Discounting of Bill of Exchange: Journal Entries Made Simple

Discounting of a bill of exchange is one of those topics where students often know the entry, but not the reason behind it.

They remember:

Bank A/c Dr.
Discount A/c Dr.
    To Bills Receivable A/c

But then doubts begin.

Why is Bank debited with less than the bill amount? Why is Discount debited? Why does the drawee pass no entry when the drawer discounts the bill? And if the bill is honoured later, why does the drawer pass no entry at maturity?

The answer is simple once you see the bill like a timed payment promise.

When the drawer discounts the bill, the drawer is not waiting until maturity. The drawer is taking money from the bank early. The bank pays now, keeps a small charge for the remaining time, and collects the full amount from the drawee on the maturity date.

This guide explains the full logic, the entries in both books, the discount calculation, and the mistakes students should avoid.

First, Recall the Basic Bill Story

A bill of exchange usually begins with a credit transaction.

Suppose A sells goods to B on credit for Rs. 20,000. A wants a clear written promise for payment, so A draws a bill on B. B accepts it.

Now the roles are:

Party	Meaning	In this example
Drawer	Person who draws the bill	A
Drawee	Person on whom the bill is drawn	B
Acceptor	Drawee after accepting the bill	B
Payee	Person who receives the money	Usually A

In A’s books, the accepted bill is Bills Receivable because A will receive money on maturity.

In B’s books, the same accepted bill is Bills Payable because B has to pay money on maturity.

So one bill creates two different account names:

Books	Account used	Nature
Drawer	Bills Receivable	Asset
Drawee	Bills Payable	Liability

This is the foundation of every discounting entry.

What Does Discounting of Bill Mean?

Discounting of bill means the holder of the bill takes the bill to the bank before maturity and receives money immediately.

The bank does not pay the full face value of the bill. It deducts discount for the remaining period and credits the balance to the customer’s bank account.

For example, if a bill of Rs. 20,000 is discounted and the bank deducts Rs. 500 as discount, the drawer receives Rs. 19,500 now. The bank will later collect Rs. 20,000 from the drawee on maturity.

So discounting has three parts:

1. The drawer gives the bill to the bank.
2. The bank pays the drawer early after deducting discount.
3. On maturity, the bank collects the full bill amount from the drawee.

This is why Discount Account appears in the drawer’s books.

Why Does the Drawer Discount a Bill?

The drawer may need cash before the maturity date.

Instead of waiting two or three months for the drawee to pay, the drawer can go to the bank and get money immediately. The bank accepts the bill because the bill carries a fixed amount and a fixed maturity date.

This helps the drawer in real business situations:

• salaries may need to be paid before the bill matures
• new goods may need to be purchased
• rent or other expenses may be due
• the business may prefer cash now instead of waiting

The drawer sacrifices a small amount as discount, but receives cash earlier.

Think of it like this:

Bill amount at maturity - bank discount = cash received today

The discount is the cost of receiving money before the bill’s payment date.

Difference Between Discounting and Keeping the Bill

Before maturity, the drawer has choices.

The drawer may keep the bill till maturity, endorse it to a creditor, send it to the bank for collection, or discount it with the bank.

Here is the difference:

Treatment of bill	What happens
Retained till maturity	Drawer waits and collects from drawee on maturity
Discounted with bank	Drawer gets money early from bank after discount
Endorsed to creditor	Drawer transfers the bill to settle a creditor
Sent for collection	Bank only collects on maturity, but does not pay early

Discounting is different from sending the bill for collection.

In collection, the bank does not pay immediately. It simply collects the money later on behalf of the drawer.

In discounting, the bank pays immediately.

Once the bank becomes the holder, the drawee will pay the bank on maturity.

Entries Before Discounting

Let us continue with a simple transaction.

A sold goods to B for Rs. 20,000 on credit and drew a bill for Rs. 20,000. B accepted it.

Before discounting, we must record the sale and acceptance.

In the Books of A, the Drawer

Particulars	Debit	Credit
B’s A/c Dr.	Rs. 20,000
To Sales A/c		Rs. 20,000
Bills Receivable A/c Dr.	Rs. 20,000
To B’s A/c		Rs. 20,000

The first entry records the credit sale.

