Dishonour of a Bill means a situation when the acceptor of the bill refuses or is unable ( say because of insolvency ) to pay the amount . In such a case , the holder of the bill can recover the amount from the Drawer or any of the previous endorsers . The holder of the bill may present the bill through a Notary Public and get the dishonour of the bill noted .
It is to be noted that it is important but not legally necessary to present the bill through Notary Public . Nothing will consist of the following :
- That the bill has been dishonoured ;
- The date of the dishonour ;
- The reason , if any , for the dishonour
- The fee charged by the Notary Public , i.e., Noting Charges .
The advantage of nothing is that the evidence of dishonour is noted .
Entries on Dishonour of a Bill.
If the bill dishonour , the party that gives the bill has to be debited since it becomes liable to pay the amount including noting charges ( if paid ) . If the bill is held by the Drawer till the date of Maturity , the bills receivable account is credited . If the bill was discounted from bank or endorsed to a creditor , the bank or the creditor's account will be credited accordingly.
The journal entries for the above cases are discussed below.
Drawers Books :
The entry for the dishonour of the bill the books of drawer would depend upon the circumstances of each cases:
1. When the bill is retained by the Drawer till maturity and dishonoured on due date :
Drawee. ..... Dr.
To Bills Receivable A/c. ( Total amount of the bill)
To cash or Bank A/c. ( Noting charges ,if any )
( Being the bill dishonoured and noting charges paid )
2. When the bill is discounted with bank and is dishonoured , entry will be :
Drawee ..... Dr ( Total amount of the bill)
To cash or Bank A/c. ( Noting charges ,if any )
(Being the bill dishonoured and amount paid to bank , noting Charges Rs .....)
3. When the bill endorsed to the Endorsee and is dishonoured , the entry will be :
Drawee .....Dr ( Total amount o the bill)
To Endorsee ( Noting charges ,if any )
( Being the bill endorsed dishonoured and noting Charges paid Rs ......)
4. When the bill has been sent to the bank for collection and is dishonoured :
Drawee. ..... Dr.
To Bills sent for collection A/c. ( Amount of bill)
To cash or Bank A/c. ( Noting charges ,if any )
( Being the bill sent for collection dishonoured and noting Charges paid Rs....)
When - a Bill sent to the bank for collection is dishonoured , bank returns the bill to the Drawee and the Drawer himself pays the noting Charges .
Drawee Books :
If the bill is dishonoured , the liability to the concerned creditor will be restored . In addition to the amount of the bill , noting Charges , if paid for getting the bill noted ,will also be payable to the creditor . Therefore , his account is credited with the amount of bill plus the noting Charges , if any . The entry is :
Bills payable A/c ...Dr. ( Amount of the bill)
Noting Charges A/c ...Dr (Noting charges , if any)
To Creditors ( Drawer) ( Amount of the bill plus noting Charges )
( Being the bill dishonoured and credit granted to the creditor for the amount of bill and noting Charges )
It is important to note that if the Drawee is declared insolvent on or before the due date, the bill is deemed to have been dishonoured and all entries for dishonour will have to be passed in the books of the concerned parties as given above .
It should be noted when bill is dishonoured :
- In the books of Drawer : In all the Drawee or Acceptor is debited to cancel the credit given to him at the time of acceptance of the bill.
- In the books of Drawee : Drawers Account is always credited and Bills payable Account is always debited
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