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Dishonour of the bill means the non-payment of the bill. The purpose of drawing a bill is to receive payment. If the payment of the bill is made, it is supposed to be the honour of the bill, so we use the word honour for its payment. Dishonour being antonym of the word ‘honour’ will thus mean that the payment of the bill has not been made. The bill will be supposed to be dishonoured in the following cases :

 

(i)                 If the payment of the bill is not made.

(ii)               If the bill is renewed.

(iii)             If the drawee becomes insolvent.

(iv)             If part payment of the bill is made.

(v)               If the payment of the bill is not made on or before the due date.

(vi)             If the drawee refuses to make payment.

In the above cases, the bill will be supposed to be dishonoured. Dishonour of the bill concerns both the drawer and drawee, so it will be recorded in the books of both the drawer and drawee. Sometimes the bill is noted and protested.

 

NOTING OF THE BILL (NOTING CHARGES)

 

If the bill is dishonoured, the drawer may approach the court, and file a suit against drawee. The drawee may plead that he did not make the payment, because the bill was not presented to him. Now, it will be difficult for the drawer to present any documentary evidence before the court to prove that the bill was actually presented before the drawee who ·refused to make its payment.

 

In order to collect documentary evidence, the drawer may approach a lawyer and explain the fact of the dishonour of the bill. The lawyer will take the bill to the drawee and ask for the payment If the drawee does not make the payment, the lawyer will note the statement of the drawee and get the statement signed by him. The lawyer will put his own signature and affix his own stamp on the statement. The statement noted by the lawyer will be the documentary evidence for the dishonour of the bill. Writing this statement by the lawyer is known as noting of the bill. The lawyer performing this work of noting of the bill is known as ‘Notary Public’. The lawyer will definitely charge certain remuneration for this service. The remuneration paid to the ‘Notary Public’ is termed as ‘Noting Charges’.

 

Special Features of Noting Charges

 

(i) The process of noting will be started by the party, who possesses the bill, i.e., the drawer, if he has retained the bill, the bank, if the bill has been discounted and the endorsee, if it has been endorsed

 

(ii) The payment of the noting charges is made in cash to the notary public by the party who possesses and owns the bill.

 

(iii) Noting charges is neither gain nor loss for the drawer, because whatever he pays as noting charges he will realise the same from the drawee.

 

(iv) Noting charges account is neither debited nor credited in the books of the drawer.

 

(v) Noting charges is a loss for the drawee, so he will debit noting charges account in his books.

 

(vi) If noting charges are paid by the bank (if the bill has been discounted) it will be realised by the bank from the drawer, who will charge it from drawee.

 

(vii) If the bill has been endorsed, noting charges will be paid to the notary public by the endorsee, who will realise it from the drawer. It will be finally realised by the drawer from the drawee.

 

(viii) Journal entry regarding noting charges is the part of the entry regarding dishonour. A combined entry should be passed for both the dishonour and noting charges.

 

Accounting Treatment

 

Dishonour of the Bill (if the bill is retained with the drawer)

 

Journal Entries

Transactions                              In the Books of Drawer                        In the Books of Drawee

(Suppose A)                                         (Suppose B)

 

l. If B accepts a bill                   B/R A/c                                  Dr.       A                                  Dr.

   drawn by A                          To B To Bills Payable A/c

(Being acceptance of the bill                          (Being acceptance of the bill

received)                                                                    given)

 

2. If B fails to meet                  B                                              Dr.       B/P A/c                        Dr.

 (honour or pay) the bill          To B/RA/c                                                       To A

on the due date            (Being the bill dishonoured)                           (Being the bill dishonoured)

 

3.lf the bill is dishonoured       B                                              Dr.      B/P A/c                        Dr.

 and A has to pay noting         To B/R A/c                                          Noting charges A/c     Dr.

 charges.                                  To Cash A/c                                         To A

(Being the bill dishonoured                            (Being the bill dishonoured

and noting charges paid)                                 and noting charges due)

 

Illustration 9. A sold goods to B for $ 12,000 on January 15, 2003 and drew a bill payable after two months. B accepted it and returned to A. On the due date, B failed to honour the bill. Pass necessary journal entries if (a) there is no noting charges; and (b) A paid charges amounting to $ 200.

