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BILL OF EXCHANGE

Bill of exchange is legally defined as unconditional order in writing addressed by one person to another signed by a people to whom is addressed to Pay on demand at a fixed or determine future time sum certain in money to the order of a specified person or to the bearer.
PARTS FOR THE BILL OF EXCHANGE.
DRAWER: Is the one who draws / write the bill of exchange.
DRAWEE: He/she is a person to whom the bill is addressed, he become an acceptor as soon as he has signified this under taking to comply with the order contained on the bill.
PAYEE: Is a person or firm to whom or to whose order payment is to be made.
SPECIMEN TO BILL OF EXCHANGE
100,000 SAME 15TH JAN 2013
Three month after the date pay
ALLY BAKARI or his order
The sum of one hundred thousand shilling (100,000)
To
CHAMBO DAUDI EMIL FAHMI
From the Example:
Emil Fahmi – Is a drawer
CHAMBO DAUDI -Is a drawee
Ally Bakari or his order – Is a payee
ADVANTAGES OF THE BILL OF EXCHANGE
– It enable an exporter /creditor to obtain cash soon after good are dispatched
– The creditor may get money by discounting the bill
– He/she fixed the date of payment and if payment is not made, a creditor can sure on the
Evidence of the bill of exchange he/she sells.
– The debtor also benefit by getting credit facilities

THE FOLLOWING ARE SOME USEFUL ILLUSTRATIVE PROBLEM ON BILLS TRANSACTION UNDER THE FOLLOWING CIRCUMSTANCES
– Where the bill received is retained by the drawer.
– Where the drawer endorse the bill (more than one endorsement).
– Where the drawer endorse the bill (only one endorsement).
– Where the bill endorsed by drawer by drawer and then discounted by the endorsee.
– Dishonoured for the bill.
– Renew the bill.
BILL RECEIVABLE.
The person to receive the money on the bill of exchange regards it as a bill receivable
Therefore the trader drawer a bill of exchange on his customer he records the details of the bill on the bill’s Receivable book.
When the drawer received back the bill of exchange he can act in one of the following
– Hold the bill of exchange until maturity.
– Discounting the bill.
– Transfer the bill to another person who them requires all the right to it.
PAYMENT OF THE BILL ON MATURITY
a. On the books of the drawer
I when goods sold on credit
DR: Personal a/c with sales amounts
CR: Sales A/C
ii- When drawee accepts the bill of exchange
DR: Bills receivable with value of the bill.
DR: Drawee
iii- When bill made on maturity (honoured).
DR: Cash at Bank
CR: Bill receivable
b. In the books of Drawee
i. When goods bought on credit.
DR: Purchases with the value of goods
CR: Drawers a/c bought.
ii. When bill drawn by the drawer accepted.
DR: Drawer with the amount of
CR: Bill payable the bills.
When at maturity the bills paid off
DR: Bills payable
CR: Cash at Bank
Example
Good has been sold by Hashimu to Mussa 1st for 200,000. A bill has been drawn end up by Hashim and accepted by Musa, the date of maturity being 31st March, Hashim keep the bill of exchange until the maturity then presented for payment. The bill was honored.
Required;
Show journal entries and accounts in the book Drawer and Drawee.
Solution:
In the books of Drawer (Hashim).
DR SALES A/C CR
1/1 Musa
200,000

DR MUSSA A/C CR
1/1 sales
200,000
DR BILL RECEIVABLE A/C CR
1/1 Mussa
200,000
31/3 Bank
200,000
DR BANK A/C CR
31/3 bill receivable
200,000

JOURNAL ENTRIES
DATE
DETAILS
DR
CR
1-Jan
i. Musa
200,000
Sales
200,000
-Being goods sold on credit.
1-Jan

ii. Bills receivable
200,000
Mussa
200,000
-Being bill of exchange accepted
31/3.
iii. Bank
200,000
Bills receivable
200,000
-Being bill of exchange honoured.

