by Renewal of a bill refers to the process where the drawer (creditor) agrees to cancel the existing bill and accepts a new bill from the drawee (debtor) on the original due date, instead of insisting on immediate payment. This typically happens when the drawee is unable to honour the bill on maturity due to temporary financial difficulties. The old bill is cancelled, and a fresh bill is drawn for the outstanding amount, often including interest for the extended period, along with any additional expenses. The drawee may also make a part-payment before the new bill is drawn. Renewal provides mutual accommodation, giving the debtor extra time while protecting the creditor’s legal rights through a fresh negotiable instrument.
Reasons for Renewal of Bills:
1. Temporary financial difficulties of the Drawee
The most common reason for renewal is that the drawee faces a short-term cash crunch and cannot arrange funds by the due date. This may arise from delayed receipts from their own debtors, unexpected expenses, or slow inventory turnover. Instead of defaulting and damaging their credit reputation, the drawee requests the drawer for additional time. The drawer, recognizing the genuine difficulty and valuing the ongoing business relationship, agrees to cancel the old bill and draw a fresh one with an extended maturity period, often with interest.
2. To avoid Dishonour and Legal consequences
Dishonour of a bill damages the drawee’s creditworthiness and reputation in the market. It also exposes the drawee to legal action, noting charges, and public protest. To avoid these severe repercussions, the drawee proactively approaches the drawer before maturity and seeks renewal. The drawer, who also wishes to avoid the hassle of legal proceedings and preserve the business relationship, agrees to the renewal. This mutual understanding allows the drawee to maintain their financial standing while giving them a practical opportunity to arrange funds.
3. To provide mutual Accommodation and maintain business relations
Renewal is often driven by the desire to preserve long-term commercial relationships. The drawer understands that the drawee’s financial difficulties may be temporary and that forcing payment could strain or sever their trading partnership. By granting renewal, the drawer demonstrates flexibility and goodwill, which fosters trust and loyalty. The drawee, in turn, feels obliged to honour the new bill promptly. This cooperative approach ensures that both parties continue to benefit from their ongoing business association beyond a single transaction.
4. To enable part-payment by the Drawee
Sometimes, the drawee can pay only a portion of the total amount on the due date, not the full sum. In such cases, the drawer may accept the part-payment as a gesture of good faith and draw a fresh bill for the remaining balance. This arrangement provides immediate partial relief to the drawer while giving the drawee manageable repayment terms for the residual amount. The part-payment also demonstrates the drawee’s genuine intent to honour their obligation, building confidence for the renewed bill.
5. To allow the drawer to Earn additional interest income
When a bill is renewed, the drawer typically charges interest for the extended credit period. This interest is often added to the principal amount of the new bill, giving the drawer an extra return for the delayed payment. For creditors, this serves as a compensation for the opportunity cost of blocked funds. The interest rate is mutually agreed upon and formalized in the new instrument. Thus, renewal can become a financially beneficial arrangement for the drawer, rather than just a concession.
6. To avoid bad Debts and ensure eventual Recovery
If the drawer insists on immediate payment and the drawee defaults, the drawer may have to classify the amount as a bad debt, incurring a loss. Renewal offers a practical alternative to recover the amount without writing it off. By extending the time and possibly securing additional security or a guarantee, the drawer increases the likelihood of eventual full recovery. This approach is commercially prudent, especially when the drawee’s business is fundamentally sound but facing temporary liquidity issues.
7. To comply with statutory or Banking requirements
In some cases, banks or financial institutions that have financed the drawer against the bill may insist on renewal rather than dishonour or legal action. Banks prefer negotiated settlements to maintain asset quality and avoid non-performing assets. Similarly, in certain regulated industries, formal renewal processes may be required to restructure outstanding dues. Therefore, renewal may be pursued not just for business convenience but also to satisfy external regulatory or lender expectations, ensuring continued access to credit facilities.
Procedure for Renewal of a Bill:
1. Cancellation of the Old Bill
When a bill is dishonoured on the due date, the old bill is first cancelled. The amount of the bill is transferred back to the debtor’s account in the books of the drawer and to the creditor’s account in the books of the acceptor. This restores the original liability between the parties and records the dishonour of the bill properly.
