Академический Документы
Профессиональный Документы
Культура Документы
No business wants to sell goods on credit to his customers who may prove unable or unwilling to pay their debts. Today, however, in every field of retail trade it appears that sales and profits can be increased by selling goods on credit basis. The manufacturers and the wholesalers sell goods mostly on credit. Credit is a very powerful instrument to promote sales, so most of the business transactions, in most business concerns, are carried on credit basis. A bill of exchange is a method of payment used between businessmen which have certain advantages over other methods of payment.
Important Points:
1. This bill is drawn by the peter & Co., so the drawer of the bill is peter & Co. 2. The bill is drawn upon William & Co., so they are drawee of the bill. They have not yet accepted the bill, and so are not liable to pay it at maturity. 3. The bill is an unconditional order in writing. It says "pay ten thousand dollars to Peter & Co." it does not say "provided you are in funds". It just says "pay!". 4. It is addressed by one person (Peter & Co.) to another (William & Co.) and is signed by the person giving it (Peter & Co.). 5. The date is easily determinable it is 90 days after first July, which is 29 September, 20.... 6. The sum of money is very certain, ten thousand US dollars. 7. The bill is payable to, or to the order of, Peter & Co.
5. On the due date the bank will present the bill to the acceptor, who honors it by paying the full value. The bank has earned the amount of interest it deducted when it discounted the bill. Where does the acceptor get the money to honor the bill? The answer is that he was given 90 days to sell the goods at profit, and therefore, he is liable to honor the bill. Now it is hoped that you will be able to follow what is happening in the following diagrams:
You can understand the figure above with the help of the following notes: 1. Business activities cannot proceed because the retail trader (Mr. B) has nothing to sell and has no money to buy goods.
2. We need a system by which retailer can purchase goods without paying for them at the moment and which enables the manufacturer (Mr. A) to be paid immediately. 3. Since a bill of exchange from a reputable trader is almost as good as money, it will be acceptable to banks. They have plenty of money to lend out to reliable customers so, they will advance money to the holder of bills of exchange. Now look at the following figure and note how bill of exchange can increase the business activities.
The result is that a bill of exchange is a useful instrument to increase business activities, and is beneficial to all the parties.
Example:
For example A drew a bill on B for $5,000 which is accepted by B at three months. A bought goods from C worth $7,000 on credit basis. Now C is creditor of A for $7,000. A endorsed the bill in favor of his creditor C for paying his debts up to the extent of $5,000. Thus C is now creditor of A up to the extent of $2,000 only; i.e. 7,000 - 5,000 = 2,000. Now C is the holder of the bill of exchange, which he has got from A. Being holder of the bill, C has all the four options before him. He may retain the bill till the due date. On due date, he will present the bill to the acceptor and receive cash from him. One important point that we should remember is, whenever a bill is discounted or endorsed, it will not be considered as the property (asset) of the person who has discounted or endorsed it and the bill receivable account is written off (neutralized) as it is no longer receivable. However, there is one possibility in which he can still be effected by the bill i.e. the person liable primarily to the bill is acceptor, who has accepted the obligation to pay. Suppose he does not honor the bill on the due date, then the person who endorsed this bill will be liable to pay. So, this is a contingent liability of the endorser until the bill is honored by the acceptor. For example, on maturity date, C presented the bill to the acceptor B but he refused to make payment. C will receive the amount from the endorser A. So, A has to take up the liability and in turn A will receive the amount from B.
Endorser's Journal (A) When a bill is endorsed: Endorsee's A/C......XXX Bill receivable A/C...........XXX No journal entry in the books of endorser when the bill is honored at the date of maturity.
Endorsee's Journal (C) When a bill is endorsed: Bill receivable A/C.........XXX Endorser's A/C..........XXX On the due date, the bill is presented to the acceptor and cash is received from him, the entry is: Cash A/C.........XXX Bill receivable A/C..........XXX