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Home Accounting for Bills of Exchange Bill of Exchange Sent to Bank for Collection
 
 

Bill of Exchange Sent to the Bank for Collection:

If a business has numerous bills he got from various debtors he may send these bills to his banker for collection purposes. It should be remembered that, this is not discounting of a bill of exchange. The bill is sent for safety and collection purposes. The bank keeps the bill in its custody till the due date and on the due date, the bank will present the bill to acceptor. After collecting the amount, the bank transfers the amount to the account of its customer (by giving credit to his account). The bank charges some nominal fee from the customer for service he rendered. This is an expense for the customer and revenue for the bank.

Journal Entries in the Books of Drawer, Drawee and Bank:

Entries in the Books of Drawer:

(1) The drawer opens a temporary account in his books, when the bill is sent to the bank for collection. The name of the account is "bank for collection account". The bill is transferred to this account and the following journal entry is passed in the journal of drawer:

Bank for collection A/C.........Dr. XXX
     Bill receivable A/C...................XXX

(2) When the bill is collected by the bank on the due date an intimation is received from the bank, following entry is made in drawer's books:

Bank A/C...........Dr. XXX
       Bank for collection A/C.......XXX

(3) Some fees is charged by the bank for the service it provided. This fees is an expense of the drawer and the income of the bank. The entry in drawer's journal is:

Bank charges A/C............Dr. XXX
     Bank A/C..............................XXX

Entries in the Books of Bank:

The following entries are passed in the books of bank:

(1) When the bill is received from the drawer for collection, no entry is passed.

(2) When the bill is collected from the acceptor, the following entry is made:

Cash A/C.........Dr. XXX
     Drawer's A/C...........XXX

(3) A separate entry is made for the collection charges:

Drawer's A/C..........Dr. XXX
     Collection charges A/C........XXX

Collection charges credited in the above journal entry are the income of the bank and expense of the drawer. Drawer writes them as bank charges.

Entries in the Books of Drawee (Acceptor):

When bill of exchange is sent to the bank for collection, drawee or acceptor does not make any journal entry in his books. The drawee only makes a journal entry when he meets the bill on due date.

In the books of acceptor, the following entry is made:

Bill payable A/C......Dr. XXX
     Cash A/C..................XXX

Example:

A sold goods to B for $10,000 on credit on 1st July, 2005. On the same date, A drew two bills on B for $6,000 and $4,000 at two months and three months respectively. On 4th July the first bill was discounted at the bank at 15% p.a. On 6th July, the other bill was sent to the bank for collection. On the due date, both the bills were honored and the bank deducted $40 as bank charges.

Required: Give journal entries in the books of A, B and the bank.

Solution:

A's Journal
Date Particulars L.F Amount (Dr.) Amount (Cr.)
1.7.2005 B A/C....................................................Dr.
     Sales A/C
(Goods sold on credit)
  10,000
10,000
1.7.2005 Bill receivable A/C...............................Dr.
     B A/C
(Acceptance received at two months)
  6,000
6,000
1.7.2005 Bill receivable A/C...............................Dr.
     B A/C
  4,000
4,000
4.7.2005 Bank A/C............................................Dr.
Discount A/C......................................Dr.
     Bill receivable
(Bill discounted @ 15% p.a.)
  5,850
150
 


6000
6.7.2005 Bank for collection..............................Dr.
     Bill receivable A/C
(Bill sent to bank for collection)
  4,000
4,000
4.10.2005 Bank A/C..........................................Dr.
     Bank for collection A/C
(Bill collected by bank on due date)
  4,000
4,000
4.10.2005 Bank charges A/C..............................Dr.
     Bank A/C
(Amount deducted by bank as collection charges)
  40
40

B's Journal
Date Particulars L.F Amount (Dr.) Amount (Cr.)
1.7.2005 Purchases A/C.....................................Dr.
     A A/C
(Goods purchased on credit)
  10,000
10,000
1.7.2005 A A/C.................................................Dr.
     Bill payable A/C
(Acceptance given at two months)
  6,000
6,000
1.7.2005 A A/C...............................Dr.
     Bill payable A/C
(Acceptance given at three months)
  4,000
4,000
4.9.2005 Bill payable A/C...................................Dr.
     Cash A/C
(Acceptance paid on presentation)
  6,000
 

6000
4.10.2005 Bill payable A/C...................................Dr.
     Cash A/C
(Acceptance paid on presentation)
  4,000
4,000

Banker's Journal
Date Particulars L.F Amount (Dr.) Amount (Cr.)
4.7.2005 Bill receivable A/C..............................Dr.
     A A/C
     Discount
(Bill discounted @ 15%)
  6,000
5,850
150
6.7.2005 No journal entry is made in the books of bank when bill is received from customer for collection.    
 
4.9.2005 Cash A/C............................................Dr.
     Bill receivable A/C
(Discounted bill presented and cash received)
  6,000
6,000
4.10.2005 Cash A/C...........................................Dr.
     A A/C
(amount collected on behalf of customer.)
  4,000
 

4,000
4.10.2005 A A/C................................................Dr.
     Collection charges A/C
(service charges deducted from A's account)
  40
40

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More study material from this topic:

Definition and explanation of bill of exchange
Types and classification of bill of exchange
Accounting treatment of bill of exchange
Discounting of a bill of exchange
Endorsement of bill of exchange
Bill of exchange sent to bank for collection
Dishonor of bill of exchange
Renewal of bill of exchange
Insolvency of one party
Retiring a bill of exchange under rebate
Accommodation bills of exchange
Bills receivable and bills payable books
Promissory note
Questions and answers

 

A D V E R T I S E M E N T

 

Financial Accounting Topics


  Introduction to Accounting
 ----------------------------------------------------------------------------
  Transactions and Accounting Equation
----------------------------------------------------------------------------
  Analysis of Business Transactions
----------------------------------------------------------------------------
  Journal, Ledger and Trial Balance
----------------------------------------------------------------------------
  Accounting for Bills of Exchange
----------------------------------------------------------------------------
  Special Journals
----------------------------------------------------------------------------
  Cash Book
----------------------------------------------------------------------------
Bank Reconciliation Statement
----------------------------------------------------------------------------
  Final Accounts
----------------------------------------------------------------------------
  Work Sheet
----------------------------------------------------------------------------
  Capital and Revenue Items
----------------------------------------------------------------------------
  Valuation of Inventories
----------------------------------------------------------------------------
  Accounts of Non-profit Making Organizations
----------------------------------------------------------------------------
  Statement of Cash Flows
----------------------------------------------------------------------------
  Accounting Ratios Analysis
----------------------------------------------------------------------------
  Depreciation, Provisions and Reserves
----------------------------------------------------------------------------
  Accounting Dictionary
----------------------------------------------------------------------------
  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
----------------------------------------------------------------------------
  Cost Volume Profit Relationship
----------------------------------------------------------------------------
  Variable Costing System
----------------------------------------------------------------------------
  Materials and Inventory Cost Control
----------------------------------------------------------------------------
  Activity Based Costing System
----------------------------------------------------------------------------
  Standard Costing and Variance Analysis
----------------------------------------------------------------------------
  Balanced Scorecard
----------------------------------------------------------------------------
  Capital Investment Analysis/Capital Budgeting
 

 

 

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