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Class 11 Accountancy Chapter 8 Bills of Exchange — Formulas & Key Points

NCERT Class 11 Accountancy Chapter 8 introduces Bills of Exchange as a negotiable instrument used in trade credit. Unlike cash transactions, bills formalise credit sales and purchases, creating legal obligations. This formula sheet consolidates every accounting entry, maturity calculation and treatment scenario—acceptance, honour, dishonour, endorsement, discounting and renewal—that appears in CBSE board and school exams.

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Key takeaways

✓Bill of Exchange involves three parties—drawer, drawee and payee—while Promissory Note has only two parties (maker and payee).
✓Maturity date = Date of bill + Period of bill + 3 days of grace (unless otherwise stated).
✓On acceptance, drawee records Bills Payable (Cr) and drawer records Bills Receivable (Dr).
✓Dishonour of bill requires reversing the original entries and recording any noting charges separately.
✓Retirement of bill before maturity involves rebate (discount) calculation: Rebate = Amount × Rate × (Unexpired period/365).
✓Endorsement transfers the bill to a third party; drawer's Bills Receivable account is credited.
✓Renewal of bill cancels the old bill and creates a new bill, often with interest on the outstanding amount.

Key Definitions and Terms

Understanding the vocabulary is half the battle in Bills of Exchange. A Bill of Exchange is an unconditional written order by the drawer (seller/creditor) to the drawee (buyer/debtor) to pay a specified sum to the payee on a certain date. A Promissory Note is a written promise by the maker to pay a sum to the payee. The drawer is the person who draws (writes) the bill; the drawee is the person on whom the bill is drawn; the payee is the person to whom payment is to be made (often the drawer himself). Acceptance means the drawee signs the bill, agreeing to pay. Maturity date is the date on which payment falls due. Grace period in India is 3 days added to the nominal due date unless the bill states 'no grace'. Noting means recording dishonour officially by a notary public, incurring noting charges. Bills Receivable (B/R) is an asset account for the drawer; Bills Payable (B/P) is a liability account for the drawee.

Bill of Exchange: Unconditional order to pay, involves three parties (drawer, drawee, payee).
Promissory Note: Unconditional promise to pay, involves two parties (maker, payee).
Acceptance: Drawee's signature on the bill, converting it into a legal liability.
Maturity Date: Due date = Date of bill + Period + 3 days grace.
Noting Charges: Fees paid to notary for recording dishonour of a bill.
Bills Receivable (B/R): Asset account (debit) in drawer's books.
Bills Payable (B/P): Liability account (credit) in drawee's books.

Maturity Date Calculation Formula

Calculating the exact maturity date is crucial for interest, rebate and due-date tracking. The formula is: Maturity Date = Date of Bill + Period of Bill + Grace Period (3 days). If the bill is dated 5 January and the period is 2 months, nominal due date is 5 March; add 3 days of grace to get 8 March as maturity date. When the period is in months, count calendar months (not 30 days). If maturity falls on a public holiday or Sunday, the bill is due on the preceding working day. For bills stating 'after sight', the period begins from the date of acceptance, not the date of the bill. Always check if the bill explicitly mentions 'no grace' or 'without grace'—in such cases, do not add 3 days.

Maturity Date = Date of Bill + Period + 3 days grace (standard in India).
If period is in months, count full calendar months then add grace days.
If maturity falls on a holiday/Sunday, bill matures on the preceding business day.
For 'after sight' bills, period starts from acceptance date, not bill date.
If bill states 'no grace' or 'without grace', skip the 3-day addition.

Core Accounting Entries — Acceptance and Honour

When a bill is drawn and accepted, the drawer records an asset (Bills Receivable Dr) and the drawee records a liability (Bills Payable Cr). On the maturity date, if the bill is honoured (paid), the drawee debits Bills Payable and credits Cash/Bank, extinguishing the liability. The drawer debits Cash/Bank and credits Bills Receivable, converting the asset into cash. These entries mirror each other and form the foundation of all subsequent transactions like endorsement, discounting and dishonour. It is vital to remember that drawing a bill does not itself create any journal entry in either party's books—only acceptance triggers accounting entries. If the drawer retains the bill until maturity, he receives cash directly. If he endorses or discounts it, the Bills Receivable account is credited earlier.

Drawing the bill: No entry in either book until acceptance.
On acceptance — Drawer: Bills Receivable Dr, Debtor/Sales Cr. Drawee: Creditor/Purchases Dr, Bills Payable Cr.
On honour (maturity) — Drawer: Cash/Bank Dr, Bills Receivable Cr. Drawee: Bills Payable Dr, Cash/Bank Cr.
Honour means the drawee pays on due date; dishonour means failure to pay.
Always close Bills Receivable and Bills Payable accounts on maturity, whether honoured or dishonoured.

