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Home Accounting for Bills of Exchange Renewal of Bill of Exchange
 
 

Renewal of Bill of Exchange:

Definition and Explanation of Renewal:

Sometimes, acceptor of a bill finds himself unable to meet his acceptance on the due date. So he may approach the drawer of the bill before the maturity date arrives, to cancel the old bill and draw a new bill with extended date. The acceptor in this case will of course have to pay interest for the extended period. Thus the cancellation of the old bill maturity in return for a new bill (which includes interest) for an extended period is called "renewal of a bill of exchange".

There are two more ways to renew a bill of exchange:

  1. The acceptor pays interest in cash and a new bill is accepted equal to the amount of the old bill.

  2. The acceptor pays a part of the amount of the bill in cash and accepts a new bill for the balance plus interest.

The renewal of the bill under different conditions is explained with the help of following examples:

  1. On 1st Jan. 2005 A (the creditor) draws a bill for $1,000 on his debtor B at 3 months. The due date of the bill is 4th April. On 31st March the acceptor (B) approaches the drawer (A) and shows his inability to meet the bill. He requests the drawer to cancel the old bill and to draw on him a new bill for extended period. A agrees on the condition that he will charge $20 as interest. Thus a new bill is drawn for $1,000 + $20 = $1020. The bill is accepted by B.

  2. On 31st March, before the due date of the same bill, B, the acceptor approaches the drawer and shows his inability to meet the bill. He requests the drawer to cancel the old bill and to draw on him a new bill for an extended period. A agrees on this condition that he will charge $20 for interest. B pays $20 for interest at the same time and accepts a new bill at 2 months for $1,000.

  3. On 31st March, the acceptor (B) requests the drawer for the cancellation of the old bill. A agrees. B pays $500 in cash as a part of the amount of the old bill and accepts a fresh bill for $510 (including $10 for interest) at two months (for an extended period).

Difference Between Dishonor and Renewal of a Bill of Exchange:

When a bill is duly presented by the holder to the acceptor on the due date and the acceptor refuses to meet the bill, this is a case of dishonor of the bill. On the other hand, if the acceptor approaches the drawer himself and shows his inability to meet the bill and requests the drawer to cancel the old bill and to draw him a new bill for an extended period, it will be a case of renewal of the bill. There is no question of noting charges in renewal of the bill because a bill is renewed with the mutual consent of both the parties, i.e., the drawer and the acceptor.

Example:

X sold goods to Y worth $30,000 on 1st March, 2005. Y accepted a bill for three months drawn on him by X on 1st March 2005. On 31st May, Y requested that the bill be renewed for a further period of two months. X agreed provided 10% interest p.a. would be charged. X then drew a new bill for the amount of original plus interest at 10% p.a. for two months. Y accepted the new bill. On the due date the new bill was honored.

Required: Give journal entries in the books of X and Y.

Solution:

X's Journal
Date Particulars L.F Amount (Dr.) Amount (Cr.)
1.3.2005 Y A/C...................................................Dr.
     Sales A/C
(Goods sold on credit basis)
  30,000
30,000
1.3.2005 Bill receivable A/C...............................Dr.
     Y A/C
(Acceptance received at three months)
  30,000
30,000
31.5.2005 Y A/C...................................................Dr.
     Bill receivable A/C
(Old bill cancelled on acceptor's request)
  30,000
30,000
31.5.2005 Y A/C..................................................Dr.
     Interest A/C
(Interest due from acceptor)
  500
500
31.5.2005 Bill receivable A/C..............................Dr.
     Y A/C
(New acceptance received)
  30,500
30,500
4.8.2005 Cash A/C............................................Dr.
     Bill receivable A/C
(Cash received on maturity)
  30,500
30,500

Y's Journal
Date Particulars L.F Amount (Dr.) Amount (Cr.)
1.3.2005 Purchases A/C.....................................Dr.
     X A/C
(Goods purchased on credit)
  30,000
30,000
1.3.2005 X A/C.................................................Dr.
     Bill payable A/C
(Acceptance given at three months)
  30,000
30,000
31.5.2005 Bill payable A/C...................................Dr.
     X A/C
(Old bill cancelled for renewal purpose)
  30,000
30,000
31.5.2005 Interest A/C........................................Dr.
     X A/C
(Interest payable to drawer)
  500
500
31.5.2005 X A/C.................................................Dr.
     Bill payable A/C
(New acceptance given)
  30,500
30,500
4.8.2005 Bill payable A/C...................................Dr.
     Cash A/C
(Cash paid on maturity)
  30,500
30,500

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

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

 

 

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