In the books of Drawee (Mussa).
DR PURCHASES A/C CR
Hashimu
200,000

DR HASHIMU A/C CR
purchases
200,000

DR BILL PAYABLE A/C CR
Hashimu
200,000
DR BANK A/C CR
Bill payable
200,000
JOURNAL ENTRIES
Date
Details
DR
CR
Purchases
Hashim
Being: Goods purchased on credit
200,000
200,000
200,000
200,000
200,000
200,000
Hashim
Bill payable
Being: Bill of exchange Accepted
Bill payment
Bank
Being: Bill of exchange honoured
EXERCISE
Jumanne bought goods from Mwakipesile valued Tshs 4900/= on 1st Feb 1986. The bill was for three month credit the bill was drawn by Mwakipesile and accepted by Jumanne on the same date on due date the bill was paid by the drawee on maturity date
Required
a) Ledger account
b) Journal entries in the books of Jumanne
EcoleBooks | BOOK KEEPING O LEVEL(FORM FOUR) NOTES - BILL OF EXCHANGE

EcoleBooks | BOOK KEEPING O LEVEL(FORM FOUR) NOTES - BILL OF EXCHANGE
2. IF THE BILL OF EXCHANGE DISCOUNTING AT THE BANK
Example
Simple sold goods to Tembo 1st April for 300,000 and draw a bill of exchange to him on that date for 3 months which he accepted, on 2nd April Simba discounting the bill. The discount change being 4,000 the bill was honored
Required;
Show Journey Entries in the books of Drawer and Drawee
JOURNAL ENTRIES
Date
Details
DR
CR

1/4
Temba
Sales
Being: Goods sold on credit
300,000
300,000
1/4
Bill Receivable
Temba
Being B.E. Accepted
300,000
30,000
2/4
Bank
Bill Receivable
Being: B.E discounted
300,000
300,000
2/4
Discount charges
Bank
Being: D changers transferred to P&L
4,000
4,000
2/4
Profit and loss
Discount charges
Being: D charges trended to P&L
4,000
4,000


DR SALES A/C CR
Temba
300,000
DR TEMBA A/C CR
sales
300,000

DR BILL RECEIVABLE A/C CR
Temba
30,000
Bank
300,000

DR BANK A/C CR

DR DISCOUNT CHARGE A/C CR
Bank
30,000
P&l
300,000
NOTE
No entry on the books of drawer concerning the discount for bill of exchange
JOURNAL ENTRY DR CR
1/4
Purchases
Simba
Being: Goods on credit
300,000
300,000
300,000
300,000
30,000
30,000
1/4
Simba
Bill Payable
Being: B.E Accepted
Bill payable
Bank
Being: B.E honoured
EXERCISE
Show the journal entries and the ledgers A/c to record the following in the books of C. Kombo
Jan 3 sold goods to D. Daima for 400,000, D. Daima accept the Bill on the same date. Bill payable after 3 month discounted the bill at Bank for 394,000 Bill honoured by D. Daima.
Solution:
In the books of C. Kombo
Date
Details
DR
CR
3/1
D. Daima
Sales
Being: Goods sold on credit
400,000
400,000
394,000
400,000
400,000
394,000
3/1
Bill Receivable
D. Daima
Being B.E. Accepted
Bank
Bill Receivable
Being: D. Change by Drawer





DR SALES A/C CR
D. Daima
400,000




DR D.DAIMA A/C CR
sales
400,000

DR BILL RECEIVABLE A/C CR
D. Daima
400,000
Bank
400,000

DR BANK A/C CR
bill receivable
400,000


DR DISCOUNTING CHARGE A/C CR
Bank
6,000
P&l
6,000

DR PROFIT AND LOSS A/C CR
Discounting charge

6,000

DISHONORED OF THE BILL OF EXCHANGE
When the debtor acceptor fails to make payment on maturity the bill it said to be DISHONORED.

