Bills of Exchange Made Simple: A CA Foundation Guide

Accounting: Bills of Exchange: A Practical Guide to Recording Transactions
Bills of Exchange play a crucial role in business and finance, serving as a written promise for future payments. For CA Foundation students, mastering the concept of Bills of Exchange is essential not only for the exam but also for practical accounting knowledge. In this blog, we will break down the meaning, types, and step-by-step process of recording transactions related to Bills of Exchange in a way that makes the topic easy to understand.

What is a Bill of Exchange?
A Bill of Exchange is a written instrument by which one party (the drawer) orders another party (the drawee) to pay a certain sum of money either to himself or to another party (the payee) at a specified future date. In simple words, it is like a credit instrument that allows trade to happen smoothly by giving buyers time to pay.

Key Parties in a Bill of Exchange
Before learning how to record, remember the three important parties:

• Drawer: The person who writes (draws) the bill, usually the seller.

• Drawee: The person who accepts the bill and promises to pay, usually the buyer.

• Payee: The person who will receive the payment, which may be the drawer or another party.

Importance of Bills of Exchange in Accounting

• Facilitates trade on credit terms.

• Provides legal evidence of debt.

• Can be discounted with banks for immediate cash.

• Helps in maintaining financial discipline between traders.

Recording Transactions in the Books of Accounts
Let’s look at how different transactions involving Bills of Exchange are recorded in accounting books.

Case 1: When the Bill is Accepted
Suppose A sells goods to B worth ₹50,000 on credit and draws a bill for 3 months. B accepts the bill.

• In the Books of A (Drawer):
  Bills Receivable A/c Dr. ₹50,000
  To B’s A/c ₹50,000

• In the Books of B (Drawee):
  A’s A/c Dr. ₹50,000
  To Bills Payable A/c ₹50,000

Case 2: When the Bill is Honoured on Due Date
On maturity, B pays the bill in full.

• In the Books of A:
  Cash A/c Dr. ₹50,000
  To Bills Receivable A/c ₹50,000

• In the Books of B:
  Bills Payable A/c Dr. ₹50,000
  To Cash A/c ₹50,000

Case 3: When the Bill is Dishonoured
If B fails to pay the bill on maturity, the entry changes.

• In the Books of A:
  B’s A/c Dr. ₹50,000
  To Bills Receivable A/c ₹50,000

• In the Books of B:
  Bills Payable A/c Dr. ₹50,000
  To A’s A/c ₹50,000

Case 4: When the Bill is Discounted with Bank
A may need cash earlier, so he discounts the bill with a bank at a discount of ₹1,000.

• In the Books of A:
  Bank A/c Dr. ₹49,000
  Discount A/c Dr. ₹1,000
  To Bills Receivable A/c ₹50,000

Case 5: Endorsement of Bill
Instead of keeping the bill, A may endorse it to his creditor, C.

• In the Books of A:
  C’s A/c Dr. ₹50,000
  To Bills Receivable A/c ₹50,000

• In the Books of C:
  Bills Receivable A/c Dr. ₹50,000
  To A’s A/c ₹50,000

Common Mistakes Students Make

• Confusing between Bills Receivable and Bills Payable.

• Forgetting to close the account after payment.

• Ignoring discount charges while recording discounted bills.

• Misunderstanding dishonour entries.

Quick Tips to Master This Chapter

1. Practice journal entries regularly with different cases.

2. Create a summary table of “Drawer vs Drawee” entries.

3. Revise practical illustrations from your CA Foundation study material.

4. Attempt past year papers and mock tests to strengthen speed.

Conclusion
Bills of Exchange are not just theoretical—they reflect real-world financial transactions. For CA Foundation students, understanding the recording of bills is crucial to scoring well in accounting papers and building strong fundamentals for advanced studies.

At ResultPrep Coaching, we simplify topics like Bills of Exchange through concept-based teaching, real-life examples, and hands-on practice sessions. With the right guidance, even the most technical topics become easy to understand.

📞 Call us at 8970007497
🌐 Visit: www.resultprep.com