Book-Keeping and Accountancy · Ch 7 — Bills of Exchange
Discounting the Bill with the Bank
Discounting the Bill with the Bank
Instead of waiting for the due date, a drawer holding an accepted bill can get immediate cash by selling (discounting) it to a bank before maturity. The bank pays the drawer the bill amount less a discount — its charge for advancing money early — calculated on the unexpired period of the bill at an agreed rate per annum.
In the books of the Drawer, on discounting:
| Particulars | Debit | Credit |
|---|---|---|
| Bank A/c ......Dr | Net amount received | |
| Discount A/c ......Dr | Discount charged | |
| To Bills Receivable A/c | Full bill amount |
The Discount A/c is debited because discounting a bill is, in effect, an interest-like finance cost the drawer bears for receiving cash before the due date.
In the books of the Drawee (Acceptor) — discounting has no effect at all. The drawee is not a party to the private arrangement between the drawer and the bank; on the due date, the drawee pays whoever presents the bill (in practice, the bank), and the entry is exactly as in the 'retain and honour' case:
| Particulars | Debit | Credit |
|---|---|---|
| Bills Payable A/c ......Dr | Bill amount | |
| To Bank A/c | Bill amount |
Selling an accepted bill to a bank before its due date in exchange for immediate cash, less a discount charge for …
The finance cost, calculated on the bill amount for the unexpired period at the bank's discount rate, that the drawer bears in exchange …