A single bill of exchange can sit in two sets of books at once — as an asset for the person waiting to be paid, and as a liability for the person who has promised to pay. That is exactly why bills of exchange accounting trips up so many students: the same piece of paper is drawn, accepted, maybe discounted or endorsed, and finally honoured or dishonoured, and every one of those events needs a journal entry in more than one place. This guide walks the full life of a bill and gives you the entries in the books of the drawer, the drawee and the payee, with a worked ₹50,000 example you can follow line by line.
We will stay with the Indian framework — the Negotiable Instruments Act, 1881 — and keep every figure illustrative, so you can swap in your own numbers in an exam or on the job.
What is a bill of exchange, and who are the three parties?
Under Section 5 of the Negotiable Instruments Act, 1881, a bill of exchange is a written instrument containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money to, or to the order of, a specified person (or the bearer). Strip away the legal wording and it is simply a formal, enforceable "pay this amount on this date" note used in credit trade.
Three roles appear on the face of every bill, defined in Section 7 of the Act:
- Drawer — the maker of the bill, usually the seller or creditor who wants to be paid.
- Drawee — the person ordered to pay, usually the buyer or debtor. Once the drawee signs across the face to signal assent, the drawee becomes the acceptor.
- Payee — the person who is to receive the money. Often the drawer and the payee are the same person, but the drawer can direct payment to someone else.
Getting these roles straight is half the battle, because the journal entries flow directly from who you are in the deal. If you want the wider foundation these entries rest on, our explainer on double-entry bookkeeping basics sets up the debit-and-credit logic used throughout this article. And if you would rather build this properly than piece it together from scattered notes, a structured accounting fundamentals course compresses months of trial and error into a clear sequence.
One bill, three roles — and the money flows in a loop
Source: Negotiable Instruments Act, 1881 (Sections 5 and 7); illustrative roles.
Bills receivable vs bills payable: one bill, two sets of books
The reason bills feel confusing is that the same instrument is an asset in one ledger and a liability in another. For the holder — the person entitled to the money — the bill is a Bills Receivable (a current asset). For the acceptor — the person who must pay — it is a Bills Payable (a current liability).
Think of it as a mirror. Every time the holder records a Bills Receivable going up, the acceptor records a Bills Payable going up by the same amount. When the bill is paid, both accounts close out together. Hold on to this mirror idea and the entries almost write themselves.
A quick vocabulary note before the entries: "drawing" means creating the bill; "acceptance" is the drawee signing to agree; "honour" is paying on the due date; "dishonour" is failing to pay; and "discounting" is selling the bill to a bank early for cash. We will take each in turn.
Recording drawing and acceptance: the first journal entries
Start with the trade itself. Suppose Anand (the drawer) sells goods worth ₹50,000 to Bhaskar (the drawee) on credit on 1 January, and draws a three-month bill that Bhaskar accepts. Because bills almost always arise from an underlying sale or purchase, the sale entry comes first, then the bill entry replaces the open debtor or creditor balance.
Here is how the drawer (Anand) records it — for him the bill is a receivable:
| Event | Journal entry (books of the drawer) | Amount (₹) |
|---|---|---|
| Credit sale | Bhaskar’s A/c Dr — To Sales A/c | 50,000 |
| Bill accepted and received | Bills Receivable A/c Dr — To Bhaskar’s A/c | 50,000 |
And here is the drawee/acceptor (Bhaskar), for whom the bill is a payable:
| Event | Journal entry (books of the drawee) | Amount (₹) |
|---|---|---|
| Credit purchase | Purchases A/c Dr — To Anand’s A/c | 50,000 |
| Bill accepted | Anand’s A/c Dr — To Bills Payable A/c | 50,000 |
Notice the symmetry: Anand’s Bills Receivable of ₹50,000 is the exact counterpart of Bhaskar’s Bills Payable of ₹50,000. The personal account of each party (the debtor or creditor) is cleared the moment the bill is drawn and accepted, because the open balance is now represented by the bill. The same debit-credit discipline from the golden rules of accounting is doing all the work here.
Discounting and endorsing a bill: entries when the holder needs cash early
A big reason bills exist at all is liquidity. The holder does not have to wait three months for the money — the bill can be turned into cash or used to settle another debt before maturity.
Discounting a bill with a bank
When Anand gets the bill discounted with his bank, the bank pays him the face value less a charge for the early money. That charge is discounting charges — a finance expense in the drawer’s books. Say the bank deducts ₹1,000 and pays ₹49,000:
| Party | Journal entry | Amount (₹) |
|---|---|---|
| Drawer (Anand) | Bank A/c Dr 49,000 & Discounting Charges A/c Dr 1,000 — To Bills Receivable A/c | 50,000 |
| Drawee (Bhaskar) | No entry — the acceptor’s liability is unchanged | — |
This is the point most learners miss: discounting is purely the holder’s affair. Bhaskar still owes ₹50,000 on the due date — now to the bank instead of to Anand — so nothing changes in his books until maturity.
