Accounting Treatment> Discounting the Bill of Exchange

\[\text{Discount}=\text{Amount of Bill}\times\frac{\text{Rate}}{100}\times\frac{\text{Unexpried days}}{365}\]

                                            Or

\[\text{Discount}=\text{Amount of Bill}\times\frac{\text{Rate}}{100}\times\frac{\text{Unexpried months}}{12}\]

A. Drawer discounts the bill with the bank:

1. Books of Drawer:

Bank A/c                    ...Dr.

Discount A/c               ...Dr.

        To Bills Receivable A/c

(Being Drawee’s acceptance discounted with the bank)

2. Books of Drawee: No entry

(Drawee is not a party to the transaction)

B. Discounted bill honoured on the due date:

1. Books of Drawer: No entry  

(Cash already received at the time of discounting)

2. Books of Drawee:

Bills Payable A/c             ...Dr.

       To Cash / Bank A/c

(Being our acceptance honoured)

C. Discounted bill dishonoured on the due date:

1. Books of Drawer:

Drawee’s A/c                ...Dr.

        To Bank A/c

(Being a discounted bill dishonoured on the due date)

2. Books of Drawee:

Bills Payable A/c             ...Dr.

      To Drawer’s A/c

(Being our acceptance dishonoured)

D. Discounted bill dishonoured and noting charges paid by bank:

1. Books of Drawer:

Drawee’s A/c                  ...Dr.

        To Bank A/c

(Being a discounted bill dishonoured on the due date and Noting Charges paid by the bank) 

[Amount = Bill amount + Noting Charges]

2. Books of Drawee:

Bills Payable A/c              ...Dr.

Noting Charges A/c          ...Dr.

        To Drawer’s A/c

(Being our acceptance dishonoured and Noting Charges payable)

• Discounting a bill means getting money from the bank before the due date by giving the bill to the bank.
• The bank gives less than the bill amount (after deducting discount charges) and collects the full amount from the drawee on the due date.
• The main parties involved are Drawer (Seller), Drawee (Buyer), Holder/Payee, and the Bank.
• The process includes selling goods on credit, drawing and accepting the bill, and then discounting it with the bank.
• The discount is treated as an expense for the drawer and is recorded in the books of accounts.