2. Charging of Interest
Since the acceptor requests additional time for payment, the drawer usually charges interest for the extended credit period. The interest amount is added to the outstanding liability of the acceptor. This compensates the drawer for the delay in receiving payment and is recorded separately in the accounting books of both parties.
3. Drawing and Acceptance of a New Bill
After calculating the amount due, including interest, a new bill is drawn by the drawer and accepted by the acceptor. The new bill specifies the revised amount and the extended due date. This creates a fresh legal obligation for payment and replaces the old dishonoured bill.
4. Settlement of the New Bill
On the maturity date of the new bill, the acceptor is expected to make payment. If the amount is paid, the bill is honoured and the transaction is completed. If payment is not made again, the new bill is dishonoured, and the drawer can take necessary legal or accounting action to recover the amount due.
Journal Entries for Renewal of Bills:
When a bill is renewed, the following sequential steps occur:
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Cancel the old bill (reverse the original entry).
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Record any part-payment made by the drawee.
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Record interest charged by the drawer for the extended period.
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Record the new bill drawn and accepted.
Assumption for illustration:
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Original bill amount: ₹10,000
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Drawee pays ₹2,000 as part-payment on the due date.
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Interest charged by drawer for renewal period: ₹500
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New bill drawn for the balance: ₹8,500 (₹10,000 – ₹2,000 + ₹500)
In the Books of Drawer (Creditor/Seller)
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Step 1: Cancel the old bill | |||
| Due Date | Bills Receivable A/c (Old) …… Dr. | 10,000 | |
| To Drawee’s A/c | 10,000 | ||
| (Being the old bill cancelled as it is not honoured on due date) | |||
| Step 2: Record part-payment received | |||
| Due Date | Bank A/c …… Dr. | 2,000 | |
| To Drawee’s A/c | 2,000 | ||
| (Being part-payment received from drawee) | |||
| Step 3: Record interest charged | |||
| Due Date | Drawee’s A/c …… Dr. | 500 | |
| To Interest A/c | 500 | ||
| (Being interest charged to drawee for the extended credit period) | |||
| Step 4: Record the new bill accepted | |||
| Due Date | Bills Receivable A/c (New) …… Dr. | 8,500 | |
| To Drawee’s A/c | 8,500 | ||
| (Being new bill drawn for balance amount including interest, accepted by drawee) |
Net effect on Drawee’s A/c (Ledger Posting):
| Dr. | Drawee’s A/c | Cr. | |
|---|---|---|---|
| To Old Bills Receivable (cancelled) | 10,000 | By Balance b/d (old bill liability) | 10,000 |
| To Interest A/c | 500 | By Bank (part-payment) | 2,000 |
| By New Bills Receivable (balance) | 8,500 | ||
| Total | 10,500 | Total | 10,500 |
In the Books of Drawee (Debtor/Buyer)
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Step 1: Cancel the old bill | |||
| Due Date | Drawer’s A/c …… Dr. | 10,000 | |
| To Bills Payable A/c (Old) | 10,000 | ||
| (Being the old bill cancelled as it is not paid on due date) | |||
| Step 2: Record part-payment made | |||
| Due Date | Drawer’s A/c …… Dr. | 2,000 | |
| To Bank A/c | 2,000 | ||
| (Being part-payment made to drawer) | |||
| Step 3: Record interest payable | |||
| Due Date | Interest A/c …… Dr. | 500 | |
| To Drawer’s A/c | 500 | ||
| (Being interest due to drawer for renewal period) | |||
| Step 4: Record acceptance of new bill | |||
| Due Date | Drawer’s A/c …… Dr. | 8,500 | |
| To Bills Payable A/c (New) | 8,500 | ||
| (Being new bill accepted in favour of drawer for balance amount) |
Net effect on Drawer’s A/c (Ledger Posting):
| Dr. | Drawer’s A/c | Cr. | |
|---|---|---|---|
| To Bills Payable (old) | 10,000 | By Balance b/d (old bill liability) | 10,000 |
| To Bank (part-payment) | 2,000 | By Interest A/c | 500 |
| To Bills Payable (new) | 8,500 | ||
| Total | 20,500 | Total | 10,500 |
(Note: The drawer’s account effectively gets debited for the old liability cancellation, part-payment, and new acceptance, while credited for the original debt and interest.)
Summary Formula for New Bill Amount:
New Bill Amount = Old Bill Amount – Part-Payment + Interest + Expenses (if any)