Dishonour of Bill — Accounting Treatment

If the drawee fails to pay on maturity, the bill is dishonoured. The drawer must reverse the Bills Receivable entry and reinstate the debtor's personal account, often adding any noting charges incurred. In the drawer's books: Debtor Dr (original amount + noting charges), Bills Receivable Cr (original amount), Cash/Bank Cr (noting charges). In the drawee's books: Bills Payable Dr (original amount), Creditor Cr (original amount + noting charges if borne by drawee), Cash Cr (noting charges if paid by drawee). Noting charges are the fees paid to a notary public to legally record the dishonour. They are typically borne by the drawee but may be paid by the drawer initially and then recovered. Always specify who bears the noting charges in the question.

Dishonour: Drawee fails to pay on maturity date.
Drawer reverses Bills Receivable, reinstates Debtor account, adds noting charges.
Drawer's entry: Debtor Dr (Amount + Noting Charges), Bills Receivable Cr (Amount), Cash Cr (Noting Charges).
Drawee's entry: Bills Payable Dr, Creditor Cr (Amount + Noting Charges if borne), Cash Cr (Noting Charges if paid).
Noting charges are additional costs for legal recording of dishonour.

Endorsement and Discounting

Endorsement transfers the bill to a third party in settlement of a debt. The drawer credits Bills Receivable and debits the creditor's account. The new holder (endorsee) now has the right to collect payment on maturity. Discounting is selling the bill to a bank before maturity at a discount. The bank pays the drawer the present value (bill amount minus discount), and the drawer credits Bills Receivable. Discount is calculated as: Discount = Bill Amount × Rate × (Period remaining / 365). The drawer records: Bank Dr (Amount – Discount), Discount (or Interest) Dr, Bills Receivable Cr. If the bill is dishonoured, the bank recovers the full amount plus noting charges from the drawer. The drawer then debits the drawee and credits Bank for the total recovered amount.

Endorsement: Transfer bill to a third party. Entry: Creditor Dr, Bills Receivable Cr.
Discounting: Sell bill to bank before maturity for immediate cash minus discount.
Discount = Bill Amount × Rate × (Days remaining / 365).
Drawer receives: Amount – Discount. Entry: Bank Dr (Net), Discount Dr, Bills Receivable Cr.
On dishonour after discounting: Bank recovers full amount + noting charges from drawer.
Drawer then records: Debtor Dr (Full + Noting Charges), Bank Cr (Full + Noting Charges).

Retirement and Rebate Calculation

Retirement of a bill means the drawee pays before the maturity date. In return, the drawer allows a rebate (discount for early payment). The rebate is calculated using: Rebate = Bill Amount × Rate × (Unexpired Period / 365). The drawee pays (Bill Amount – Rebate), and the drawer receives the same net amount. Drawer's entry: Bank Dr (Net Amount), Rebate Dr, Bills Receivable Cr (Full Amount). Drawee's entry: Bills Payable Dr (Full Amount), Rebate Cr, Bank Cr (Net Amount). Rebate is an expense for the drawer (loss of interest) and income for the drawee (gain from early settlement). Always calculate unexpired period from the date of retirement to the original maturity date, including grace days if applicable.

Retirement: Drawee pays before maturity; drawer allows rebate for early payment.
Rebate = Bill Amount × Rate × (Unexpired Days / 365).
Unexpired period: Days from retirement date to maturity date.
Drawer receives: Bill Amount – Rebate. Entry: Bank Dr (Net), Rebate Dr, Bills Receivable Cr (Full).
Drawee pays: Bill Amount – Rebate. Entry: Bills Payable Dr (Full), Rebate Cr, Bank Cr (Net).
Rebate is income for drawee, expense for drawer.

Renewal of Bill and Interest Calculation

When the drawee cannot pay on maturity, the drawer may agree to cancel the old bill and draw a new bill for a longer period. This is called renewal. The old bill is cancelled (dishonoured), and a new bill is drawn, often for the original amount plus interest for the extended period. Interest is calculated on the overdue amount at an agreed rate. The drawee may pay part of the debt in cash, and the new bill is drawn for the balance plus interest. Drawer's entries: (i) Cancel old bill: Debtor Dr, Bills Receivable Cr. (ii) Draw new bill: Bills Receivable Dr, Debtor Cr (for new bill amount including interest). (iii) If cash received: Bank Dr, Debtor Cr. Drawee mirrors these entries. The new maturity date starts from the date of renewal, not the original bill date.

Renewal: Old bill cancelled, new bill drawn for extended period, usually with interest added.
Interest on renewal = Outstanding Amount × Rate × (Period / 365 or 12 for months).
Drawer cancels old B/R: Debtor Dr, Bills Receivable Cr.
Drawer draws new bill: Bills Receivable Dr, Debtor Cr (Amount + Interest).
If part payment in cash: Bank Dr, Debtor Cr; new bill for balance + interest.
Drawee: Cancel Bills Payable Dr, Creditor Cr; new Bills Payable Cr for new bill.