The second entry replaces B’s personal account with Bills Receivable because A has received B’s accepted bill.

In the Books of B, the Drawee

Particulars	Debit	Credit
Purchases A/c Dr.	Rs. 20,000
To A’s A/c		Rs. 20,000
A’s A/c Dr.	Rs. 20,000
To Bills Payable A/c		Rs. 20,000

The first entry records the credit purchase.

The second entry replaces A’s personal account with Bills Payable because B has accepted the bill.

Now the bill is ready. A can keep it, endorse it, send it for collection, or discount it.

Entry for Discounting in the Books of Drawer

Suppose A discounts the bill with the bank and the bank deducts Rs. 500 as discount.

A receives Rs. 19,500.

The entry in A’s books will be:

Particulars	Debit	Credit
Bank A/c Dr.	Rs. 19,500
Discount A/c Dr.	Rs. 500
To Bills Receivable A/c		Rs. 20,000

Why is Bank Account debited?

Because cash or bank balance increases by Rs. 19,500.

Why is Discount Account debited?

Because discount is an expense or loss for the drawer. It is the amount deducted by the bank.

Why is Bills Receivable credited?

Because the drawer no longer holds the bill. The bill has been transferred to the bank.

This is the heart of discounting.

Entry for Discounting in the Books of Drawee

At the time of discounting, the drawee passes no entry.

This surprises many students, but it is very logical.

The drawee has already accepted the bill. The drawee’s liability is still Bills Payable. Whether the drawer keeps the bill, endorses it, sends it for collection, or discounts it with the bank, the drawee’s liability does not change at that moment.

The drawee will make an entry only when the bill is paid on maturity or dishonoured.

So, at the time of discounting:

Books of drawer	Books of drawee
Bank A/c Dr., Discount A/c Dr. to Bills Receivable A/c	No entry

This one sentence prevents a lot of wrong entries.

How to Calculate Discount on Bill

In most school questions, discount is calculated for the period between the date of discounting and the date of maturity.

Use this formula:

Discount = Bill amount x Rate x Unexpired period

If the rate is per annum, express the unexpired period as a fraction of a year.

For example:

Bill amount = Rs. 30,000
Rate of discount = 12 percent p.a.
Remaining period = 3 months

Discount = 30,000 x 12/100 x 3/12
Discount = Rs. 900

So the bank will credit:

Rs. 30,000 - Rs. 900 = Rs. 29,100

The entry in the drawer’s books:

Particulars	Debit	Credit
Bank A/c Dr.	Rs. 29,100
Discount A/c Dr.	Rs. 900
To Bills Receivable A/c		Rs. 30,000

If the question gives exact dates, calculate the period from the date of discounting to the maturity date. If the question gives only months, follow the period clearly given in the question.

What Happens on Maturity if the Discounted Bill Is Honoured?

If the discounted bill is honoured, the bank receives money from the drawee on maturity.

The drawer has already transferred the bill to the bank. So the drawer passes no entry on maturity.

The drawee records payment of the accepted bill.

In the Books of Drawer

No entry

Why?

Because the drawer already received money from the bank at the time of discounting and already removed Bills Receivable from the books.

In the Books of Drawee

Particulars	Debit	Credit
Bills Payable A/c Dr.	Bill amount
To Bank A/c		Bill amount

Why is Bills Payable debited?

Because the liability under the accepted bill is now settled.

Why is Bank credited?

Because the drawee pays the bank or the holder of the bill.

Full Solved Example: Bill Discounted and Honoured

On 1 April, A sold goods to B for Rs. 30,000. A drew a bill on B for three months. B accepted it. On the same day, A discounted the bill with the bank at 12 percent p.a. On maturity, B paid the bill.

Pass journal entries in the books of A and B.