ACCOUNTING ENTRIES.
In the books of drawer.
i) When the bill is dishonored by drawee
DR: Personal A/C (Drawee) with the value of bill
DR: Bill receivable
ii) When noting charge paid by Drawee
DR: Drawee A/C with the amount of noting charge.
CR: Bank or Cash A/c
iii) When noting charge transfer to drawers A/c
DR: Cash or Bank
CR: Drawee account
In the books of drawee
i) When at maturity the bill is dishonored
DR: Bill payable A/C with the value of bill
CR: Drawer A/c
ii) When the bill plus noting charge are paid off
DR: Drawer a/c
DR: Noting charge a/c
CR: Cash/ bank with the amount.
EXAMPLE
On 1st June Twaha sold goods to Pinda for 500,000. A bill of exchange with maturity date of August was drawn up and accepts by Pinda.
On August Bill of exchange presented to pinda but he fails to pay it and the bill is therefore dishonoured. The bill is noted the entry being 20,000 which initially paid by Twaha.
Required.
-Show the accounting entries in the books of Twaha and Pinda

JOURNAL ENTRIES
Date
Details
DR
CR
1/6
Pinda a/c
Sales a/c
Being: Goods sold on credit
500,000
500,000
500,000
20,000
20,000
500,000
50,000
500,000
20,000
20,000
1/6
Bill Receivable
Pinda a/c
Being B.E. Accepted
Pinda a/c
Bill receivable A/c
Being: B.E Dishonoured
Noting charge
Bank
Being: Noting has paid by drawer
4/8
Pinda a/c
Noting charge
Being: Noting charge has paid by drawee


In the books of Drawee (PINDA).
DR PURCHASES A/C CR
Twaha
500,000

DR TWAHA A/C CR
Bill payable 500,000
purchases
500,000
Bill payable
500,000

DR BILL PAYABLE A/C CR
Twaha
500,000
Twaha
500,000


DR BANK A/C CR
Noting charge
20,000

DR NOTING CHARGE A/C CR

Bank
20,000


JOURNAL ENTRIES
Date
Details
DR
CR
1/6
Purchases a/c
Twaha a/c
Being: Goods sold on credit
500,000
500,000
500,000
20,000
500,000
50,000
500,000
20,000
1/8
Twaha a/c
Bill payable a/c
Being B.E. Accepted
4/8
Bill payable a/c
Twaha a/c
Being: B.E Dishonoured
4/8
Pinda a/c
Noting charge
Being: Noting charge paid by drawee.
EXERCISE
Asha sold goods to Bahati Tshs 300/= on 1st Jan 1990 Bahati accepted bill for three months and Asha discounted it with the banker for Tshs 280/= on due date the bill was paid by Bahati
Required
Journal entries and ledger in the books of Asha and Bahati
IN THE BOOKS OF ASHA
Workings:
Discounting charge = face value of the bill−cash received from the bank
EcoleBooks | BOOK KEEPING O LEVEL(FORM FOUR) NOTES - BILL OF EXCHANGE
EcoleBooks | BOOK KEEPING O LEVEL(FORM FOUR) NOTES - BILL OF EXCHANGE


