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Renewal of the Bill


When the acceptor of the bill foresees that it may be difficult to meet the obligation of the bill on maturity due to temporary difficulties, he may approach the drawer with the request for extension for time for payment by canceling the old bill and drawing a fresh bill with new terms of payment. This is called renewal of the bill. Since the cancellation of bill is mutually agreed upon noting of the bill is not required.

But the drawee has to pay interest to the drawer for the extended period of credit. The interest is paid in cash or may be included in the amount of the new bill. Sometimes, a part of the amount due may be paid and the new bill may be drawn only for the balance.

For example, a bill of Rs. 10,000 is cancelled on a cash payment of Rs. 3,000 and acceptance of a new bill for the balance of Rs. 7,000 plus interest as agreed between the parties.

The journal entries in the books of the drawer and the drawee will be the same as that of dishonour of bill. As for the interest in valued, if it is not paid in cash, the drawer debits the drawee's account and credits the interest account, and the drawee debits the interest and credits the drawer's account in his books.

 

The journal entries recorded in case of renewal for the cancellation of the old bill, for interest and for the acceptance of the new bill in the books of the drawer and drawee are given below:

 

Transaction

Books of Drawer

Books of Drawee

Cancellation of old bill

 


Interest

 


New bill

 

Drawee's A/c Dr.

To Bills Receivable A/c


Drawee's A/c Dr.
To Interest A/c


Bill Receivable A/c Dr.
To Drawee's A/c

Bills Payable A/c Dr.
To Drawer's A/c


Interest A/c Dr.
To Drawer's A/c


Drawer's A/c Dr.
To Bills Payable A/c


Problem#4
On February 01, 2006 Ravi sold goods to Mohan for Rs.18,000; Rs. 3,000 were paid by Mohan immediately and for the balance he accepted three months bill drawn upon him by Ravi. On the date of maturity of the bill Mohan requested Ravi to cancel the old bill and a new bill upon him for a period of 2 months. He further agreed to pay interest in cash to Ravi @ 12% p.a. Ravi agreed to Mohan's request and cancelled the old bill and drew a new bill. The new bill was met on maturity by Mohan. In this case, the following entries will be recorded in the books of Ravi and Mohan.

Solution:
 
Books of Ravi- Journal

Date

Particulars

L.F.

Debit

Amount

Rs.

Credit

Amount

Rs.

2006

Feb. 01

 

 

Feb. 01

 

 

 

 

May 01

 

 

 

 

 


May 04

 

 

 

 

 

Jul. 07

Mohan's A/c Dr.

To Sales A/c

(Sold goods to Mohan)

 

Cash A/c Dr.

Bills Receivable A/c Dr.

To Mohan's A/c (Received Rs. 3,000 in cash from Ravi and an acceptance for the balance)

Mohan's Account Dr.

To Bills Receivable A/c

To Interest A/c

(Cancelled old bill on renewal

Rs. 300 as interest)

Bill's Receivable A/c Dr.

Cash A/c Dr. 300

To Mohan's A/c 15,300

(Received new acceptance from Mohan)


Bank A/c Dr.

To Bills Receivable A/c

(Mohan met his new acceptance)

 

18,000

 

 

3,000

15,000

 

 


15,300

 

 

 

 

15,000

300

 

 

 

 



15,000



18,000

 

 

 


18,000

 



15,000

300

 

 

 

 

 

15300

 

 

 

 



15,000

 

Books of Mohan- Journal

Date

Particulars

L.F.

Debit

Amount

Rs.

Credit

Amount

Rs.

2006

Feb. 01

 

 

Feb. 01

 

 

 

 

 

May 04

 

 

 

 

 


May 04

 

 

 

 

 

Jul. 07

Purchases A/c Dr.

To Ravi A/c

(Purchased goods from Ravi)

 

Ravi A/c Dr.

ToCash A/c

To Bills Payable A/c

(Received cash from Ravi and his acceptance)


Bill Payable A/c Dr.

Interest A/c Dr.

To Ravi A/c

(Old bill cancelled on renewal,

Rs. 300 charged as interest)

Ravi's A/c Dr.

To Bills Payable A/c

To Cash A/c

(Accepted new bill and paid cash for interest)


Bill Payable A/c Dr.

Bank A/c

(Met acceptance of the new bill on maturity)

 

18,000

 



18,000

 

 

 

 


15,000

300

 

 

 

15,300

 

 

 

 

 



15,000



18,000

 

 

 

3,000

15,000

 

 

 

 


15,300

 

 

 

 

15,000

300

 

 

 

 

15,000





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