Think of a friend who borrowed ₹20,000 from you and promised to repay it on 31 March. On 30 March he calls: "I can't pay the full amount right now. Give me three more months, and I'll pay you interest for the extra time." You agree. Nothing new has really happened — the same debt continues, only its due date has moved forward, and a little interest has been added for the favour.
That is exactly what happens in business when a debtor cannot honour a bill of exchange on its due date and requests the creditor to grant him more time. The old bill is cancelled and a fresh bill is drawn, usually for the amount of the old bill plus interest for the extended period. This cancelling of the old bill and drawing of a new one is called renewal of a bill.
The precise meaning
A bill of exchange is a written promise to pay a certain sum on a certain date. When the acceptor (the debtor) finds himself unable to meet it on maturity, he may approach the drawer (the creditor) for an extension of time. If the drawer agrees, the old bill is treated as discharged and a new bill is drawn. The new bill normally covers:
- the original amount of the old bill, and
- interest on that amount for the period of extension.
Sometimes the debtor pays a part of the amount in cash and the new bill is drawn only for the balance plus interest. Either way, the essential idea is the same: the old liability is extinguished and replaced by a new one.
Renewal is not a fresh transaction of sale or purchase. It is only a rearrangement of an existing debt. The original debt does not disappear — it simply takes a new form.
Why it matters
For the creditor, renewal means he does not receive his money on time, so he charges interest as compensation for the delay. For the debtor, it means he avoids the disgrace and legal consequences of dishonour and gets breathing time to arrange funds. In the books, therefore, two things must be recorded: the cancellation of the old bill and the creation of the new one, along with the interest.
The interest is the creditor's income and the debtor's expense. This is the whole reason the concept appears in the chapter on bills of exchange — it tests whether you can separate the interest element from the principal element and post each to the right account.
Accounting treatment
The entries depend on who is recording them. Take the usual case: the old bill was for the full amount, and the new bill is drawn for the old amount plus interest.
In the books of the drawer (creditor):
| Step | Entry | Debit | Credit |
|---|
| 1 | Cancel the old bill | Acceptor's Account | Bills Receivable Account |
| 2 | Record interest due | Acceptor's Account | Interest Account |
| 3 | Draw the new bill | Bills Receivable Account | Acceptor's Account |
In the books of the acceptor (debtor):
| Step | Entry | Debit | Credit |
|---|
| 1 | Cancel the old bill | Bills Payable Account | Drawer's Account |
| 2 | Record interest payable | Interest Account | Drawer's Account |
| 3 | Accept the new bill | Drawer's Account | Bills Payable Account |
Notice the symmetry. The drawer debits the acceptor because the acceptor now owes him more; the acceptor credits the drawer because he now owes the drawer more. The interest account is a nominal account — it is closed by transferring its balance to the Profit and Loss Account at the end of the year. For the drawer it is a gain; for the acceptor it is a loss. …