Step 1: Calculate Discount

Bill amount = Rs. 30,000
Rate = 12 percent p.a.
Period = 3 months

Discount = 30,000 x 12/100 x 3/12
Discount = Rs. 900

Amount received from bank = Rs. 30,000 - Rs. 900
Amount received from bank = Rs. 29,100

Books of A, the Drawer

Date	Particulars	Debit	Credit
Apr 1	B’s A/c Dr.	Rs. 30,000
	To Sales A/c		Rs. 30,000
Apr 1	Bills Receivable A/c Dr.	Rs. 30,000
	To B’s A/c		Rs. 30,000
Apr 1	Bank A/c Dr.	Rs. 29,100
	Discount A/c Dr.	Rs. 900
	To Bills Receivable A/c		Rs. 30,000
On maturity	No entry

Books of B, the Drawee

Date	Particulars	Debit	Credit
Apr 1	Purchases A/c Dr.	Rs. 30,000
	To A’s A/c		Rs. 30,000
Apr 1	A’s A/c Dr.	Rs. 30,000
	To Bills Payable A/c		Rs. 30,000
On maturity	Bills Payable A/c Dr.	Rs. 30,000
	To Bank A/c		Rs. 30,000

The important point is that B does not record the discount. The discount is A’s expense because A chose to receive money early from the bank.

What if the Bill Is Discounted After Some Time?

Sometimes the bill is not discounted immediately.

For example, A receives a three-month bill on 1 April but discounts it with the bank on 1 May.

In that case, the bank charges discount only for the remaining period, not for the whole term of the bill.

The logic is:

Longer time left until maturity = more discount
Shorter time left until maturity = less discount

Suppose:

Bill amount = Rs. 24,000
Rate = 10 percent p.a.
Remaining period = 2 months

Then:

Discount = 24,000 x 10/100 x 2/12
Discount = Rs. 400

Amount received = Rs. 24,000 - Rs. 400
Amount received = Rs. 23,600

The drawer’s discounting entry will be:

Particulars	Debit	Credit
Bank A/c Dr.	Rs. 23,600
Discount A/c Dr.	Rs. 400
To Bills Receivable A/c		Rs. 24,000

This is a common calculation mistake.

What if the Discounted Bill Is Dishonoured?

A discounted bill is expected to be paid by the drawee to the bank on maturity.

But if the drawee does not pay, the bill is dishonoured. The bank will recover the bill amount from the drawer because the drawer had discounted the bill with the bank.

This is why the drawer has to bring back the drawee’s personal account.

Suppose A discounted B’s accepted bill of Rs. 20,000. On maturity, B dishonoured the bill. The bank paid noting charges of Rs. 200 and recovered Rs. 20,200 from A.

In the Books of A, the Drawer

Particulars	Debit	Credit
B’s A/c Dr.	Rs. 20,200
To Bank A/c		Rs. 20,200

B is debited because B again owes A the bill amount plus noting charges.

Bank is credited because the bank recovered the amount from A.

In the Books of B, the Drawee

Particulars	Debit	Credit
Bills Payable A/c Dr.	Rs. 20,000
Noting Charges A/c Dr.	Rs. 200
To A’s A/c		Rs. 20,200

B debits Bills Payable because the bill liability is cancelled. B debits Noting Charges because the cost of dishonour belongs to the drawee. A is credited because B now owes A personally.

If the question says the discounted bill is honoured, do not write dishonour entries.

If the question says the discounted bill is dishonoured, write the dishonour entries on maturity.

Discounting vs Cash Discount

The word “discount” can create confusion because students have already studied trade discount and cash discount in journal entries.

Discounting of bill is different.

Term	Meaning
Trade discount	Reduction in list price at the time of sale
Cash discount	Discount for prompt payment between buyer and seller
Discounting of bill	Bank deducts a charge when giving money before bill maturity

In discounting of bill, the Discount Account is debited in the drawer’s books because it is the bank’s charge for early payment.

It is not a discount given to the drawee.

It is not recorded by the drawee at the time of discounting.

That one line is usually enough to place the entry correctly.

Quick Revision Table

Use this table after you understand the logic.

