BOOK KEEPING FORM FOUR – BILL OF EXCHANGE

Bill of exchange   is legally defined as unconditional order in writing addressed by one person to another signed by a people to whom is addressed to Pay on demand at a fixed or determine future time sum certain in money to the order of a specified person or to the bearer.

PARTS FOR THE BILL OF EXCHANGE.

DRAWER:    Is the one who draws / write the bill of exchange.

DRAWEE:     He/she is a person to whom the bill is addressed,  he become an acceptor as soon as he has signified this under taking to comply with the order contained on the bill.

PAYEE:         Is a person or firm to whom or to whose order payment is to be made.

                          SPECIMEN TO BILL OF EXCHANGE

From the Example:

Emil Fahmi                           – Is a drawer

CHAMBO DAUDI                   -Is a drawee
Ally Bakari or his order             – Is a payee

ADVANTAGES OF THE BILL OF EXCHANGE

      –         It enable an exporter /creditor to obtain cash soon after good are dispatched

–     The creditor may get money by discounting the bill

–     He/she fixed the date of payment and if payment is not made, a creditor can sure on the

      Evidence of the bill of exchange he/she sells.

–     The debtor also benefit by getting credit facilities

 
THE FOLLOWING ARE SOME USEFUL ILLUSTRATIVE PROBLEM ON BILLS TRANSACTION UNDER THE FOLLOWING CIRCUMSTANCES

–          Where the bill received is retained by the drawer.

–          Where the drawer endorse the bill (more than one endorsement).

–          Where the drawer endorse the bill (only one endorsement).

–          Where the bill endorsed by drawer by drawer and then discounted by the endorsee.

–          Dishonoured for the bill.

–          Renew the bill.

BILL RECEIVABLE.

The person to receive the money on the bill of exchange regards it as a bill receivable

Therefore the trader drawer a bill of exchange on his customer he records the details of the bill on the bill’s Receivable book.

When the drawer received back the bill of exchange he can act in one of the following

–          Hold the bill of exchange until maturity.

–          Discounting the bill.

–          Transfer the bill to another person who them requires all the right to it.

PAYMENT OF THE BILL ON MATURITY

a.      On the books of the drawer

I     when goods sold on credit

DR: Personal a/c   with sales amounts

CR: Sales A/C

ii- When drawee accepts the bill of exchange

DR: Bills receivable  with value of the bill.

DR: Drawee

iii- When bill made on maturity (honoured).

DR: Cash at Bank

CR: Bill receivable

b.      In the books of Drawee

i.   When goods bought on credit.

      DR: Purchases   with the value of goods

      CR: Drawers a/c   bought.

    ii. When bill drawn by the drawer accepted.

DR: Drawer  with the amount of

CR: Bill payable  the bills.

When at maturity the bills paid off

DR: Bills payable

CR: Cash at Bank

Example

Good has been sold by Hashimu to Mussa 1^st for 200,000. A bill has been drawn end up by Hashim and accepted by Musa, the date of maturity being 31^st March, Hashim keep the bill of exchange until the maturity then presented for payment. The bill was honored.

Required;

Show journal entries and accounts in the book Drawer and Drawee.

Solution:

In the books of Drawer (Hashim).

DR                             MUSSA    A/C                                          CR

   DR                          BILL RECEIVABLE   A/C                          CR

      DR                                    BANK   A/C                                      CR

                                       JOURNAL ENTRIES

In the books of Drawee (Mussa).

    DR                                   PURCHASES A/C          CR

DR                                HASHIMU A/C             CR

   DR                                BILL PAYABLE    A/C       CR

  DR                                  BANK    A/C                      CR

                                             JOURNAL ENTRIES

EXERCISE
Jumanne bought goods   from   Mwakipesile   valued   Tshs   4900/=   on   1^st   Feb   1986. The bill   was   for   three   month   credit   the bill   was   drawn   by Mwakipesile   and   accepted   by Jumanne   on   the   same     date     on   due   date   the bill   was   paid   by the   drawee   on maturity date

           Required

a)       Ledger   account

b)      Journal   entries   in the books     of Jumanne

2.  IF  THE BILL OF EXCHANGE DISCOUNTING AT THE BANK

Example

Simple sold goods to Tembo 1st April for 300,000 and draw a bill of exchange to him on that date for 3 months which he accepted, on 2^nd April Simba discounting the bill. The discount change being 4,000 the bill was honored

Required;

Show Journey Entries in the books of Drawer and  Drawee

JOURNAL ENTRIES

DR                                      TEMBA   A/C                        CR

DR                     BILL RECEIVABLE   A/C   CR

DR                                BANK   A/C                CR

DR              DISCOUNT CHARGE   A/C          CR

NOTE

No entry on the books of drawer concerning the discount for bill of exchange

                                      JOURNAL ENTRY               DR             CR

EXERCISE

Show the journal entries and the ledgers A/c to record the following in the books of C. Kombo

Jan 3 sold goods to D. Daima for 400,000, D. Daima accept the Bill on the same date. Bill payable after 3 month discounted the bill at Bank for 394,000 Bill honoured by D. Daima.

Solution:

In the books of C. Kombo

DR                           D.DAIMA    A/C                 CR

DR                    BILL RECEIVABLE   A/C        CR

DR                        BANK   A/C                       CR

DR            DISCOUNTING CHARGE A/C    CR

DR                   PROFIT AND LOSS A/C                CR