EcoleBooks | BOOK KEEPING O LEVEL(FORM FOUR) NOTES - BILL OF EXCHANGE

IN THE BOOKS OF DRAWEE
EcoleBooks | BOOK KEEPING O LEVEL(FORM FOUR) NOTES - BILL OF EXCHANGE
NB
Discounting of the bill of exchange
To discount the bill means to collect money from the bank before the due date (maturity date )
To discount the bill of exchange means to sell of less value than the face value of the bill
What the bank will do , is to pay drawer (seller ) and the recover the money from the acceptor ( buyer ). At the sometime the bank charge the drawer the charges is known as discounting charges.
Discount charge = face value of the bill x rate of discount charge x months of the bill.
  • No any effect in the books of drawee because the bill was discounted by the drawer and is one who borne the discount charge for selling his bill to the bank before the maturity date. But drawee has to wait until the date of maturity so as to present the bill to the bank for payment without knowing that the bill was discounted by the
drawer , that will enable bank to collect money which has been given to the drawer during bill discounted.
IF THE BILL IS DISCOUNTED AND DISHONORED.
Definition
This occurs whereby the bill which was originally discounted by the drawer is now dishonoure
d
Example.
On 10th March Ahmed owned Salum 200,000 for goods supplied on that date, he accepted a bill at 3 month for the whole amount.
On March 13 Salum discounted the bill of exchange at bank the discounted charge being 10,000 on the due date Ahmed dishonoured the bill and the noting charge were 15,000.
Required.
-Show accounting entries in the books of drawer
– In the books of Drawer (Ahmed)
JOURNAL ENTRIES
Date
Details
DR
Cr
10/5
Salum a/c
Sales a/c
Being: Goods sold on credit

200,000
200,000
200,000
200,000
200,000
200,000
10/3
Bill receivable a/c
Salum a/c
Being B.E accepted
13/3
Bank a/c
Bill receivable a/c
Being: B.E. discounted
13/3
Discounting charges a/c
Bank a/c
Being: charge paid by drawer

10,000
10,000
200,000
15,000
15,000
10,000
10,000
200,000
15,000
15,000
13/3
Profit & Loss a/c
Discounting charges a/c
Being: D charges transfer to P&l
13/06
Salum a/c
Bill receivable
Being B.E dishonoured
13/06
Noting charge a/c
Bank a/c
Being noting charge paid by drawer
13/06
Salum a/c
Noting charges a/c
Being charge transfer to drawee

EXERCISE.1 (DISHONOURED BILL)
Nyangeta sold goods on 1st Jan 1990 to Masambe who accepted a bill of exchange on the same date payable three months times for Tshs 5000 on maturity the bill was presented to Masambe but failed to pay thus the bill was dishonoured it was noted and the noting charges amounted to Tshs 200/=
Required
Record the above transaction in the books of drawer and show the journal entries
IN THE BOOKS OF DRAWER

EcoleBooks | BOOK KEEPING O LEVEL(FORM FOUR) NOTES - BILL OF EXCHANGE
NB
noting charges is an expenses to the drawer(seller ) therefore should credited in the bank account in the books of drawer.
EXERCISE.2
Sudi sold of Tshs 4000/= to Chaka who received an acceptance from Chaka for two months. Sudi discounted the bill with the banker who charged him 8% discounting charges on maturity the bank failed to get money from Chaka, thus the bill was dishonoured noting charges amount to Tshs 350/=
Required:
a) Ledger account
b) Journal entries in the books of drawer.
IN THE BOOKS OF DRAWER
EcoleBooks | BOOK KEEPING O LEVEL(FORM FOUR) NOTES - BILL OF EXCHANGE

EcoleBooks | BOOK KEEPING O LEVEL(FORM FOUR) NOTES - BILL OF EXCHANGE

EcoleBooks | BOOK KEEPING O LEVEL(FORM FOUR) NOTES - BILL OF EXCHANGE
JOURNAL ENTRIES

EcoleBooks | BOOK KEEPING O LEVEL(FORM FOUR) NOTES - BILL OF EXCHANGE
EXERCISE 3
On January 1st 1998 Anna sold goods to Bakari for Tshs 50,000/= and on the same day drew up him a bill for three month on January 4th 1998 discount it for Tshs 49000/= with the bankers. On due date the bill was dishonored and noting charges to Tshs 100/=
Required
a) Record the above transaction in the journal of Anna ignore narration
Open the ledger account in the books of Anna