Common Mistakes and Memory Tricks

Students often confuse Bills Receivable (asset, debit balance) with Bills Payable (liability, credit balance). Remember: 'Receivable' means you will receive cash (asset); 'Payable' means you must pay (liability). Another frequent error is forgetting the 3-day grace period when calculating maturity dates—always add grace unless the question says 'no grace'. When discounting, students sometimes credit Bank instead of debiting it; the bank pays you, so Bank Dr. For noting charges, remember they are added to the debtor's account because the debtor (drawee) is liable for the dishonour. Rebate on retirement is the opposite of discount on discounting: rebate is a loss to the drawer (Dr Rebate), discount is also a loss to the drawer (Dr Discount). Mnemonic for parties: 'D-D-P' = Drawer Draws on Drawee, Payee receives Payment. For renewal, the new bill amount = Old amount + Interest – any Cash paid.

Bills Receivable = Asset (Dr balance); Bills Payable = Liability (Cr balance).
Always add 3 days grace unless question explicitly states 'no grace' or 'without grace'.
On discounting, Bank is debited (you receive cash); Bills Receivable is credited.
Noting charges are added to the debtor's account (drawee's responsibility).
Rebate on retirement and Discount on discounting are both expenses (Dr) for the drawer.
Mnemonic: 'D-D-P' = Drawer Draws on Drawee for Payee.
Renewal: New bill = Old amount + Interest – Cash paid (if any).

Solved Mini-Example 1: Acceptance and Honour

Question: A sells goods to B for ₹15,000 on 1 April 2025. A draws a 3-month bill on B, which B accepts. The bill matures and B honours it. Pass journal entries in the books of both A and B. Solution: Maturity date = 1 April + 3 months = 1 July + 3 days grace = 4 July 2025. A's Books: (i) On acceptance (1 April): Bills Receivable Dr ₹15,000, B Cr ₹15,000. (ii) On honour (4 July): Bank Dr ₹15,000, Bills Receivable Cr ₹15,000. B's Books: (i) On acceptance (1 April): A Dr ₹15,000, Bills Payable Cr ₹15,000. (ii) On honour (4 July): Bills Payable Dr ₹15,000, Bank Cr ₹15,000. This example shows the mirror-image nature of drawer and drawee entries for a straightforward acceptance and honour scenario.

Solved Mini-Example 2: Discounting and Dishonour

Question: C draws a bill for ₹20,000 on D for 2 months on 10 May 2025. D accepts. C discounts the bill with his bank on 15 May at 15% p.a. The bill is dishonoured on maturity; bank charges ₹200 as noting charges. Pass entries in C's books. Solution: Maturity date = 10 May + 2 months = 10 July + 3 days = 13 July. Period from 15 May to 13 July = 59 days. Discount = 20,000 × 15/100 × 59/365 = ₹485.48 (round to ₹485). C receives ₹19,515. (i) On discounting (15 May): Bank Dr ₹19,515, Discount Dr ₹485, Bills Receivable Cr ₹20,000. (ii) On dishonour (13 July): Bank recovers ₹20,000 + ₹200 = ₹20,200 from C. Entry: D Dr ₹20,200, Bank Cr ₹20,200. C now has a receivable of ₹20,200 from D. This example illustrates discounting mechanics and dishonour recovery by the bank.

Solved Mini-Example 3: Renewal with Part Payment

Question: E drew a bill on F for ₹10,000 for 3 months on 1 January 2025. On maturity, F could not pay and requested renewal. E agreed: F paid ₹2,000 cash and accepted a new bill for the balance plus interest at 18% p.a. for 2 months. Pass entries in E's books. Solution: Old bill maturity = 1 Jan + 3 months = 1 April + 3 days = 4 April. Balance after cash payment = 10,000 – 2,000 = ₹8,000. Interest = 8,000 × 18/100 × 2/12 = ₹240. New bill amount = 8,000 + 240 = ₹8,240. E's Entries on 4 April: (i) Cancel old bill: F Dr ₹10,000, Bills Receivable Cr ₹10,000. (ii) Cash received: Bank Dr ₹2,000, F Cr ₹2,000. (iii) New bill accepted: Bills Receivable Dr ₹8,240, F Cr ₹8,240. Net effect: F's account is credited ₹2,000 + ₹8,240 = ₹10,240 and debited ₹10,000, leaving a credit balance of ₹240 (interest earned by E).