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Explore the ACCA Knowledge Level course →Endorsing a bill to a creditor
Instead of banking the bill, Anand can hand it over to his own creditor, Chandra, to settle ₹50,000 he owes. This transfer is an endorsement, and Chandra becomes the new holder (the endorsee). In Anand’s books the entry simply swaps one asset for the discharge of a liability:
- Drawer (Anand): Chandra’s A/c Dr 50,000 — To Bills Receivable A/c 50,000.
- Drawee (Bhaskar): no entry — he still owes ₹50,000, now payable to Chandra.
Whether a bill is held, discounted or endorsed, the acceptor’s obligation is the constant: pay the holder on the maturity date. Keeping that anchor in mind stops the entries from blurring together.
Honour, dishonour and noting charges: the day the bill matures
Every bill has a maturity date, and under Section 22 of the Act you build it by adding three days of grace to the nominal due date for a time bill. A bill drawn on 1 January for three months nominally falls due on 1 April; add three days of grace and it matures on 4 April. (Days of grace do not apply to bills payable on demand or at sight, and under Section 25, if the maturity day is a public holiday the bill falls due on the preceding business day.)
How the maturity date is built: term plus three days of grace
Source: Negotiable Instruments Act, 1881 (Sections 22 and 25); illustrative dates.
When the bill is honoured
If Bhaskar pays on the due date, the bill is honoured and both sides close the bill accounts:
- Drawer (if still holding): Bank A/c Dr 50,000 — To Bills Receivable A/c 50,000.
- Drawee: Bills Payable A/c Dr 50,000 — To Bank A/c 50,000.
If the bill had been discounted, Anand passes no entry at maturity — the bank collects directly from Bhaskar, whose entry is unchanged above.
When the bill is dishonoured
If Bhaskar fails to pay, the bill is dishonoured by non-payment, and the original debt revives. To create legal proof, the holder usually has the fact noted by a notary public; the fee for that is the noting charges, and they are ultimately borne by the party at fault — the acceptor. Say noting charges are ₹200 on our bill held to maturity by Anand:
| Party | Journal entry on dishonour | Amount (₹) |
|---|---|---|
| Drawer (Anand) | Bhaskar’s A/c Dr — To Bills Receivable A/c 50,000 & To Bank A/c (noting) 200 | 50,200 |
| Drawee (Bhaskar) | Bills Payable A/c Dr 50,000 & Noting Charges A/c Dr 200 — To Anand’s A/c | 50,200 |
If the bill had instead been discounted or endorsed when it was dishonoured, the holder’s claim simply shifts: Anand would credit Bank (if the bank had discounted it) or Chandra’s A/c (if endorsed) for ₹50,200, because he must make good the amount plus noting charges to whoever held the bill. Bhaskar’s entry stays the same — his debt, now including noting charges, is reinstated to Anand. The way a dishonour can convert into a bad debt if the acceptor cannot pay is a natural next topic once these entries are solid.
The complete journey of a bill, then, looks like this:
How to master bills of exchange accounting
You do not memorise bill entries — you reason them out from two anchors. First, decide which side you are on: the holder records a Bills Receivable (asset), the acceptor records a Bills Payable (liability), and the two always move together. Second, ask what happened to the paper: drawing creates it, discounting and endorsing move it, and maturity closes it through either honour or dishonour. Every entry in this article follows from those two questions.
Work the ₹50,000 example by hand three or four times — once for a bill held to honour, once for a discounted bill, once for an endorsed bill, and once for a dishonour with noting charges — and the pattern becomes second nature. Then stress-test yourself by writing both parties’ books for the same event, because exams love to ask for the counterpart entry. For a closely related set of entries, see how the same journal discipline applies to recording GST journal entries.
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Start the ACCA Knowledge Level courseFrequently Asked Questions
What is the difference between bills receivable and bills payable?
They are the two sides of the same bill. For the holder entitled to the money, the bill is a Bills Receivable — a current asset. For the acceptor who must pay, the identical bill is a Bills Payable — a current liability. When the bill is honoured, both accounts are closed together for the same amount.
What journal entry does the drawer pass when a bill is discounted?
The drawer debits Bank with the cash received and Discounting Charges with the bank’s deduction, and credits Bills Receivable with the full face value. For a ₹50,000 bill discounted at ₹1,000, that is Bank ₹49,000 and Discounting Charges ₹1,000 debited, Bills Receivable ₹50,000 credited. The drawee passes no entry on discounting.
How are noting charges treated in the books of each party?
Noting charges are the notary’s fee for recording a dishonour. The holder pays them first but recovers them from the acceptor, so they are added to the amount the acceptor owes. In the acceptor’s books, Noting Charges A/c is debited along with Bills Payable; in the holder’s books they are added to the acceptor’s personal account.
How do you calculate the maturity date of a bill of exchange?
Take the bill’s term from its date, then add three days of grace under Section 22 of the Negotiable Instruments Act, 1881. A three-month bill dated 1 January matures on 4 April. Days of grace do not apply to demand or sight bills, and if maturity falls on a public holiday the bill is due on the preceding business day.
What happens in the books when a bill is dishonoured?
Dishonour reverses the bill and revives the original debt. The holder credits Bills Receivable (or Bank/the endorsee if the bill had been discounted or endorsed) and debits the acceptor’s personal account, including any noting charges. The acceptor debits Bills Payable and Noting Charges and credits the holder’s personal account, restoring what is owed.
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