by Honor of a bill refers to the payment of the bill of exchange by the acceptor on the due date. When the acceptor pays the amount specified in the bill at maturity, the bill is said to be honoured. It signifies the successful completion of the transaction and the discharge of liability. Honor of bills enhances trust and goodwill between business parties and ensures smooth commercial operations. Upon payment, the bill is cancelled and no further obligation remains on the acceptor. In accounting, appropriate journal entries are passed to close the Bills Receivable and Bills Payable accounts after settlement of the bill.
Accounting entries for Honor of Bills:
In the Books of Drawer
| Transaction | Journal Entry |
|---|---|
| Bill Honoured on Maturity | Bank A/c Dr. To Bills Receivable A/c |
In the Books of Acceptor
| Transaction | Journal Entry |
|---|---|
| Bill Honoured on Maturity | Bills Payable A/c Dr. To Bank/Cash A/c |
Summary
| Books | Effect of Honor of Bill |
|---|---|
| Drawer | Bills Receivable is closed and cash is received. |
| Acceptor | Bills Payable is closed and payment is made. |
Dishonor of Bills
Dishonor of a bill occurs when the acceptor fails to pay the amount of the bill on the due date or refuses to accept it when presented for acceptance. In such a situation, the bill is said to be dishonoured. Dishonor may arise due to insufficient funds, financial difficulties, insolvency, or refusal to meet the payment obligation. When a bill is dishonoured, the liability of the debtor is revived, and the holder can recover the amount along with any noting charges incurred. Dishonor adversely affects the business reputation and creditworthiness of the acceptor. Appropriate accounting entries are passed to record the dishonour of the bill in the books of both parties.
Accounting entries for Dishonor of Bills:
In the Books of Drawer
| Transaction | Journal Entry |
|---|---|
| Dishonour of Bill | Debtor’s A/c Dr. To Bills Receivable A/c |
| Noting Charges Paid | Debtor’s A/c Dr. To Bank/Cash A/c |
| Dishonour with Noting Charges | Debtor’s A/c Dr. To Bills Receivable A/c To Bank/Cash A/c (Noting Charges) |
In the Books of Acceptor
| Transaction | Journal Entry |
|---|---|
| Dishonour of Bill | Bills Payable A/c Dr. To Creditor’s A/c |
| Noting Charges Payable | Noting Charges A/c Dr. To Creditor’s A/c |
| Dishonour with Noting Charges | Bills Payable A/c Dr. Noting Charges A/c Dr. To Creditor’s A/c |
Summary
| Books | Effect of Dishonour |
|---|---|
| Drawer | Bills Receivable is cancelled and debtor’s liability is restored. |
| Acceptor | Bills Payable is cancelled and creditor’s claim is revived. |
| Noting Charges | Added to the amount recoverable from the acceptor. |
Renewal of Dishonored Bills
Renewal of a dishonored bill refers to the cancellation of an existing bill that could not be paid on the due date and the issue of a new bill for an extended period. The acceptor requests additional time for payment, and the drawer agrees to grant the extension. Usually, interest is charged for the extended credit period. Renewal helps the acceptor meet financial obligations while providing assurance of future payment to the drawer.
Accounting Treatment of Renewal of Dishonored Bills:
When a bill is dishonoured and the acceptor is unable to make payment, the drawer may agree to extend the time for payment. In such a case, the old bill is cancelled, interest is charged for the extended period, and a new bill is drawn and accepted. This process is known as renewal of a dishonoured bill.
In the Books of Drawer
| Transaction | Journal Entry |
|---|---|
| Dishonour of Old Bill | Debtor’s A/c Dr. To Bills Receivable A/c |
| Interest Charged | Debtor’s A/c Dr. To Interest A/c |
| Acceptance of New Bill | Bills Receivable A/c Dr. To Debtor’s A/c |
In the Books of Acceptor
| Transaction | Journal Entry |
|---|---|
| Dishonour of Old Bill | Bills Payable A/c Dr. To Creditor’s A/c |
| Interest Due | Interest A/c Dr. To Creditor’s A/c |
| Acceptance of New Bill | Creditor’s A/c Dr. To Bills Payable A/c |
Summary
| Step | Treatment |
|---|---|
| 1 | Old bill is cancelled after dishonour. |
| 2 | Interest is charged for additional credit period. |
| 3 | A new bill is drawn and accepted. |
| 4 | Liability continues until the new bill is honoured. |
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