The drawer may wait for the entire period of the bill to receive its payment. If he is in the immediate need of funds, he can get the bill discounted with the bank. Discounting of the bill means encashing the bill or borrowing from the bank on the security of the bill. The drawer transfers the possession and also the ownership of the bill. The bank charges certain interest, here known as discount for the period, it has advanced the amount. On the due date, the bank will present the bill to the drawer and receive the payment.
Calculation of discount: The bank will charge discount for the period, it has advanced the loan. The period may differ and so the amount of discount will also differ. Calculation of discount has been illustrated as under.
Illustration 4: A draws a bill on B for $ 3,000 on January 1, 2003 payable after 3 months. The bill is discounted by A, as he is in the immediate need of funds. Calculate discount in the following cases :
(a) The bill has been discounted for $ 2,900.
(b) The bill has been discounted@ 12%.
(c) The bill has been discounted @ 12% on January 4.
(d) The bill has been discounted@ 12% on February 4.
(e) The bill has been discounted@ 12% on March 4.
Solution. (a) Discount will be the difference between the amount of the bill and the amount received from the bill discounted, i.e., $ 3,000 2,900 = 100.
(b) Discount = 3,000 * 12/100 * 3/12 = 90
The date of discounting of the bill has not been given, so it will be assumed that it has beer. Discounted on January 1, 2003.
(c) Discount= 3,000 * 12/100 *3/12 = 90
Discount is always charged for the period between the date of discounting and due date, i.e., January 4, 2003 April l, 2003 = 3 months.
(d) Discount= 3,000 *12/100 * 2/ 12 = 60
Discount will be charged for two months, i.e., (February 4, 2003 – April 4, 2003 ).
(e) Discount= 3,000 *12/100 * 1/12 = 30
Discount will be charged for one month, i.e., (March 4, 2003 – April 4, 2003)
Accounting treatment. Journal entry regarding discounting of the bill will be made in the books of drawer only. Drawee is not concerned with the discounting, so he will not pass any entry for it.
Illustration 5. X draws a bill only for $ 4,000 on July 1, 2003 payable after 4 months. Y accepts it and returns it to X. The bill is discounted by X for $ 3,850 and duly met on the due date.
Pass the necessary journal entries in the books of X and Y and also prepare Y’s account in the books of X and X’s account in the books of Y.
Solution. Journal Entries
In the Books of X
Date  Particulars  Amount
L.F. Debit Credit $ $ 
2003
July 1
July 1 
Bills Receivable A/c To Y (Being the acceptance of the bill received)
Cash A/c Discount A/c To Bills Receivable A/c (Being the bill discounted for $ 3,850) 
Dr. 4,000 4,000
Dr. 3,850 Dr. 150 4,000 
Note. X, the drawer will not pass any journal entry for the payment of the bill, because he has already transferred the possession and the ownership of the bill to the Bank. X does not possess the bill, so he cannot present it. He will not receive the payment and thus he cannot pass entry for the payment. The bank will present the bill receive the payment and pass the journal entry for the payment.
In the Books of X
Y’s Account
Dr. Cr.
Date Particulars J.F.
2003 July 1 To Balance b/d 
Amount Date
$ 2003 4,000 July 1 4,000 
L.F. Particulars Amount
$ By Bills Receivable A/c 4,000
4.000

Note. It has been assumed that the bill has been drawn against an old debt amounting to $ 4,000, because bills are always drawn against value received. In this case, goods have not been sold to Y, so it will be assumed that Y is the debtor. In order to show this fact we shall write “To Balance b/d” at the debit side of Y’s account. Y’s account prepared above shows that Y was the debtor for $ 4,000 for which the bill has been drawn. Y is no longer debtor. He has now become drawee of the bill.
Journal Entries
In the Books ofY (Drawee)
Date Particulars L.F.
2003
July 1 To X Dr. Bills Payable A/c (Being the acceptance of the bill given)
Nov. 4 Bills Payable A/c Dr. To Cash A/c (Being the payment of the bill made) 
Amount
Credit Debit $ $
4.000 4.000
850 150 4000 
Note. Y will not pass any entry for discounting of the bill because he is not concerned with it.
In the Books of Y
X’s Account
Dr. Cr.
Date Particulars J.F.
2003 July 1 To Bills Payable A/c 
Amount Date
$ 2003 4.000 July 1 4,000 
Particulars J.F. Amount
$
By Balance b/d 4.000 
Note. Y has accepted bill $ 4,000, drawn by X. It shows that X must have been Y’s creditor. This fact has been shown at the credit side of X’s account as “By Balance b/d.”
Illustration 6. A bill for $ 5,000 payable for three months after date is drawn by Kusum, on Suman and accepted by the latter. Show entries that would be passed in the journal of Kusum, in each of the following cases :
(a) If she keeps the bill till maturity and then receives payment of it on the due date.
(b) If she discounts it at their bank for $ 4, 950.
(c) If she endorses it to her creditor Pushpa.
Solution. Journal Entries
In the Books of Kusum
Date Particulars L.F.
Debit Credit
$ $
Bills Receivable A/c Dr. 5,000
To Suman 5,000
(Being the acceptance of the bill received)
(a) CashA/c Dr. 5,000
To Bills Receiva_ble A/c 5,000
(Being the payment of the bill received)
(b) Cash A/c Dr. 4,950
Discount A/c Dr . 50
To Bills Receivable A/c 5,000
(Being the bill discounted with the bank)
(c) Pushpa Dr. 5,000
To Bills Receivable A/c 5,000
(Being the bill endorsed in favour of Pushpa)