Situation	Books of drawer	Books of drawee
Bill accepted	Bills Receivable A/c Dr. to Drawee’s A/c	Drawer’s A/c Dr. to Bills Payable A/c
Bill discounted	Bank A/c Dr., Discount A/c Dr. to Bills Receivable A/c	No entry
Discounted bill honoured	No entry	Bills Payable A/c Dr. to Bank A/c
Discounted bill dishonoured	Drawee’s A/c Dr. to Bank A/c	Bills Payable A/c Dr., Noting Charges A/c Dr. to Drawer’s A/c

If there are no noting charges on dishonour, remove the Noting Charges line and use only the bill amount.

Common Mistakes Students Make

Here are the mistakes to watch for.

Mistake	Correct idea
Passing an entry in the drawee’s books when the bill is discounted	Drawee passes no entry at discounting
Debiting Bank with the full bill amount	Bank is debited only with the net amount received
Forgetting Discount Account	Discount is debited as the drawer’s expense
Crediting the drawee when the bill is discounted	Bills Receivable is credited, not the drawee
Passing an entry for the drawer on maturity when the discounted bill is honoured	Drawer passes no entry on honour
Treating bill discount like trade discount	Bill discount is a bank charge, not a sale discount

The answer will usually show you whether Bank, Discount, Bills Receivable, or Bills Payable should appear.

A Simple Method to Solve Any Discounting Question

Use this method whenever a question mentions discounting of bill.

1. Identify the drawer and drawee.
2. Record the original credit sale or purchase if required.
3. Record acceptance of the bill.
4. Calculate bank discount for the unexpired period.
5. In the drawer’s books, debit Bank with net proceeds and debit Discount with bank discount.
6. Credit Bills Receivable with the full bill amount.
7. In the drawee’s books, write no entry at discounting.
8. At maturity, record payment by the drawee if the bill is honoured.
9. If dishonoured, bring back the personal account and add noting charges if given.

This sequence keeps the whole question neat.

Once the story is clear, the entries become much easier.

Frequently Asked Questions

What is discounting of bill of exchange?

Discounting of bill means giving the accepted bill to the bank before maturity and receiving money immediately after the bank deducts discount. The bank later collects the full bill amount from the drawee on maturity.

What is the journal entry for discounting a bill in the books of drawer?

The entry is:

Particulars	Debit	Credit
Bank A/c Dr.	Net amount received
Discount A/c Dr.	Discount charged by bank
To Bills Receivable A/c		Full bill amount

Bank is debited with the amount actually received. Discount is debited with the bank’s charge. Bills Receivable is credited because the drawer transfers the bill to the bank.

What entry is passed in the books of drawee when the bill is discounted?

No entry is passed in the drawee’s books at the time of discounting. The drawee’s liability is still Bills Payable. The drawee records an entry only when the bill is paid on maturity or dishonoured.

Why is Discount Account debited?

Discount Account is debited because the bank deducts discount as a charge for giving money before maturity. It is an expense for the drawer.

Why is Bills Receivable credited on discounting?

Bills Receivable is credited because the drawer no longer holds the bill. The bill has been transferred to the bank, so the asset is removed from the drawer’s books.

What happens when a discounted bill is honoured?

When a discounted bill is honoured, the drawer passes no entry because the drawer has already received money from the bank. The drawee records:

Particulars	Debit	Credit
Bills Payable A/c Dr.	Bill amount
To Bank A/c		Bill amount

What happens when a discounted bill is dishonoured?

If the discounted bill is dishonoured, the bank recovers the amount from the drawer. The drawer debits the drawee and credits Bank. In the drawee’s books, Bills Payable and Noting Charges are debited, and the drawer’s personal account is credited.

Is discounting of bill the same as cash discount?

No. Cash discount is between buyer and seller for prompt payment. Discounting of bill is a bank transaction where the bank deducts a charge for giving money before the bill’s maturity date.

Is discount calculated on the full bill amount or the amount received?

Discount is calculated on the full bill amount for the remaining period until maturity. The amount received from the bank is the bill amount minus discount.

How can I remember the discounting entry easily?

Remember this line:

Cash comes in, discount is lost, bill goes out.

So Bank Account is debited, Discount Account is debited, and Bills Receivable Account is credited.