IF THE BILL OF EXCHANGE ENDORSED
This is where by the bill of exchange negotiated (given) to someone else.
Example
The goods have been sold by Juma to Bakar on 1st Jan 12 for 400,000. A bill of exchange drawn by Juma and accepted by Bakari on Jan 2012. The date of maturity being 31 March 2012. The bill is endorsed to Ismail on 3st March. Show
-The ledger and Journal entire in the books of Juma.
JOURNAL ENTRIES
Date
Details
DR
Cr
1/1
Bakari a/c
Sales a/c
Being: Goods sold on credit
400,000
400,000
1/1
Bill receivable a/c
Bakari a/c
Being B.E accepted
400,000
400,000
3/3
Ismail a/c
Bill receivable
Being: B.E. discounted

ecolebooks.com
400,000
400,000
31/3
Bank a/c
Ismail
Being: B.E honoured
400,000
400,000


DR SALES A/C CR
Bakar
400,000


DR BAKAR A/C CR
sales
400,000

DR BILL RECEIVABLE A/C CR
Bakar
400,000
Ismail

400,000

DR ISMAIL A/C CR
bill receivable
400,000
Bank
400,000

DR BANK A/C CR
Ismail
400,000
EXERCISE.
The goods has been sold by Mcharo to Abubakar and Ahmed for 500,000 and 100,000 respectively on 1st Jan. The bill of exchange drawn by Mcharo and accepted by Abubakari and Ahamed. The date of maturity being 3rd March, the bill drawn to Abubakar was discounted at bank by Mcharo for 496,000 on 5th Jan and the another 700,000 bill which drawn to Ahamed endorsed to Yusuf. Both bill are honored.
Required:
To show the ledger and journal entries in book of drawer.
-In the books of Drawer (Mcharo to Abubakar).
DR SALES A/C CR
Abubakar
500,000

DR ABUBAKAR A/C CR
sales
500,000
DR BILL RECEIVABLE A/C CR
Abubakar
500,000

DR BANK A/C CR

Bill rec.
500,000
Disc. charge
4,000


DR D. CHARGE A/C CR
Bank
4,000
P&L
4,000


DR PROFIT AND LOSS A/C CR
Disc. charge
4,000



JOURNAL ENTRIES
DATE
DETAILS
DR
CR
1/1
Abubakar a/c
Sales a/c
Being: Good sold on credit
500,000
500,000
496,000
4,000
4,000
500,000
500,000

496,000
4,000
4,000
1/1
Bill receivable a/c
Abubakar a/c
Being: BE Accepted
5/1
Bank a/c
Bill receivable a/c
Being B.E Discounted
5/1
Discounted charges a/c
Bank a/c
Being: D charges paid by drawer
5/1
Profit & loss a/c
Discounting charge a/c
Being: D charge transferred P&L
In the books of Drawer (Mcharo to Ahmed)

JOURNAL ENTRIES
DATE
DETAILS
DR
CR
1/1
Ahmed a/c
Sales a/c
Being: Good sold on credit
700,000


700,000

700,000

700,000

700,000
700,000
700,000
700,000

700,000


700,000
1/1
Bill receivable a/c
Abubakar a/c
Being: B.E Acceptant
5/1
Bill receivable
Ahmed’s a/c
Being B.E Discounted
5/1
Yusuf a/c
Bill receivable a/c
Being: B E endorsed to Yusuf
5/1
Bank a/c
Yusuf a/c
Being B.E honoured
RENEWING A BILL OF EXCHANGE
Definition
To renew a bill of exchange means to extend the credit period by the duration of the bill.
To renew a bill means to extend the maturity date of the bill
This happen when the acceptor (drawer ) of the bill may not be in the position to honor the bill on presentation and it may be mutually arrange that he accept a fresh bill(new bill) in place of the existing one interest is usually added to the new bill as compensation for the delayed payment

In the books of drawer (seller )

