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Home Accounting for Bills of Exchange Endorsement of Bill of Exchange

Endorsement of Bill of Exchange:

The 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 liable (drawee).


Definition and Explanation of Endorsement:

If the 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 "endorsement".


For 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 B.

Journal Entries in the Books of Endorser and Endorsee:

When a bill of exchange is endorsed the following journal entries are made in the books of endorser and endorsee as the drawee will remain unaffected.
Endorser's Journal (A) Endorsee's Journal (C)
When a bill is endorsed:

Endorsee's A/C......XXX
     Bill receivable A/C...........XXX

When a bill is endorsed:

Bill receivable A/C.........XXX
        Endorser's A/C..................XXX

No journal 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:
Cash A/C.........XXX
      Bill receivable A/C..........XXX

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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



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