Bills of Exchange

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A Powerpoint Presentation on Bills of Exchange - Accountancy

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Welcome

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Bills Of Exchange

Definition:

Definition According to section 5 of Negotiable Instrument Act, “A Bill Of Exchange is an instrument in writing containing an unconditional order, signed by the maker , directing a certain person to pay a sum of money only to or to the order of a certain person or to the bearer of the instrument.”

Special features:

Special features A Bill Of Exchange is an instrument in writing It must be signed by the maker It contains an unconditional order The order must be to pay money and money only The sum payable must be specific The amount must be paid within a stipulated time The name of the drawee must be clearly mentioned It must be dated and stamped

Parts Of A Bill Of Exchange:

Parts Of A Bill Of Exchange Date Term Amount Stamp Parties

Specimen/Design Of A Bill Of Exchange:

Specimen/Design Of A Bill Of Exchange JAISALMER 27 th Nov. 2006 Stamp Three months after due date, pay XYZ or order, the Sum of Rs 1000(one thousand only) for value received. To, M/S ABC Kvs . BSF Dabla Jaisalmer .

Parties to a Bill Of Exchange:

Parties to a Bill Of Exchange Drawer The person who draws or writes the Bill Of Exchange is called the Drawer. The Drawer must be the seller or creditor to whom the money is owing.

Drawee:

Drawee The Drawee is the person on whom the bill is drawn. He is the purchaser or debtor who is ordered by the Drawer to pay the amount.

Payee:

Payee The person who has the right to receive the amount of the bill is called the Payee, the Payee may be a third person or the Drawer himself.

Advantages of Bill of Exchange:

Advantages of Bill of Exchange A Bill of Exchange is used in settlement of debts It fixes the date of payment. It is a written and signed acknowledgement of debt. A debtor enjoys full period of credit. A drawer can convert the bill into cash by getting it discounted with the bank.

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1. Term of Bill : The period intervening between the date on which a bill is drawn and the date on which it becomes due for payment is called 'Term of Bill'. 2. Due Date : Due date is the date on which the payment of the bill is due. Due date is ascertained in the following manner : ( i ) In case of 'Bill at sight' :- Due date is the date on which a bill is presented for the payment. (ii) In case of 'Bill after Date' :- Due Date = Date of Drawing + Term of Bill. (iii) In case of ' Bill after sight' :– Due date = Date of Acceptance + Term of Bill. IMPORTANT TERMS

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3. Days of Grace : Drawee is allowed three extra days after the due date of bill for making payments. Such 3 days are know as 'Days of Grace'. It is a custom to add the days of grace. 4. Date of Maturity : The date which comes after adding three days of grace to the due date of a bill is called 'Date of maturity'.

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5. Bill at sight/Bill on Demand When no time for payment is mentioned in the bill of exchange and the bill is payable whenever it is presented to the drawee for the payment, such bills are know as "Bill at sight" or "Bill on Demand". 3 days of grace are not allowed when bill is payable on demand.

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6. Bill after Date Bill after date is the bill in which due date and date of maturity is ascertained from the date on which the bill is drawn. 3 days of grace are allowed for ascertaining the date of maturity in case of bill after date.

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7. Discounting of Bill When the bill is encashed from the bank before its due date , it is known as discounting of bill. Bank deducts its charges from the amount of bill and disburses the balance amount.

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8. Endorsement of Bill Endorsement of a bill means the Process of transferring the title of bill from the drawer or holder to their creditors. The person transferring the title is called " Endorser" and the person to whom the bill is transferred called 'Endorsee'. The endorsee can further endorse the bill in favor of his creditors. Endorsement is executed by putting the signature at the back of the bill.

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9. Bill sent for Collection Bill sent for Collection It is a process when the bill is sent to the bank with instructions to keep the bill till maturity and collect its amount from the acceptor on the date of maturity. 10. Dishonor of Bill When the drawee (or acceptor) of the bill fails to make payment of the bill on the date of maturity, it is called ‘Dishonor’ of Bill.

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11. Noting of Bill To obtain the proof of dishonor of a bill, it is re-sent to the drawee through a legally authorized persons called Notary Public. Notary Public charges a small fee for Providing this service known as noting charges. Noting charges are paid to the Notary Public first by the holder of the bill but are ultimately recovered from the drawee, because he is the person responsible for the dishonor.

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12. Retirement of a Bill When the drawee makes the payment of the bill before its due date it is called ‘Retirement of a bill‘. In such a case, holder of the bill usually allow a certain amount as Rebate to the drawee. Amount of rebate is calculated at a fixed percentage for the unexpired period only.

