (Cr) Rs.10/-

At Syndicate Bank (upon receipt of DD)

Rajesh A/c being chq no 123456 of Canara Bank, Kolkatta(Cr) Rs.970/-

Clearing A/c being DD from Kolkatta (Dr) Rs.970/-

Rajesh A/c being charges for chq no.123456 (Dr) Rs.30/-

Chq collection A/c (Cr) Rs.20/-

 Courier Charges A/c (Cr) Rs.10/-

Assumptions:

Courier charges at both banks are Rs.10/-

Cheque collection and DD charges at both banks are Rs.2/- per thousand subject to a
minimum of Rs.20/-

Cheque return charges at both banks are Rs.25/-

Foreign Currency Cheques: The final type of cheque collection would involve another
variable i.e. the currency. In this case the account holder would be having an account in one
currency wherein he would have received the cheque in another currency. The process
followed would be like the process for outstation cheque. But the additional point to be kept
in mind is that it would also involve conversion of the currency. Additionally banks in India
need to have an account with a bank outside India in the local currency. Let us understand
this with an example and the steps involved.

Mr Siddharth has an account with Canara Bank, Koramangala Branch, Bangalore. He has
received a cheque of US$1000/- from Mr John Smith. The cheque is drawn on Bank of New
York, Washington Branch. He deposits the cheque along with a deposit slip at his branch.
Canara Bank has an account with Chase Manhattan Bank for bill collection purpose. The
steps involved would be as follows”

Step 1: No entries are passed at this stage but entries would be made in Foreign Cheque
Collection Register with details of cheque no. amount etc. The cheque would then be sent to
Chase Manhattan Bank with appropriate covering letter.

Step 2 : Upon receipt of the cheque, Chase Manhattan Bank would debit its Cheque
Collection A/c and credit Canara Bank A/c after deducting its charges. This would be similar
to the process of outstation cheque. It would also send an advice to Canara Bank of having
credited its account. Further it would make arrangement to collect funds from Bank of New
York. This would again be the process of local cheque collection.

Step 3 : Canara Bank would debit Chase Manhattan A/c and credit customer account after
deducting its charges. At this stage the amount be converted to Indian Rupees.This process
may also involve the Foreign Department of Canara Bank since banks would not have
multiple accounts for this purpose. There would be one account where all debits and credits
pertaining to customer of Canara Bank would happen. This account is usually maintained at
one main branch with the Foreign Department monitoring the same.

It is obvious from the above example that here the mirror accounts would be Chase
Manhattan Bank’s A/c with Canara Bank and Canara Bank’s A/c with Chase Manhattan
Bank.

Cheque Discounting : By now you would be aware that the process of outstation and foreign
currency cheques involve time. Hence, depending on the customer’s requirement and banks
being satisfied with the customer the banks may give credit to the customer immediately.
This process is known as cheque discounting. The process would be similar as in bill
discounting. The charges for this would be higher since banks would also take into account
the number of days the bank would be out of funds i.e. the time taken for collection of the
cheque. Banks would charge interest on the number of days it is out of funds. It may also
depend on the kind of existing arrangement between the bank and its customer.

Summary: Bill collection is nothing but movement of money from one place to another.
Since it is a bill of exchange there would be three entities involved i.e. the maker (person who
has to pay the money), the person who has been directed to pay by the maker (the banker)
and the receiver. The banks play an important part in this facility because of their reach and
speed at which they can do it. But with the advent of “at par cheques” and “anywhere
banking” the process of bill collection has been reduced a lot. At the same time it also been
made more secure. In the coming days we will see more such attempts with the introduction
of cheque truncation and other such facilities of funds transfer.