Q.On May 01, 2016 Mohit sends his promissory note of ₹6,000 for 3 months to Rohit. Rohit gets it discounted with his bankers at 18 percent per annum on May 04. On the due date the bill is dishonoured, the bank paying ₹10 as noting charges. Rohit agrees to accept ₹2,130 in cash (including ₹130 for noting charges and interest) and another promissory note for ₹4,000 at 2 months. On the due date, Mohit approaches Rohit again and asks for renewal of the bill for a further period of 3 months. Rohit agrees to the request, provided Mohit pays ₹200 as interest in cash. This last bill is paid on maturity. Draft journal entries in the books of Mohit and Rohit.

Start with something you already know. You borrow ₹10,000 from a friend and sign a paper promising to pay it back in three months. That paper is a bill of exchange — a written promise to pay. Now suppose, before those three months are up, you come into money and decide to clear the debt early. You call the friend, hand over the cash, and take your signed paper back and tear it up. The promise is dead. That tearing-up-before-due-date is exactly what "retirement of a bill" means.

The precise meaning

When the acceptor of a bill pays the holder the amount before the due date, and the holder hands the bill back to be cancelled, the bill is said to be retired. The acceptor is settling early, so the holder loses the interest they would have earned by waiting until maturity. To compensate for that lost interest, the acceptor pays a little extra — this extra is called a rebate on retirement of a bill, or simply rebate.

So the amount the acceptor actually pays is:

Amount paid on retirement = Amount of the bill − Rebate

And the rebate itself is interest for the unexpired period — the time still left between the retirement date and the due date:

Rebate = Amount of the bill × Rate of interest × Unexpired period (in years)

Notice the logic: the longer the time still left to run, the bigger the rebate, because the holder is giving up more waiting.

Why it matters

Two reasons. First, it is a real commercial event — traders often retire bills early to save interest or to free up their credit. Second, and more important for your exam, it changes who gets what. If the bill is simply honoured on maturity, the full amount changes hands. If it is retired early, the acceptor pays less (bill minus rebate) and the holder receives less, but the holder books that shortfall as income. Getting the rebate entry right — and putting it in the correct period — is where marks are won and lost.

Accounting treatment

The entries depend on who is keeping the books. Take the two sides separately.

In the books of the acceptor (the one who pays and gets the bill back):

Read it as: the liability (Bills Payable) is wiped out, the rebate is a gain recorded separately, and cash goes out for the net amount. The rebate is income for the acceptor, so it is credited to a Rebate account and later transferred to Profit & Loss.

In the books of the holder (the one who receives payment and returns the bill):

Here the asset (Bills Receivable) disappears, cash comes in for the net amount, and the rebate is a loss/expense — the holder is accepting less than the full bill, so it is debited and later charged to Profit & Loss. …