1. When the bill is dishonoured
DR: debtor (drawee ) account

CR: bill receivable account
With the value of the bill
2. When the drawee debtors accept a new bill
DR: bills receivable account
CR: debtor (drawee) account
With the new value of the bill with interest
3. Interest on the new bill
DR: debtor (drawee) account
CR: interest receivable account
value of interest
4. When the bill is honoured by the debtor
DR: bank account
CR: bills receivable account
With the value of the new bill
Example
On 1st Jan 1981 peter sold goods to Abdallah valued Tshs 4000/= on three month credit on 1st April 1981 Peter presented his bill to the bank but the bill was dishonored and he paid 25/= a charge on dishonored bill. It was arranged that he accept fresh bill in place of the existing one the interest of 50/= was charged for Abdallah honored the bill
Required:
Show the ledger account and journal in the books of peter
IN THE BOOKS OF DRAWER(PETER )
EcoleBooks | BOOK KEEPING O LEVEL(FORM FOUR) NOTES - BILL OF EXCHANGE



EcoleBooks | BOOK KEEPING O LEVEL(FORM FOUR) NOTES - BILL OF EXCHANGE


EcoleBooks | BOOK KEEPING O LEVEL(FORM FOUR) NOTES - BILL OF EXCHANGE
Example 2
On 1st Jan 1990 Juma sold goods to Hamis for Tshs 2000/= on three months credit. Hamis dishonored his obligation to Juma
The bill was noted for Tshs 300/= Hamis accepted a fresh bill with interest of 400/= on 30th M
ay 1990, Hamis honored the new bill
Required
a) Ledger account
b) Journal entries in the books of accepted and drawer
IN THE BOOKS OF ACCEPTOR
EcoleBooks | BOOK KEEPING O LEVEL(FORM FOUR) NOTES - BILL OF EXCHANGE
EcoleBooks | BOOK KEEPING O LEVEL(FORM FOUR) NOTES - BILL OF EXCHANGE
EcoleBooks | BOOK KEEPING O LEVEL(FORM FOUR) NOTES - BILL OF EXCHANGE
IN THE BOOKS OF DRAWER
EcoleBooks | BOOK KEEPING O LEVEL(FORM FOUR) NOTES - BILL OF EXCHANGE
EcoleBooks | BOOK KEEPING O LEVEL(FORM FOUR) NOTES - BILL OF EXCHANGE

EcoleBooks | BOOK KEEPING O LEVEL(FORM FOUR) NOTES - BILL OF EXCHANGE
EcoleBooks | BOOK KEEPING O LEVEL(FORM FOUR) NOTES - BILL OF EXCHANGE
EXERCISE
Show journal entries and bill and all ledger account to record the following transaction on the books E.china
June 4. Sold goods on credit of Tshs 5000/= to F.FELL
June 4 bill drawn and accepted by F.FELL Tshs 5180/= to include interest payable
After 3 months
Sept 7 bill dishonored by F. FELLI
Sept 8. Noting charge paid in cash Tshs 20/=
Sept 9. F.FELI agree to accept new bill for Tshs 5360/= to include noting and interest
For the further three months period
Dec 31st F. FELI honored the new bill
IN THE BOOKS OF E. CHINA
EcoleBooks | BOOK KEEPING O LEVEL(FORM FOUR) NOTES - BILL OF EXCHANGE

EcoleBooks | BOOK KEEPING O LEVEL(FORM FOUR) NOTES - BILL OF EXCHANGE
EcoleBooks | BOOK KEEPING O LEVEL(FORM FOUR) NOTES - BILL OF EXCHANGE

DISCUSSION QUESTIONS
On 1st Feb 2001 Salome for her own accommodation draws upon Thomas a bill for Tshs 5000/= for three months the bill is accepted be Thomas on due date Thomas meets the bill but her bank account didn’t have a sufficient funds to meet the bill instead she pays Tshs 2000/= in cash and gives a bill for two month for 3000/= plus interest of 4% per annum this is dully met on maturity
Required
a) Give the journal entries in the books of Salome ignoring narration
b) Post to the relevant ledger account




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EcoleBooks | BOOK KEEPING O LEVEL(FORM FOUR) NOTES - BILL OF EXCHANGE

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