Discounting of Bills of Exchange is another popular type of loan by modern banks. This method allows the owner of the bill of exchange to receive a discount from the bank. In exchange bills, the debtor accepts the bills drawn by the creditor (that is, the owner of the bills) and agrees to pay the amount stated at maturity.
After making a small deduction (in the form of a fee), the bank pays the owner the value of the invoice. When the bill of exchange expires, the bank receives payment from the party that accepts the bill. Therefore, such a loan is self-clearing. An exchange invoice is a written, legally binding document that indicates the seller’s obligation to pay a particular amount to the seller or recipient on a particular day.
Description – Discounting of Bills of Exchange:
If the invoice withdrawal does not want to remain until the invoice due date and requires money, he can sell the invoice to the bank at a fixed discount rate.
The invoice is approved by the withdrawal on a signed dated order to pay to the bank. The bank will be the owner and owner of the invoice.
After receiving the invoice, the bank pays cash to the withdrawal at the agreed rate for the number of days it needs to be executed, equal to the face value minus interest or discount. This process is known as Bill of Exchange discounts.
When the invoice is discounted by the owner, the next entry is withdrawn and passed to the addressee and the bank’s books.
When the invoice is withdrawn by withdrawal (A) and accepted by the withdrawal destination (B)
Journals
| Drawer’s Journal | Drawee’s Journal |
| B/R A/C………………XXX B A/C………………XXX(Acceptance received) | A A/C………………XXX B/P A/C……………..XXX(Acceptance given) |
| When a bill is discounted at bank:Bank A/C………………….XXXDiscount A/C……………..XXX B/R A/C………………..XXX(Bill discounted at bank) | No journal entry at the time of discounting the bill in the books of drawee. |
Entries that discount invoices in the withdrawal journal include an increase in the bank balance of the withdrawal at present value (par value-specified discount), an increase in loss (specified discount), and a decrease in assets (notes receivable) is showing.
The entries in the Bank’s journal look like this:
Discounting of Bill at Bank:
B/R A/C…………XXX
Drawer A/C……..XXX
Discount A/C…..XXX
(Bill discounted)
This journal shows an increase in bank assets (B / R), an increase in liabilities (the amount transferred to the withdrawal account), and an increase in bank revenue (discount).
If the bank presents the invoice to the acceptor on the maturity date and the acceptor fulfils its obligations, the next entry will be passed.
| Drawer’s Journal | Drawee’s Journal | Bank’s Journal |
| No entry in the books of drawer. | Bill payable A/C…XXX Cash A/C………XXX(Acceptance honoured and cash paid to bank on presentation of the bill) | Cash A/C…….XXX B/R A/C………XXX(Cash received from acceptor equal to full value of the bill) |
The addressee pays the full amount to the bank at maturity, but if the withdrawal discounts the invoice to the bank, the bank pays the face value minus the discount. This difference (discount) is the cost of the bank’s revenue and withdrawals.
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