 

Solution.                                             Journal Entries

In the Books of A

Date

 

 

2003

Jan. 15

 

 

 

Jan. 15

 

 

 

Mar. 18

(a)

 

 

(b)

 

Particulars

 

 

 

B

To Sales A/c

(Being goods sold to B on credit)

 

B/R A/c

   To B

(Being the acceptance of the bill received)

 

B

To B/R A/c

(Being the bill dishonored)

 

B

To B/RA/c

To Cash A/c

(Being the bill dishonored and noting charges paid)

                       Amount

L.F

                Debit              Credit

                   $                    $

Dr.           12,000

12,000

 

 

Dr.            12,000

12,000

 

 

Dr.

12.000

12,000

Dr.

12,200

12,000

200

Journal Entries

in the Books of B

Date

 

 

 

2003

Jan. 15

 

 

 

Jan. 15

 

 

 

Mar. 18

(a)

 

 

(b)

                              Particulars

 

 

 

 

Purchases A/c

To A

(Being goods purchased from A)

 

A

To Bills Payable A/c

(Being the acceptance of the bill given)

 

B/P A/c

To A

(Being the bill dishonored)

 

B/P A/c

Noting Charges A/c

To A

(Being the bill dishonored and noting charges due)

                          Amount

L.F

                   Debit                 Credit

                      $                      $

Dr.             12,000

12.000

 

 

 

Dr.              12,000

12.000

 

Dr.

 

 

 

Dr.

Dr.

 

12,000

 

 

 

12,000

200

 

 

12,000

 

 

 

 

12,000

 

DISHONOUR OF THE BILL (If the bill has been discounted)

 

If the drawer is in the immediate need of funds, he can get the bill discounted with the bank. In case of discounting of the bill the possession and the ownership of the bill is transferred to the bank. The bank will present the bill to the drawee. If the drawee does not make the payment, the bank will debit the amount of the bill together with noting charges (if any) to the drawer’s account. In other words, we can say that the bank will charge the amount from the drawer.

 

In case of dishonour of the bill, the drawer will be I iable to ri1ake the payment of the amount of the bill and also noting charges to Bank. At the same time, he will realise the ~mount paid to the bank from the drawee. In accounting term, we can say that the drawee will be the debtor and the bank will be the creditor. This is why, the drawer will debit drawee’s account and credit Bank account.

 

The drawee will make the same accounting treatment as he made in the earlier case when the bill was retained with drawer.

 

Accounting Treatment

Transactions                            In the Books of Drawer                       In the Books of Drawee

(Suppose A)                                         (Suppose B)

1. B accepts a bill drawn         B/RA/c Dr. 2,000                               A          Dr.                   2,000

by A for $ 2,000                      To       B          2,000                           To B/P A/c                   2,000

(Being the bill drawn)                         (Being the acceptance of

the bill given)

 

2. The bill is discounted           Cash A/c          Dr. 1,950                    (Not concerned)

for $ 1,950                               Discount A/c   Dr. 50                                     No entry

To B/R                        A/c   2,000

(Being the bill discounted)

 

3. The bill is dishonoured        B                      Dr. 2,000                                 B/P A/c     Dr. 2,000

To Bank A/c    2,000                                      To        2,000

(Being the bill dishonoured)               (Being the bill dishonoured)

 

4. The bill is dishonoured        B                      Dr. 2,010                                 B/P A/c Dr. 2,000

and notarial charges               To Bank A/c     2,010                              Noting charges A/c Dr. 10

being $ 10                               (Being the bill dishonoured and                                 To A 2,010

noting charges paid by the bank)        (Being the bill dishonoured

and noting charges due)

 

Illustration 10. Masud draws a bill on Jamal for $ 20,000 on Sept. 4, 2003 payable after 4 months. Masud discounts the bill with the bank@ 12% on October 7. The bill is dishonoured on the due date.