One-Glance Last-Minute Revision Box

Use this checklist in the final 10 minutes before your exam. (1) Maturity Date = Bill Date + Period + 3 days grace (unless 'no grace'). (2) Acceptance entries: Drawer—Bills Receivable Dr; Drawee—Bills Payable Cr. (3) Honour: Drawer—Cash Dr, B/R Cr; Drawee—B/P Dr, Cash Cr. (4) Dishonour: Drawer—Debtor Dr (Amount + Noting Charges), B/R Cr, Cash Cr (Noting). Drawee—B/P Dr, Creditor Cr (Amount + Noting), Cash Cr (Noting). (5) Endorsement: Creditor Dr, B/R Cr. (6) Discounting: Bank Dr (Net), Discount Dr, B/R Cr. Discount = Amt × Rate × Days/365. (7) Retirement: Bank Dr (Net), Rebate Dr, B/R Cr. Rebate = Amt × Rate × Unexpired/365. (8) Renewal: Cancel old bill, draw new bill for balance + interest. Interest = Amt × Rate × Period. (9) B/R is an asset (debit); B/P is a liability (credit). (10) Noting charges always added to debtor's account. (11) Always specify which party bears noting charges.

Maturity = Date + Period + 3 grace (unless stated otherwise).
Acceptance: Drawer B/R Dr; Drawee B/P Cr.
Honour: Drawer Cash Dr, B/R Cr; Drawee B/P Dr, Cash Cr.
Dishonour: Reinstate debtor + noting charges; reverse B/R or B/P.
Endorsement: Creditor Dr, B/R Cr.
Discounting: Bank Dr (Net), Discount Dr, B/R Cr. Formula: Amt × Rate × Days/365.
Retirement: Bank Dr (Net), Rebate Dr, B/R Cr. Formula: Amt × Rate × Unexpired/365.
Renewal: Cancel old, draw new = Balance + Interest.
B/R = Asset (Dr); B/P = Liability (Cr).
Noting charges on dishonour added to debtor/drawee account.
Interest on renewal = Outstanding × Rate × Period.

Frequently asked questions

What is the difference between a Bill of Exchange and a Promissory Note?+

A Bill of Exchange involves three parties (drawer, drawee, payee) and is an order to pay. A Promissory Note involves two parties (maker, payee) and is a promise to pay. Bills are drawn by the creditor; promissory notes are made by the debtor.

How do I calculate the maturity date of a bill of exchange?+

Add the period of the bill to the date of the bill, then add 3 days of grace (unless the bill states 'no grace'). If the period is in months, count full calendar months. If maturity falls on a holiday or Sunday, it matures on the preceding business day.

What entries are passed when a bill is dishonoured?+

In the drawer's books: Debit the Debtor account (bill amount plus noting charges), Credit Bills Receivable (bill amount), Credit Cash/Bank (noting charges paid). In the drawee's books: Debit Bills Payable, Credit Creditor (amount plus noting charges if borne), Credit Cash (noting charges).

What is the formula for calculating discount when discounting a bill with a bank?+

Discount = Bill Amount × Rate of Discount × (Number of Days Remaining / 365). The drawer receives Bill Amount minus Discount. The entry is: Bank Dr (Net Amount), Discount Dr, Bills Receivable Cr (Bill Amount).

How is rebate on retirement different from discount on discounting?+

Rebate applies when the drawee pays early (before maturity); the drawer allows a reduction for early settlement. Discount applies when the drawer sells the bill to a bank before maturity. Both are calculated similarly: Amount × Rate × Period / 365, and both are expenses (debit) for the drawer.

What happens if a discounted bill is dishonoured?+

The bank recovers the full bill amount plus any noting charges from the drawer. The drawer debits the Debtor (original drawee) with the total recovered amount and credits Bank. The drawer then pursues recovery from the original debtor.

How do I record the renewal of a bill of exchange?+

First, cancel the old bill: Debit Debtor, Credit Bills Receivable (old amount). If cash is received, Debit Bank, Credit Debtor. Then draw the new bill: Debit Bills Receivable (new amount including interest), Credit Debtor. Calculate interest on the outstanding balance at the agreed rate and period.

Who is liable to pay noting charges when a bill is dishonoured?+

Typically, the drawee (the party who failed to pay) is liable for noting charges. However, the drawer may initially pay the charges, then add them to the debtor's account for recovery. Always check the question to see who actually pays the charges.

What are Bills Receivable and Bills Payable accounts?+

Bills Receivable is an asset account in the drawer's books, showing bills held for future collection (debit balance). Bills Payable is a liability account in the drawee's books, showing bills accepted and to be paid (credit balance). They mirror each other in the transaction.

Can I get step-by-step solutions for Class 11 Accountancy Chapter 8 Bills of Exchange problems?+

Yes, CBSETUTOR.ai offers a 24×7 AI tutor where you can upload photos of your Bills of Exchange problems and get instant step-by-step solutions, including journal entries and maturity calculations. It covers every NCERT and CBSE question pattern for Class 11 Accountancy at ₹999/month for all subjects, with a 3-day free trial to start.

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