Accounting for Bills of Exchange
Definition and parties
A bill of exchange is a written instrument containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer, on demand or at a fixed future time. Parties: drawer (the maker, usually the seller), drawee (who accepts and pays, the buyer) and payee (who receives the money). Once accepted, the bill is a bill receivable for the drawer and a bill payable for the drawee.
Key terms: tenor is the period of the bill; days of grace are three days added to the period; due date is the date of the bill plus the tenor plus three days; discounting is encashing the bill with a bank before the due date at a rate charged on the unexpired period; endorsement transfers the bill to a creditor; dishonour is followed by noting by a notary public; retirement before due date earns a rebate; an accommodation bill is drawn for mutual help rather than for a trade debt.
Worked example
A bill is dated 1 January 2024 for three months. The nominal due date is 1 April 2024; adding three days of grace gives 4 April 2024. If 4 April is a public holiday, the bill falls due on the preceding business day. If the drawer discounts the bill on 1 February at 12% per annum, the unexpired period is two months, so the discount is 12% × 2/12 of the bill amount and the drawer receives the face value less that discount.
Traps
Forgetting the three days of grace; adding grace to a bill payable on demand or at sight; counting the unexpired period from the date of the bill instead of the date of discounting; naming the drawee as the drawer; treating noting charges as an income.