Bills of exchange explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
A bill of exchange lets a seller who has sold on credit get paper that can be held, cashed early or passed to a creditor. Each stage changes the entries in the books of both parties. This guide follows one invented bill through four outcomes and gives the entry for each side. Our bookkeeping and online accounting team passes these entries for clients who trade on bills.
On acceptance, the drawer debits Bills Receivable and credits the drawee; the drawee debits the drawer and credits Bills Payable. A bill held to maturity is settled by cash; a discounted bill is cashed with a bank at a discount charge; an endorsed bill settles a debt to a third party; a dishonoured bill revives the debt, with noting charges recoverable from the drawee. A promissory note is accounted for in the same way, with the maker in the drawee's role.
The law, by link
The legal definitions are in our posts on section 5, bill of exchange and section 4, promissory note. The fixing of the due date, including days of grace, is in sections 21 and 22, and noting and protest in sections 99 and 100. This article is about the books only. To keep the arithmetic simple, the bill below is treated as falling due on 1 July 2026; the legal due date under the Act should be fixed from the post on sections 21 and 22.
Terms and accounts
| Term | Meaning | Account |
|---|---|---|
| Drawer | Seller who makes the bill | Holds Bills Receivable |
| Drawee (acceptor) | Buyer who accepts it | Holds Bills Payable |
| Discounting | Selling the bill to a bank before maturity for less than its face value | Discount on Bills |
| Endorsement | Passing the bill to a third party | Credits Bills Receivable |
| Noting charges | Notary's fee on a dishonoured bill | Paid by the holder, recovered from the drawee |
| Retirement | Paying the bill before its due date, usually for a rebate | Rebate or discount |
For promissory notes, the maker (who promises to pay) is the equivalent of the drawee and the payee that of the drawer.
Worked example: one bill of 1,00,000
The entity and all figures in this example are invented for illustration.
Sethi Textiles sells goods worth 1,00,000 on credit to Bhatia Garments on 1 April 2026 and draws a three-month bill. Bhatia accepts it. For arithmetic only, an assumed discount and interest rate of 12 per cent a year is used, and the bill is treated as due on 1 July 2026.
On acceptance (all outcomes).
| Books of Sethi (drawer) | Debit | Credit |
|---|---|---|
| Bills Receivable A/c Dr | 1,00,000 | |
| To Bhatia Garments | 1,00,000 |
| Books of Bhatia (drawee) | Debit | Credit |
|---|---|---|
| Sethi Textiles Dr | 1,00,000 | |
| To Bills Payable A/c | 1,00,000 |
Outcome 1: held to maturity
| Books of Sethi on 1 July | Debit | Credit |
|---|---|---|
| Bank A/c Dr | 1,00,000 | |
| To Bills Receivable A/c | 1,00,000 |
| Books of Bhatia on 1 July | Debit | Credit |
|---|---|---|
| Bills Payable A/c Dr | 1,00,000 | |
| To Bank A/c | 1,00,000 |
Outcome 2: discounted with the bank on 1 May
Two months remain. Discount = 1,00,000 x 12 per cent x 2/12 = 2,000. The bank pays 98,000.
| Books of Sethi on 1 May | Debit | Credit |
|---|---|---|
| Bank A/c Dr | 98,000 | |
| Discount on Bills A/c Dr | 2,000 | |
| To Bills Receivable A/c | 1,00,000 |
Bhatia's books are unchanged; he pays the bank on 1 July, debiting Bills Payable and crediting Bank for 1,00,000. If Bhatia dishonours, the bank recovers from Sethi and the debt revives in Sethi's books (see outcome 4).
Outcome 3: endorsed to a creditor on 1 May
Sethi owes Rawat Yarns 1,00,000 and endorses the bill to Rawat in full settlement.
| Books of Sethi | Debit | Credit |
|---|---|---|
| Rawat Yarns Dr | 1,00,000 | |
| To Bills Receivable A/c | 1,00,000 |
| Books of Rawat | Debit | Credit |
|---|---|---|
| Bills Receivable A/c Dr | 1,00,000 | |
| To Sethi Textiles | 1,00,000 |
Bhatia's books do not change; on 1 July he pays Rawat, the holder.
Outcome 4: dishonoured, noted and renewed
The bill is sent for collection and dishonoured on 1 July. Sethi pays noting charges of 500. Bhatia asks for renewal: he pays 30,000 in cash now, and gives a new three-month bill for the balance, with interest at 12 per cent a year on that balance for the three months. The noting charges are included in the amount due.
