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Retiring A Bill of Exchange Under Rebate:

Contents:

Definition and Explanation of Retiring a Bill:

Sometimes the acceptor of a bill of exchange desires to meet the bill before its maturity if he has sufficient funds at his disposal. He may ask the holder of the bill to accept the payment before the due date. If the holder agrees to his proposal (obviously he welcomes it), he will withdrew the bill. Such a withdrawal is called "retirement of a bill of exchange". The holder generally allows the acceptor a rebate or discount for the unexpired period of the bill. This rebate is discount is an expense for the holder and a revenue for the acceptor of the bill. The accounting treatment is similar to cash discount.

Journal Entries:

When a bill of exchange is retired by an acceptor, the following entry is made in books of the holder:

Cash A/C...................Dr.    (with actual amount of cash received)
Rebate A/C................Dr.    (amount of rebate allowed)
     Bill receivable A/C          (full amount of bill)

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

Bill payable A/C...........Dr.    (with full amount)
     Cash A/C                      (amount actually paid) 
     Rebate A/C                   (rebate earned)

Example:

On 1st Jan. 2005, A sold goods to B worth $5,000 and drew a bill on B for $5,000 at three months. One month before its maturity B asked A that he wanted to make payment of the bill immediately, to which A agreed and also allowed him rebate of 6% p.a.

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

Solution:

A's Journal
Date Particulars L.F Amount (Dr.) Amount (Cr.)
1.1.2005 B A/C................................................Dr.
     Sales A/C
(Goods sold on credit basis)
  5,000
5,000
1.1.2005 Bill receivable A/C...............................Dr.
     B A/C
(Acceptance received at three months)
  5,000
5,000
4.3.2005 Cash A/C...........................................Dr.
Rebate A/C........................................Dr.
     Bill receivable A/C
(Bill retired by the acceptor under a rebate of 6% p.a.)
  4975
25

5,000

S's Journal
Date Particulars L.F Amount (Dr.) Amount (Cr.)
1.1.2005 Purchases A/C.....................................Dr.
     A A/C
(Goods purchased on credit)
  5,000
5,000
1.1.2005 A A/C.................................................Dr.
     Bill payable A/C
(Acceptance given at three months)
  5,000
5,000
4.3.2005 Bill payable A/C...................................Dr.
     Cash A/C
     Rebate A/C
(Bill retired under rebate one month before its maturity)
  5,000
4,975
25

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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
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  Special Journals
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  Cash Book
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
  Accounts of Non-profit Making Organizations
----------------------------------------------------------------------------
  Statement of Cash Flows
----------------------------------------------------------------------------
  Accounting Ratios Analysis
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  Depreciation, Provisions and Reserves
----------------------------------------------------------------------------
  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
----------------------------------------------------------------------------
  Activity Based Costing System
----------------------------------------------------------------------------
  Standard Costing and Variance Analysis
----------------------------------------------------------------------------
  Balanced Scorecard
----------------------------------------------------------------------------
  Capital Investment Analysis/Capital Budgeting
 

 

 

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