 

Pass necessary journal entries in the books of Masud and Jamal if (a) there is no noting charges and (b) bank paid $ 300 as noting charges.

 

Solution.                                             Journal Entries

In the Books of Masud

Amount

Date                                        Particulars                             L.F.

Debit                           Credit

$                                  $

2003

Sept. 4             Bills Receivable A/c                                        Dr.      20,000

To Jamal                                                                                                          20,000

(Being the acceptance of the bill received)

 

Oct. 7              Cash or Bank A/c                                           Dr.      19,400

Discount A/c                                                   Dr.       600

To B/RA/c                                                                                           20,000

(Being the bill discounted@ 12%)

 

2004

Jan. 7               Jamal Dr.                                                                     20,000

(a)                    To Bank A/c                                                                                                   20,000

(Being the bill dishonoured)

(b)                    Jamal Dr.                                                                     20,300

To Bank A/c                                                                                                    20,300

(Being the bill dishonoured and noting charges paid)

 

Notes. (i) Calculation of discount = 20,000* 12/100 * 3/12 = $ 600.

 

Discount has been calculated for the period between the date of discounting and due date, i.e., Oct. 7-Jan. 7, 2004.

 

(ii) The entry regarding dishonour with noting charges and without noting charges is the same. In case of noting charges the amount of the entry has been increased with the amount of noting charges.

 

Journal Entries

In the Books of Jamal (Drawee)

Date

 

 

2003

Sept. 4

 

 

 

2004

Jan. 7

(a)

 

(b)

Particulars

 

 

 

Masud

To Bills Payable

(Being the acceptance of the bill given)

 

B/PNc

To Masud

(Being the bill dishonoured)

 

B/P A/c

Noting Charges A/c

To Masud

(Being the bill dishonoured and noting charges due)

L.F.

 

 

Dr.

 

 

 

 

Dr.

 

 

 

Dr.

Dr.

 

Debit

$

20,000

 

 

 

 

20,000

 

 

 

20,000

300

 

Credit

$

20.000

 

 

 

 

20,000

 

 

 

20,300

Notes.              (i) The drawee is not concerned with the discounting of the bill, so Jamal has not passed any entry for discounting the bill.

 

(ii) The entry regarding dishonour, both with noting charges and without it are the same as in the case of retaining bill. Drawee is not concerned with bank. He is always liable to the drawer.

 

DISHONOUR OF THE BILL (if the bill has been endorsed)

 

The drawer may endorse the bill in favour of its creditors. The endorsee becomes the owner of the bill. On the due date the endorsee will present the bill to the drawee. If the drawee does not make the payment, it will not be the bad debt. The endorsee will realise the amount from the drawer together with the amount of noting charges, if any. The drawer will realise the amount of the dishonoured bill with noting charges from the drawee. In this way, the drawer has to realise the amount from the drawee and has to pay it to the endorsee. In accounting terminology drawee will be the debtor and the endorsee will be the creditor. While passing journal entry drawee’s account will be debited (debit the debtor) and endorsee’s account will be credited (credit the creditor).

 

The drawee is not concerned with the endorsement, so he will pass entry in the same way, as in the case of bill being retained by the drawee.

 

Accounting Treatment

Transactions       In the Books of Drawer       In the Books of Drawee      In the Books of Endorsee

   (Suppose A)                          (Suppose B)                            (Suppose C)

1. A’s draft is        B/RA/c       Dr. 300           A          Dr. 300

accepted by B    To B              300                  To B/P A/c      300                   (Not concerned)

(Being the acceptance         (Being the acceptance

of the bill received)                         of the bill given)

 

2. A endorse the    C               Dr. 300                                                            B/ R A/c Dr. 300

bill in favour         To B/R A/c      300             (Not concerned)                      To A                            300

of C                     (Being the bill endorsed                                          (Being the bill received

in favour of C)                                                                        from A)

 

3. B fails to          B                 Dr. 300            B/P A/c     Dr. 300                   A Dr. 300

honour the hill       To C          300                  To A                300            To B/R A/c 300

