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Discharge and Dishonour of Bills

Learn everything you need to know about the bill of exchange. Understand dishonour of bills and discharge of bills.

Izhar Ahmad16 Dec, 2023

Dishonour of bills occurs when an instrument that is ideally supposed to be acknowledged is not respected, which may be divided into two categories: non-acceptance and non-payment. Dishonour of bills and discharge of bills are both connected to instruments that are not exchanged for a variety of reasons.

What is a Bill of Exchange?

As per the Provisions of the Negotiable Instruments Act 1881, a bill of exchange is described as a written document that comprises clear instructions. This instruction, signed by the maker of the bill, directs a specific individual to make a payment of a designated amount solely to either a specified person, the order of that person, or the holder of the instrument.

Features of Bill of Exchange

The given definition gives rise to several features of a bill of exchange, which include the following:

The bill of exchange must be documented in writing.
It functions as an authoritative order for payment.
The order for payment is without any conditions.
The creator of the bill must affix their signature.
The specified payment and its due date must be explicit.
The payee designated in the bill must be specific.
The stated amount in the bill is payable either immediately or upon the lapse of a defined period.
Compliance with legal stamping requirements is necessary.

Dishonour of Bills Meaning

A bill is considered dishonored if the drawee fails to fulfill the payment obligation on the maturity date. In such a scenario, the acceptor becomes liable again, leading to the reversal of entries made upon receiving the bill. To illustrate, if Alex receives a bill accepted by Robert, and it gets dishonored, the accounting entries in Alex's books would be adjusted as follows:

Initially, when Alex held the bill until maturity:

Debit Robert’s Account Credit Bill Receivables Account

Subsequently, when Alex endorsed the bill in favor of Peter:

Debit Robert’s Account Credit Peter’s Account

When Alex discounted the bill with her bank:

Debit Robert’s Account Credit Bank Account

When Alex sent the bill for collection:

Debit Robert’s Account Credit Bill Sent for Collection Account

Dishonour of Bills Example and Journal Entries

For around 10,000, Shalini sold products to Rohit on January 1st, 2019, and drew up a two-month bill of exchange. After accepting the bill, Rohit gave it back to Shalini. Rohit failed to honor the debt on its maturity date. Make the required entries in the books of Shalini and Rohit for each of the instances mentioned below:

1. When Shalini Retained the Bill until its Maturity

The accounting entries in Shalini's books are as follows:

Books of Shalini

Date	Particulars	Debit Amount	Credit Amount
2019
Jan. 01	Rohit’s A/c Dr.	10,000
	To Sales A/c (Sold goods to Rohit)		10,000
Jan. 01	Bills Receivable A/c Dr.	10,000
	To Rohit’s A/c (Received Rohit’s acceptance)		10,000
Mar. 04	Rohit’s A/c Dr.	10,000
	To Bills Receivable A/c (Rohit dishonored his acceptance)		10,000

2. When Shalini Discounted the Bill

The corresponding journal entries in Shalini's books are as follows:

Date	Particulars	Debit Amount	Credit Amount
2019
Jan. 01	Rohit’s A/c Dr.	10,000
	To Sales A/c (Sold goods to Rohit)		10,000

Jan. 01	Bills Receivable A/c Dr.	10,000
	To Rohit’s A/c (Received Rohit’s acceptance)		10,000
Jan. 01	Bank A/c Dr.	9,800
	Discount A/c Dr.	200
	To Bills Receivable A/c (Rohit’s Bill dishonored his acceptance)		10,000
Mar. 04	Rohit’s A/c Dr.	10,000
	To Bank A/c (Discounted bill dishonored by Rohit)		10,000

3. When Shalini Endorsed the Bill to Sunil

the corresponding journal entries in Shalini's books are as follows:

Date	Particulars	Debit Amount	Credit Amount
2019
Jan. 01	Rohit’s A/c Dr.	10,000
	To Sales A/c (Sold goods to Rohit)		10,000
Jan. 01	Bills Receivable A/c Dr.	10,000
	To Rohit’s A/c (Received Rohit’s acceptance)		10,000
Jan. 01	Sunil A/c Dr.	10,000
	(Rohit’s acceptance endorsed in favor of Sunil)		10,000
Mar. 04	Rohit’s A/c Dr.	10,000
	To Sunil A/c (Endorsed bill dishonored by Rohit)		10,000

In Rohit's ledger, the following entries are recorded as follows:

Books of Rohit

Date	Particulars	Debit Amount	Credit Amount
2019
Jan. 01	Purchases A/c Dr.	10,000
	To Shalini’s A/c (Purchased goods from Shalini)		10,000
Jan. 01	Shalini’s A/c Dr.	10,000
	To Bills Payable A/c (Accepted Shalini’s draft)		10,000
Mar. 04	Bills Payable A/c Dr.	10,000
	To Shalini’s A/c (Acceptance in favor of Shalini dishonored)		10,000

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Types of Dishonour of Bills

A bill is considered dishonored when the drawee is unable to make the payment on the maturity date. Dishonour of bills can occur through either non-payment or non-acceptance.

Dishonour of bills by Non-Payment:

When a drawee, or other non-partner drawees, fails to pay as required, a bill of exchange is dishonored by non-payment. This applies to promissory notes, bills of exchange, or cheques when the maker of the note, acceptor of the bill, or drawee of the cheque defaults in payment despite being duly requested.