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13. Renewal of a Bill Sometimes, the drawee of a bill finds himself unable to meet the bill on due date. To avoid dishonoring of bill, he may request the holder of the bill to cancel the original bill and draw a new bill in place of old one. It the holder agrees, the old bill is cancelled and a new bill with new terms is drawn on the drawee and also accepted by him. This process is called 'Renewal of a bill'.

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In this case, Noting of the bill is not required as cancellation of the bill is mutually agreed upon by both the parties of the bill. Normally, the drawer charge interest for the period of new bill. The interest may be paid in cash or may be added in the amount of new bill. If any part payment is made at the time of renewal of a bill, interest is calculated only on the outstanding amount.

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14. Insolvency of Acceptor When the drawee (i.e., acceptor) of a bill is unable to meet his liabilities on due date, the drawee become insolvent. In such a case, entries for the dishonor of the bill are passed in the books of drawer/holder and drawee of the bill. Any proportionate amount received from the drawee is recorded in the books of the holder and the amount unrecoverable is debited to 'Bad Debts A/c'.

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On the Due Date bill is Honored – The accounting treatment under this heading is based on the assumption that bill is duly honored at maturity of the bill. Accounting Treatment of Bill Transactions

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Case - I Bill is retained by the drawer till date of maturity Case II : When the bill is discounted from the Bank by the Drawer Case III : When bill is endorsed in favor of a creditor Case - IV When Bill is sent to the Bank for collection

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Note : There will be no effect in the books of Drawee either the bill is discounted from the bank or endorsed to a creditor or sent to the bank for collection. The drawee makes the payment in normal manner. It is only in the books of drawer where an additional entry is passed to record the effect of the above transaction.

Points to Remember : :

Points to Remember : 1. When calculating Date of Maturity the following points must be considered : ( i ) In case of "Bill at sight" or "Bill on demand" 3 days of grace are NOT allowed. (ii) When the term of bill is mentioned in no of days, then Date of drawing the bill is not included. Date of payment is included in determining date of maturity .If date of maturity falls on a day which is public holiday, the maturity date of the bill shall be "PRCEDING DAY'. If maturity date is on an emergent holiday declared under the Negotiable Instolement Act. 1881, the next working day immediately after the holiday will be considered as the date of maturity. (iii) When the period is stated in months the date of maturity shall be calculated in terms of calendar months ignoring the no. of days in a month.

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2. Noting Charges : ( i ) Noting charges are not an expense for the drawer. (ii) It is always debited as 'Noting chargers in the books of drawee. (iii) Noting charges are recovered by drawer from drawee. (iv) Noting charges are paid only when noting of the bill is necessary any at the time DISHONOUR of bill. (v) Noting of the bill is NOT required when the bill is CANCELLED with the consent of both the parties, specially at the time of RENEWAL of Bill.

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Illustration X sold goods to Y on 1st April, 2011 for Rs. 20,000 on credit and drew upon him a bill for the same amount payable after 3 months. Y accepted the bill and returned it to X. On the date of maturity bill was presented to Y for the payment and he honored it. Pass the Journal Entries in the books of both the parties when : Case I – Bill is retained by the X till the date of maturity. Case II – Bill is discounted by X from his bank on 4th April @ 6% per annum. Case III – Bill is endorsed in favor of Z on 4th May, 2011. Case IV – Bill is sent to Bank for collection on 1st July, 2011.

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In the book of X (Drawer)

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Note : 1. First two entries passed on April 1, 2011 will be same in the books of X (Drawer) in all the 4 cases. 2. If a bill is honoured on the date of maturity. NO ENTRY is passed on the date of maturity in the books of drawer, if : - Bill is discounted from the bank ; or - Bill is endorsed in favour of creditor

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(In all 4 cases) In the Books of Y (Drawee)

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(Case - III) In the books of Z (Endorsee)

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B. When Bill is dishonored on date of maturity. Case I - Bill is retained by the drawer till date of maturity.

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Cass II - Bill is discounted by the drawer from his bank, the following entry is passed, at the time of maturity, if the bill is dishonored. Case III - When bill is endorsed in favour of a creditor (At the time of Dishonour of a Bill)

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(At the time of Dishonor of a bill) Case IV- When Bill is sent for collection to Bank (At the time of Dishonor of a Bill)

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By- Puneet Bhatia Sub. – PPT on Business Studies Submitted to – Mr. Kamal sir