drawer or holder of the bill may endorse (transfer)
the bill in favor of his creditor for the clearance
of his own debts. A bill of exchange is a
"negotiable instrument" i.e. a document which is
transferable by delivery without notice to the party
holder of the bill puts his signature on the back of
the bill with a view to transfer the property
contained in it (right to receive money from the
acceptor), then he becomes endorser, and the person
to whom the bill of exchange is transferred will
become endorsee. This procedure by which a bill is
transferred from one person to another person for
the settlement of debts is called
example A drew a bill on B for $5,000 which is
accepted by B at three months. A bought goods from C
worth $7,000 on credit basis. Now C is creditor of A
for $7,000. A endorsed the bill in favor of his
creditor C for paying his debts up to the extent of
$5,000. Thus C is now creditor of A up to the extent
of $2,000 only; i.e. 7,000 - 5,000 = 2,000.
Now C is the holder of
the bill of exchange, which he has got from A. Being
holder of the bill, C has all the four options
before him. He may retain the bill till the due
date. On due date, he will present the bill to the
acceptor and receive cash from him.
One important point
that we should remember is, whenever a bill is
discounted or endorsed, it will not be considered as
the property (asset) of the person who has
discounted or endorsed it and the bill receivable
account is written off (neutralized) as it is no
longer receivable. However, there is one possibility
in which he can still be effected by the bill i.e.
the person liable primarily to the bill is acceptor,
who has accepted the obligation to pay. Suppose he
does not honor the bill on the due date, then the
person who endorsed this bill will be liable to pay.
So, this is a contingent liability of the endorser
until the bill is honored by the acceptor.
For example, on
maturity date, C presented the bill to the acceptor
B but he refused to make payment. C will receive the
amount from the endorser A. So, A has to take up the
liability and in turn A will receive the amount from
bill of exchange is endorsed the following journal
entries are made in the books of endorser and
endorsee as the drawee will remain unaffected.
When a bill is
Bill receivable A/C...........XXX
When a bill is
Bill receivable A/C.........XXX
entry in the books of endorser when the bill
is honored at the date of maturity.
On the due
date, the bill is presented to the acceptor
and cash is received from him, the entry is:
Bill receivable A/C..........XXX