Dishonour of Bills by Non-Acceptance:

As per the Negotiable Instrument Act of 1881, a bill of exchange is considered dishonored by non-acceptance when the drawee, not in a partnership, fails to accept the bill despite being duly required to do so. This happens when presentment is excused, and the bill is not accepted.

Discharge of Bills

Discharge of bills may be done in a number of situations, which means being released from responsibilities. Here, discharge refers to both the instrument's discharge and the discharge of one or more persons who are accountable for the shown instrument.

Read Related Topics
Functions of Marketing	What is Consumer Awareness?	Reverse Repo Rate	Capital Reserve
Diminishing Balance Method	Suit for Damages	Indifference Curve	Discharge of Contract

Discharge and Dishonour of Bills FAQs

What is Dishonour of bills?

A bill is considered to be dishonored when the drawee (the person who is obligated to pay) is unable to make the payment on the bill's maturity date.

What is the difference between dishonour and discharge of a bill?

Dishonour occurs when the payee of the instrument fails to pay the bearer or holder of the instrument for various reasons, while discharge occurs when the instrument is no longer negotiable.

What is the discharge of a bill?

A bill is discharged when it is paid in full by or on behalf of the drawee or acceptor.

Who is called a payor?

The individual who pays the money to the payee is known as the payor.

Who is also called a drawer?

A payor, often known as a drawer, is the individual who has the money and writes the check.

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What is a Bill of Exchange?

Features of Bill of Exchange

The given definition gives rise to several features of a bill of exchange, which include the following:

The bill of exchange must be documented in writing.
It functions as an authoritative order for payment.
The order for payment is without any conditions.
The creator of the bill must affix their signature.
The specified payment and its due date must be explicit.
The payee designated in the bill must be specific.
The stated amount in the bill is payable either immediately or upon the lapse of a defined period.
Compliance with legal stamping requirements is necessary.

Dishonour of Bills Meaning

Initially, when Alex held the bill until maturity:

Debit Robert’s Account Credit Bill Receivables Account

Subsequently, when Alex endorsed the bill in favor of Peter:

Debit Robert’s Account Credit Peter’s Account

When Alex discounted the bill with her bank:

Debit Robert’s Account Credit Bank Account

When Alex sent the bill for collection:

Debit Robert’s Account Credit Bill Sent for Collection Account

Dishonour of Bills Example and Journal Entries

1. When Shalini Retained the Bill until its Maturity

The accounting entries in Shalini's books are as follows:

Books of Shalini

Date	Particulars	Debit Amount	Credit Amount
2019
Jan. 01	Rohit’s A/c Dr.	10,000
	To Sales A/c (Sold goods to Rohit)		10,000
Jan. 01	Bills Receivable A/c Dr.	10,000
	To Rohit’s A/c (Received Rohit’s acceptance)		10,000
Mar. 04	Rohit’s A/c Dr.	10,000
	To Bills Receivable A/c (Rohit dishonored his acceptance)		10,000

2. When Shalini Discounted the Bill

The corresponding journal entries in Shalini's books are as follows:

Date	Particulars	Debit Amount	Credit Amount
2019
Jan. 01	Rohit’s A/c Dr.	10,000
	To Sales A/c (Sold goods to Rohit)		10,000

Jan. 01	Bills Receivable A/c Dr.	10,000
	To Rohit’s A/c (Received Rohit’s acceptance)		10,000
Jan. 01	Bank A/c Dr.	9,800
	Discount A/c Dr.	200
	To Bills Receivable A/c (Rohit’s Bill dishonored his acceptance)		10,000
Mar. 04	Rohit’s A/c Dr.	10,000
	To Bank A/c (Discounted bill dishonored by Rohit)		10,000

3. When Shalini Endorsed the Bill to Sunil

the corresponding journal entries in Shalini's books are as follows:

Date	Particulars	Debit Amount	Credit Amount
2019
Jan. 01	Rohit’s A/c Dr.	10,000
	To Sales A/c (Sold goods to Rohit)		10,000
Jan. 01	Bills Receivable A/c Dr.	10,000
	To Rohit’s A/c (Received Rohit’s acceptance)		10,000
Jan. 01	Sunil A/c Dr.	10,000
	(Rohit’s acceptance endorsed in favor of Sunil)		10,000
Mar. 04	Rohit’s A/c Dr.	10,000
	To Sunil A/c (Endorsed bill dishonored by Rohit)		10,000

In Rohit's ledger, the following entries are recorded as follows:

Books of Rohit

Date	Particulars	Debit Amount	Credit Amount
2019
Jan. 01	Purchases A/c Dr.	10,000
	To Shalini’s A/c (Purchased goods from Shalini)		10,000
Jan. 01	Shalini’s A/c Dr.	10,000
	To Bills Payable A/c (Accepted Shalini’s draft)		10,000
Mar. 04	Bills Payable A/c Dr.	10,000
	To Shalini’s A/c (Acceptance in favor of Shalini dishonored)		10,000

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Types of Dishonour of Bills

A bill is considered dishonored when the drawee is unable to make the payment on the maturity date. Dishonour of bills can occur through either non-payment or non-acceptance.

Dishonour of bills by Non-Payment:

Dishonour of Bills by Non-Acceptance:

Discharge of Bills

Read Related Topics
Functions of Marketing	What is Consumer Awareness?	Reverse Repo Rate	Capital Reserve
Diminishing Balance Method	Suit for Damages	Indifference Curve	Discharge of Contract