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If a
business has numerous bills he got from various
debtors he may send these bills to his banker for
collection purposes. It should be remembered that,
this is not
discounting of a bill of exchange. The bill is
sent for safety and collection purposes. The bank
keeps the bill in its custody till the due date and
on the due date, the bank will present the bill to
acceptor. After collecting the amount, the bank
transfers the amount to the account of its customer
(by giving credit to his account). The bank charges
some nominal fee from the customer for service he
rendered. This is an expense for the customer and
revenue for the bank. Journal
Entries in the Books of Drawer, Drawee and Bank:
Entries in the Books of Drawer:
(1)
The drawer opens a temporary account in his books,
when the bill is sent to the bank for collection.
The name of the account is "bank for collection
account". The bill is transferred to this account
and the following journal entry is passed in the journal
of drawer:
Bank for collection
A/C.........Dr. XXX
Bill receivable A/C...................XXX
(2) When the bill is
collected by the bank on the due date an intimation
is received from the bank, following entry is made
in drawer's books:
Bank A/C...........Dr.
XXX
Bank for collection A/C.......XXX
(3) Some fees is
charged by the bank for the service it provided.
This fees is an expense of the drawer and the income
of the bank. The
entry in drawer's journal is:
Bank charges
A/C............Dr. XXX
Bank A/C..............................XXX
Entries in the Books of Bank:
The following entries are passed in the books of
bank:
(1) When the bill is
received from the drawer for collection, no entry is
passed.
(2) When the bill is
collected from the acceptor, the following entry is
made:
Cash A/C.........Dr.
XXX
Drawer's A/C...........XXX
(3) A separate entry
is made for the collection charges:
Drawer's
A/C..........Dr. XXX
Collection charges A/C........XXX
Collection charges credited in the above journal
entry are the income of the bank and expense of the
drawer. Drawer writes them as bank charges.
Entries in the Books of Drawee (Acceptor):
When bill of exchange is sent to the bank for
collection, drawee or acceptor does not make any
journal entry in his books. The drawee only makes a
journal entry when he meets the bill on due date.
In the books of acceptor, the following entry is
made:
Bill payable
A/C......Dr. XXX
Cash A/C..................XXX
Example:
A sold
goods to B for $10,000 on credit on 1st July, 2005.
On the same date, A drew two bills on B for $6,000
and $4,000 at two months and three months
respectively. On 4th July the first bill was
discounted at the bank at 15% p.a. On 6th July, the
other bill was sent to the bank for collection. On
the due date, both the bills were honored and the bank
deducted $40 as bank charges.
Required:
Give journal entries in the books of A, B and the bank.
Solution:
A's Journal
|
Date |
Particulars |
L.F |
Amount (Dr.) |
Amount (Cr.) |
|
1.7.2005 |
B
A/C....................................................Dr.
Sales A/C
(Goods sold on credit) |
|
10,000 |
10,000 |
|
1.7.2005 |
Bill
receivable
A/C...............................Dr.
B A/C
(Acceptance received at two months) |
|
6,000 |
6,000 |
|
1.7.2005 |
Bill
receivable
A/C...............................Dr.
B A/C |
|
4,000 |
4,000 |
|
4.7.2005 |
Bank
A/C............................................Dr.
Discount
A/C......................................Dr.
Bill receivable
(Bill discounted @ 15% p.a.) |
|
5,850
150
|
6000 |
|
6.7.2005 |
Bank for
collection..............................Dr.
Bill receivable A/C
(Bill sent to bank for collection) |
|
4,000 |
4,000 |
|
4.10.2005 |
Bank
A/C..........................................Dr.
Bank for collection A/C
(Bill collected by bank on due date) |
|
4,000 |
4,000 |
|
4.10.2005 |
Bank charges
A/C..............................Dr.
Bank A/C
(Amount deducted by bank as collection
charges) |
|
40 |
40 |
B's Journal
|
Date |
Particulars |
L.F |
Amount (Dr.) |
Amount (Cr.) |
|
1.7.2005 |
Purchases
A/C.....................................Dr.
A A/C
(Goods purchased on credit) |
|
10,000 |
10,000 |
|
1.7.2005 |
A
A/C.................................................Dr.
Bill payable A/C
(Acceptance given at two months) |
|
6,000 |
6,000 |
|
1.7.2005 |
A
A/C...............................Dr.
Bill payable A/C
(Acceptance given at three months) |
|
4,000 |
4,000 |
|
4.9.2005 |
Bill payable
A/C...................................Dr.
Cash A/C
(Acceptance paid on presentation) |
|
6,000
|
6000 |
|
4.10.2005 |
Bill payable
A/C...................................Dr.
Cash A/C
(Acceptance paid on presentation) |
|
4,000 |
4,000 |
Banker's Journal
|
Date |
Particulars |
L.F |
Amount (Dr.) |
Amount (Cr.) |
|
4.7.2005 |
Bill
receivable
A/C..............................Dr.
A A/C
Discount
(Bill discounted @ 15%) |
|
6,000 |
5,850
150 |
|
6.7.2005 |
No journal
entry is made in the books of bank when bill
is received from customer for collection. |
|
|
|
|
4.9.2005 |
Cash
A/C............................................Dr.
Bill receivable A/C
(Discounted bill presented and cash
received) |
|
6,000 |
6,000 |
|
4.10.2005 |
Cash
A/C...........................................Dr.
A A/C
(amount collected on behalf of customer.) |
|
4,000
|
4,000 |
|
4.10.2005 |
A
A/C................................................Dr.
Collection charges A/C
(service charges deducted from A's account) |
|
40 |
40 |
|
