Definition and Explanation of
Dishonor of Bill:
What
happens when a bill is not honored by the acceptor
on the due date (cash is not paid to the holder of
the bill)? A bill of exchange is said to be
dishonored when its acceptor refuses to pay the
amount of the bill to the holder of the bill on its
maturity. The bill then becomes useless and the
party from whom it has been received will be liable
to pay for the amount. It is very important to know
that, when a bill is dishonored, in whose possession
it was? Because when a bill is dishonored, all the
parties involved are effected and books of accounts
of all the parties have to be adjusted. For example,
A draws a bill of $5,000 on B and B accepts it and
returns it to A. A retains the bill in his
possession till the due date. On the due date the
bill is not honored by the acceptor. We can see,
there are two parties involved whose books are to be
adjusted. If suppose, A has discounted or endorsed
the bill, then there are three parties involved and
books of accounts of all the parties are effected.
Noting Charges:
When a
bill is dishonored, the holder of the bill, (drawer,
banker, endorsee or any other party) in order to
make a strong ground for drawing legal proceeding
against the acceptor may get the official
recognition that the bill has been dishonored. He
goes to an official called notary public, and gives
the bill to him. The notary public will present the
bill for payment again to the acceptor and if the
money is received he will hand over the money to the
original party. But if the bill is again dishonored,
the notary public will note the fact of dishonor and
the reasons of the dishonor on the bill and will
give the bill back to the holder of the bill. It is
now a strong evidence against the acceptor, in case,
if the case is filed in the court.
For this service, the
notary public will charge a small fee obviously from
the holder of the bill. This fee is known as "noting
charges" and is always recoverable from the
party responsible for dishonor (the acceptor).
It must be remembered
that noting charges are not the expenses of any
party involved. They are always expenses of the
acceptor in whose books they will be debited.
Who Pays Noting Charges:
-
If
the bill is retained by the drawer, the drawer
will pay the noting charges.
-
If
the bill has been discounted the bank will pay.
-
If
the bill has been endorsed to the endorsee, the
endorsee will pay.
-
If
the endorsee has endorsed the bill to his
creditor (a new endorsee), the new endorsee will
pay.
But
the new endorsee will recover the noting charges
from first endorsee, the first endorsee from the
drawer and ultimately the drawer from the acceptor
(being an expense of acceptor).
Example:
On 1st
Jan. 2005. the X sold goods to Y. for $10,000 on
credit basis. On the same date X drew a bill for
$10,000 on Y. at two months. Y accepted the bill and
returned it to X. On the due date Y could not honor
acceptance.
Required:
Give journal entries in the books of X and Y.
Solution:
X's Journal
|
Date |
Particulars |
L.F |
Amount (Dr.) |
Amount (Cr.) |
|
1.1.2005 |
Y
A/C................................................Dr.
Sales A/C
(Goods sold on credit basis) |
|
10,000 |
10,000 |
|
1.1.2005 |
Bill
receivable
A/C...............................Dr.
Y A/C
(Acceptance received at two months) |
|
10,000 |
10,000 |
|
4.3.2005 |
Y
A/C...............................................Dr.
Bill receivable account A/C
(Bill is dishonored on the due date) |
|
10,000 |
10,000 |
When the goods
were sold to Y, he became a debtor for $10,000. Then
he paid his debts by giving acceptance (B/R) to X.
But when he did not honor his acceptance on the due
date, he again became a debtor of X. (Amount is
still due from him).
Y's Journal
|
Date |
Particulars |
L.F |
Amount (Dr.) |
Amount (Cr.) |
|
1.1.2005 |
Purchases
A/C.....................................Dr.
X A/C
(Goods purchased on credit) |
|
10,000 |
10,000 |
|
1.1.2005 |
X
A/C.................................................Dr.
Bill payable A/C
(Acceptance given at two months) |
|
10,000 |
10,000 |
|
4.3.2005 |
Bill payable
A/C...................................Dr.
X A/C
(Acceptance not honored on maturity) |
|
10,000 |
10,000 |
In the above
example, the drawer (X) has not got the bill noted
by the notary public and so no noting charges were
paid by him.
Suppose if he also paid $40 as noting charges, then
a further entry will have to be made both in the
books of X as well as in the books of Y.
In X's Journal
|
Date |
Particulars |
L.F |
Amount (Dr.) |
Amount (Cr.) |
|
4.3.2005 |
Y
A/C...............................................Dr.
Cash A/C
(Cash paid as noting charges on behalf of Y) |
|
40 |
40 |
In Y's Journal
|
Date |
Particulars |
L.F |
Amount (Dr.) |
Amount (Cr.) |
|
4.3.2005 |
Noting charges
A/C...............................Dr.
X A/C
(Noting charges paid by the X) |
|
40 |
40 |
|