Working of the new bill:
| Particulars | Amount |
|---|---|
| Amount due on dishonour (1,00,000 + noting 500) | 1,00,500 |
| Less: cash paid now | (30,000) |
| Balance carried to new bill | 70,500 |
| Add: interest on 70,500 for 3 months at 12 per cent (70,500 x 12/100 x 3/12 = 2,115) | 2,115 |
| Amount of new bill | 72,615 |
| Books of Sethi (drawer) | Debit | Credit |
|---|---|---|
| Bhatia Garments Dr | 1,00,500 | |
| To Bills Receivable A/c | 1,00,000 | |
| To Bank A/c (noting charges) | 500 | |
| (Bill dishonoured) | ||
| Bank A/c Dr | 30,000 | |
| To Bhatia Garments | 30,000 | |
| Bhatia Garments Dr | 2,115 | |
| To Interest Received A/c | 2,115 | |
| Bills Receivable (new) A/c Dr | 72,615 | |
| To Bhatia Garments | 72,615 |
| Books of Bhatia (drawee) | Debit | Credit |
|---|---|---|
| Bills Payable A/c Dr | 1,00,000 | |
| Noting Charges A/c Dr | 500 | |
| To Sethi Textiles | 1,00,500 | |
| Sethi Textiles Dr | 30,000 | |
| To Bank A/c | 30,000 | |
| Interest Paid A/c Dr | 2,115 | |
| To Sethi Textiles | 2,115 | |
| Sethi Textiles Dr | 72,615 | |
| To Bills Payable (new) A/c | 72,615 |
Check on the personal accounts. In Sethi's books Bhatia's account has debits of 1,00,500 + 2,115 = 1,02,615 and credits of 30,000 + 72,615 = 1,02,615. In Bhatia's books Sethi's account has credits of 1,00,500 + 2,115 = 1,02,615 and debits of 30,000 + 72,615 = 1,02,615. Both close to nil, and the new bill of 72,615 is the only amount outstanding.
Retirement of the new bill
Suppose Bhatia pays the new bill one month before its due date. Rebate at 12 per cent for one month = 72,615 x 12/100 x 1/12 = 726.15, taken as 726 for the example, so Bhatia pays 71,889.
| Books of Sethi | Debit | Credit |
|---|---|---|
| Bank A/c Dr | 71,889 | |
| Rebate Allowed A/c Dr | 726 | |
| To Bills Receivable (new) A/c | 72,615 |
| Books of Bhatia | Debit | Credit |
|---|---|---|
| Bills Payable (new) A/c Dr | 72,615 | |
| To Bank A/c | 71,889 | |
| To Rebate Received A/c | 726 |
Check: 71,889 + 726 = 72,615 in both sets of books.
Common mistakes
- Treating a discounted bill as paid in full: the discount is a charge against profit.
- Forgetting the contingent position on discounting: if the drawee dishonours, the drawer is liable to the bank.
- Not crediting the endorser's account correctly: endorsement settles a debt, so a creditor is debited, not the bank.
- Charging noting charges to the drawer's loss: they are recoverable from the drawee.
- Using the date of the bill as the due date: the due date is set under the Act; see the linked post.
Need help with bills and notes?
If you trade on bills and your Bills Receivable and Payable accounts do not agree with the party ledgers, we can reconstruct the entries. Our bookkeeping and online accounting team handles these registers and the discounting and renewal entries.
Key takeaways
- Acceptance creates Bills Receivable for the drawer and Bills Payable for the drawee.
- Discounting gives cash now at a discount charge; endorsement settles a creditor.
- Dishonour revives the debt, with noting charges recoverable.
- Renewal combines part payment, interest and a new bill.
- Retirement before due date earns a rebate for the drawee.
Read next
- Journal entries: rules of debit and credit
- Cash book: single, double and triple column
- Section 5, Negotiable Instruments Act: bill of exchange
- Sections 99 and 100: noting and protest
Disclaimer: Based on the Accounting Standards issued by the Institute of Chartered Accountants of India as on 1 April 2025, the Companies (Accounting Standards) Rules, 2021 as amended up to G.S.R. 169(E) of 10 March 2026, the Companies Act, 2013 and the ICAI guidance named in the article, as consulted on 4 October 2026. The worked example uses invented figures. Later amendments should be checked on icai.org and mca.gov.in. This article is general information, not legal advice; check the official text before acting.