Karthik and Ravi: A Dishonoured Bill, Noting Charges and a Renewal
On 1 January 2025 Karthik of Chennai sold cotton fabric to Ravi of Salem for ₹1,20,000 and drew a bill of exchange on him payable three months after date. Ravi accepted it and returned it to Karthik, who kept it until maturity. On 4 April 2025 Ravi failed to pay. The bill came back through Karthik's bank with noting charges of ₹300, which Karthik had to pay to the notary. On 10 April 2025 Karthik drew a fresh bill on Ravi for two months, including the noting charges and interest at 12% per annum on the amount due for the renewed period; Ravi accepted. Karthik is unsure about two things: why a bill drawn on 1 January becomes due on 4 April rather than 1 April, and whether he was right to charge the noting charges to Ravi instead of to his own profit and loss account.
1. State the maturity date of the original bill and of the renewed bill, explain the three days of grace, and compute the amount of the renewed bill.
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Original bill: drawn 1 January 2025 for three months after date. Three months from 1 January = 1 April 2025; adding the three days of grace gives a maturity date of 4 April 2025.
Why grace days exist: by long-established mercantile custom, later given statutory force, the drawee is allowed three extra days beyond the nominal due date to arrange payment. They are added to every bill payable 'after date' or 'after sight' unless the bill expressly says 'without grace'. If the maturity date falls on a public holiday, the bill becomes due on the preceding business day - so in practice Karthik should check the holiday list before presenting the bill.
Renewed bill: drawn 10 April 2025 for two months. 10 April + 2 months = 10 June 2025; + 3 days of grace = 13 June 2025.
Amount of the renewed bill
| Particulars | ₹ |
|---|---|
| Original bill | 1,20,000 |
| Add: noting charges paid by Karthik | 300 |
| Amount due on dishonour | 1,20,300 |
| Add: interest at 12% p.a. for 2 months (1,20,300 × 12/100 × 2/12) | 2,406 |
| Amount of the new bill | 1,22,706 |
Interest is computed on the full amount due including noting charges, because Ravi is liable for that amount from the date of dishonour until the renewal date. The two-month period is used because the new bill runs for two months.
2. Pass the journal entries in Karthik's books on dishonour and on renewal of the bill.
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On dishonour (4 April 2025) - the bill is cancelled and Ravi's personal account replaces it, loaded with the noting charges Karthik had to pay:
| Particulars | Dr ₹ | Cr ₹ |
|---|---|---|
| Ravi's A/c Dr | 1,20,300 | |
| To Bills Receivable A/c | 1,20,000 | |
| To Bank A/c (noting charges paid) | 300 | |
| (Bill dishonoured; noting charges recovered from the drawee) |
On renewal (10 April 2025) - interest is first added to Ravi's balance, then the new bill is recorded:
| Particulars | Dr ₹ | Cr ₹ |
|---|---|---|
| Ravi's A/c Dr | 2,406 | |
| To Interest A/c | 2,406 | |
| (Interest at 12% p.a. for two months on ₹1,20,300) | ||
| Bills Receivable A/c Dr | 1,22,706 | |
| To Ravi's A/c | 1,22,706 | |
| (Fresh bill accepted for the amount due plus interest) |
After these entries Ravi's A/c stands at nil (1,20,300 + 2,406 – 1,22,706) and the new Bills Receivable A/c carries ₹1,22,706 at a cost of ₹1,20,300 - the ₹2,406 difference is Karthik's interest income, credited to Profit and Loss Account. Note that cancelling the old bill requires no entry in Ravi's books for the noting charges beyond the debit to Karthik's account, because the charges increase what Ravi owes either way.
3. Who must ultimately bear the ₹300 noting charges, and why? What entries would Karthik pass if, instead of dishonour, Ravi had retired the bill on 1 March 2025 for ₹1,18,800 after a rebate of ₹1,200?
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Noting charges are borne by the drawee, Ravi. Noting is the formal protest by a notary public recording that the bill was dishonoured; it is a cost caused entirely by the drawee's default, so the holder pays it only as an agent and recovers it from the defaulter. Karthik's treatment is therefore correct: he debits Ravi's account, not his own profit and loss account. Had Karthik been the one at fault (for example, by failing to present the bill in time), the cost would fall on him. The same logic applies to interest on renewal - it compensates the holder for the delay and is charged to the drawee.
If Ravi had retired the bill early on 1 March 2025 for ₹1,18,800, Karthik receives less than the face value because he is being paid before maturity; the ₹1,200 difference is a rebate - a finance charge borne by Karthik, not a loss on the bill itself:
| Particulars | Dr ₹ | Cr ₹ |
|---|---|---|
| Bank A/c Dr | 1,18,800 | |
| Rebate on Bills Allowed A/c Dr | 1,200 | |
| To Bills Receivable A/c | 1,20,000 | |
| (Bill retired before maturity at a rebate) |
At year-end, Rebate on Bills Allowed A/c is transferred to Profit and Loss Account as an expense. In Ravi's books the mirror entry is: Bills Payable A/c Dr ₹1,20,000; To Bank A/c ₹1,18,800; To Rebate on Bills Received A/c ₹1,200, with the rebate treated as income. Early retirement benefits the drawee and costs the holder - students often reverse this and wrongly record a gain in the holder's books.