Explain how the cashbook with discount and bank column is affected with respect to Bills of Exchange.

Take help of the following transactions if needed-

• Discount a B/E at 1% through bank
• Received rs. 2000 for a B/E from Hari Ram and deposited it into the bank.
• Discounted a B/E for Rs. 1000 at 1% through bank
• Honoured our own acceptance by cheque Rs. 5000
• Purchased 60 war bonds of Rs. 100 each at Rs. 95 each nd paid for them by cheque

Thank u so much!

The following are the three possible situations when Bill of Exchange affects the discount column and/or bank column of the Cash Book.

  1. When the bill is honoured by drawee (acceptor) at maturity.

  2. When the bill is honoured at maturity and payment is received by the holder of the bill (payee)

  3. When the bill is discounted through bank before maturity.

  Let us understand the above given situations one by one.

  1. When the bill is honoured by the drawee (acceptor) at maturity.

  Example: Honoured own acceptance by cheque of Rs 5,000

  Here, no discount has been given because the bill is honoured at maturity and the whole amount of the bill i.e. Rs 5,000 paid without any discount.

  2. When payment of bill is received at maturity by the holder (payee) of the bill

  Example: X drawn a bill of Rs 5,000 in favour of Y and the bill was honoured at maturity

  In the books of X, honouring of the bill will be recorded as:

  In this transaction, no discount will be allowed because the bill has been honoured at maturity and the whole amount of the bill i.e. Rs 5,000 received without any discount.

  3. When bill is discounted with bank (before maturity)

  Example: Bill of Rs 1,000 discounted at 1% through bank.

  Here, the holder of the bill is to get Rs 990 from the bank after the discount of Rs 10 as the bill was discounted before maturity date.

  Reason

  1. As per the rule of Nominal Account, discount of Rs 10 is a loss to the payee of the bill because the payee received Rs 990 instead of Rs 1,000.

2. As per the rule of Real Account, bank column is to be debited as the amount of Rs 990 is received by the payee’s bank.

The Last Transaction of your query- ‘Purchased 60 war bonds of Rs 100 each at Rs 95 and paid for them by cheque’.

This transaction will be recorded in the Cash Book as:

The face value of the bond is Rs 100 and the purchase price is Rs 95. Hence, it will be credited to the bank column of the Cash Book at Rs 95 each.

Note:

When the bonds are issued at discount, then in the books of accounts, discount is considered as interest on bonds. In this case, the amount of interest on bonds is Rs 300 (i.e. Rs 5 × 60 bonds). This interest is recorded at the time of maturity of bonds and not at the time of purchase of bonds.