(Being the bill                      (Being the bill             (Being the bill dishonoured)

dishonoured)                                    dishonoured)

 

4. The bill is

 dishonoured       B Dr. 305                            B/P A/c Dr. 300                     A Dr. 305

and C had to

pay $  5 as            To C 305                            Noting charges A/c          Dr. 5 To B/R A/c 300

noting charges)  (Being the bill

dishonoured                            To A 305                     To Cash A/c 5

and noting charges

paid by C) and                  (Being the bill

noting charges due)                dishonoured                 (Being the bill dishonoured                                                      and noting charges paid)         and noting charges paid)

 

Illustration 11. Brown accepted a bill drawn by Black on October 20, 2003 for $ 24,000, payable after 3 months. The bill was endorsed in favour of Blue, in full settlement of a debt of $ 25,000. On the due date, the bill was dishonoured.

 

Pass necessary journal entries in the books of Brown, Black and Blue assuming :

(a) There are no noting charges.

(b) Noting charges amount to Rs. 400.

 

Solution.                               Journal Entries

                               (In the Books of Black (Drawer)

Date                                        Particulars                                    L.F.           Amount

                                                                                                                  Debit

                                                                                                                       $

2003

Oct 20                          B/R A/c                                                    Dr.    24,000

To Brown

(Being the acceptance of the bill received)

 

Oct. 20                 Blue                                                                 Dr.    25,000

To Bills Receivable A/c

To Discount A/c

(Being bill endorsed against a book debt

of $ 25,000)

2004

Jan. 23              Brown                                                                 Dr.     24,000

(a)                 Discount                                                                 Dr.       1,000

To Blue

(Being the bill dishonoured and discount

received has been written off)

 

(b)                      Brown                                                                Dr.      24.400

Discount                                                                   Dr.        1,000

To Blue

(Being the bill dishonoured and noting

charges paid by Blue)

 

Credit

$

 

 

24,000

 

 

 

24,000

1,000

 

 

 

 

 

25 ,000

 

 

 

 

 

25,400

 

Note. Cash discount of $ 1,000 earned by endorsing the bill will be written off, because the bill was dishonoured. Discount account was credited while endorsing the bill, so it has been debited to write off the discount account.

 

                                                       Journal Entries

                                     (In the Books of Browrr(Drawee)

2003

Oct. 20              Black                                                                           Dr.     24,000

To Bills Payable A/c                                                                                        24,000

(Being the acceptance of the bill given)

 

2004

Jan. 23             Bills Payable A/c Dr. 24,000

(a)                    To Bank                                                                                  24,000

(Being the bill dishonoured)

 

Jan. 23             Bills Payable A/c                                                        Dr.       24,000

(b)                    Noting Charges A/c                                                     Dr.       400

To Black                                                                                                          24,400

(Being the bill dishonoured and noting charges due)

 

Note. Brown, the drawee is not concerned with the endorsement of the bill or the discount Allowed or received. Therefore, entry regarding endorsement has not been passed in his books.

 

Journal Entries

In the Books of Blue (Endorsee)

2003

Oct. 20            B/R A/c                                                           Dr.                   24.000

Discount A/c                                                   Dr                   1,000

To Black                                                                                                          25,000

(Being bill received from Black in

full settlement of a debt of $ 25.000)

 

2004

Jan. 23             Black                                                              Dr.                   25.000

(a)                    To B/R A/c                                                                                                      24,000

To Discount A/c                                                                                              1,000

(Being the bill dishonoured and discount

allowed written off)

 

Jan. 23                         Black                                                   Dr.                   25400

(b)                                To B/R A/c                                                                                         24,000

To Discount A/c                                                                                  1,000

Cash A/c                                                                                              400

(Being the bill dishonoured, noting

charges paid and discount allowed written off)

 

Note. Accepting a bill receivable for $ 24,000 against a debt of $ 25,000 shows that $ 1,000 was allowed as discount. As the bill was dishonoured, discount allowed account was written off.