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The bill can be used by the drawer in either of the four ways (mentioned earlier). It may be just possible that the drawer may himself be the debtor of certain other person. According to trade practice, the drawer may accept the bill drawn by his creditor. Instead of accepting a fresh bill, the drawer may endorse (transfer) his Bills Receivable. The endorsee will be the owner of the bill and he will realise the payment of the bill on the due date from the drawee. Let us suppose that, A sells goods to B for $ 700 on credit. B accepts a bill for the amount. A endorses the bill in favour of his creditor C. On the due date, C presents the bill to Band realises the full payment of the bill on the due date.

 

 

Accounting Treatment of Endorsement

 

In the books of A (Drawer). A is seller of goods to B. He is also the drawer of the bill, so he will pass only three journal entries, the first for selling goods the second for drawing the bill and the third for endorsing the bill. He will not pass any journal entry for the payment of the bill.

 

In the books of B (Drawee). B is concerned with the purchases of goods. He is also concerned with the acceptance and payment of the bill, so he will pass three entries, i.e., for purchasing goods, for accepting bill and for the payment of the bill. It is important to note here that the drawee is not concerned with the endorsement. He will make the payment of the bill on the due date to the person, who presents it.

 

In the books of C (Endorsee). Endorsee (transferee) C is concerned with receiving bills receivable from A and receiving the payment of the bill from B.

 

Illustration 3. (a) A draws a bill on B for $ 2,000 against sale of goods on 30th November; 2004, payable after two months. B accepts it. A endorses the bill to C who realises the payment of the bill on the due date.

 

Pass journal entries in the books of A, B and C.

(b) How will you treat if A endorses the bill to C against a debt of $ 2,020 in full settlement.

 

Solution. (a)                                        Journal Entries

In the Books of A (Drawer)

Date                            Particulars                                         L.F.                             Amount

Debit               Credit

$                      $.

2004

Nov. 30                       B                                  Dr.                                           2,000

To Sales A/c                                                                                        2,000

(Being goods sold to B on credit)

 

Nov. 30                       Bills Receivable Ale    Dr.                                           2,000

To B                                                                                                    2,000

(Being acceptance of the bill received from B)

 

Nov. 30                       C                                 Dr.                                          2,000

To Bills Receivable A/c                                                                       2,000

(Being the bill endorsed in favour of C)

(b) If the bill has been endorsed against a debit of $ 2,020.

 

2004

Nov. 30                       C                                             Dr.                              2,020

To Bills Receivable A/c                                                                       2,000

To Discount A/c                                                                                  20

(Being endorsement of bill against a debt of $ 2,020)

 

Notes. (i) C’s account will be debited with $ 2,020, because A owes this amount and the debt is cleared with the endorsement of the bill of $ 2,000. Bills receivable account will be credited with its original value. It should be noted that bills receivable and bills payable accounts are always debited and credited with their original values. A has to pay Rs. 20 lesser. It is discount received, a gain, so credited.

 

(ii) A will not pass any entry for the payment of the bill, because he will not receive the payment of the bill. A does not possess the bill. He will not present it for payment, so he will not receive payment and thus not pass entry for the payment of the bill.

 

Journal Entries

In the Books of B (Drawee)

2004

Nov. 30                       Purchases A/c                          Dr.                              2,000

To A                                                                                                    2,000

(Being goods purchased on credit from A)

 

Nov. 30                       A Dr.                                                                          2,000

To B/P A/c                                                                                           2,000

(Being acceptance of the bill given)

 

2005

Feb. 2                          B/P A/c                                   Dr.                              2000

To Cash A/c                                                                                         2000

(Being the payment of the bill made)

 

Note. The drawee will not pass any entry regarding the endorsement of the bill, because it is an arrangement between A and C. B is not concerned with it, so he will not pass any entry for the endorsement.

 

(a) Journal Entries in the Books of C (Endorsee)

2004

Nov. 30                       Bills Receivable A/c                Dr.                  2000

To A                                                                                                    2,000

(Being bill received from A against a debt of $ 2,000)

 

2005

Feb. 2                          Cash A/c                                  Dr.                  2,000

To Bills Receivable A/c                                                                       2,000

(Being the payment of the bill received)

(b) If the bill is received against a debt of $ 2,020.

 

2004

Nov. 30                       Bills Receivable A/c                Dr.                  2000

Discount A/c                             Dr                      20

To A                                                                                                    2020

(Being bill receivable against a debt of $ 2,020)

 

Note. (a) C is the owner of the bill. He has received it from 8 against debt. He will present the bill, receive the payment and also pass entry for the payment.

 

(b) C has received a bill of $ 2,000 against a debt of $ 2,020 in full settlement. He allowed $ 20 as discount, so received $ 20 lesser. It is an expense, so debited in the books of accounts.