Insolvency of Drawee in Bills of Exchange: Partial Recovery Entries

Insolvency of the drawee looks scary because it brings two ideas together.

First, the bill of exchange is not paid. Second, the amount is not recovered fully.

That is why students often ask: “Do we pass a dishonour entry first? Do we record bad debts immediately? What does 60 paise in a rupee mean? Why does the drawee use Deficiency Account instead of Bad Debts Account?”

The answer becomes simple when you remember the order.

The bill fails first. Then the recoverable and irrecoverable parts are separated.

Once this order is clear, the entries stop feeling like a separate trick.

First, Recall the Basic Bill Relationship

In a bill of exchange, the drawer is usually the person who has to receive money, and the drawee is the person who has accepted the bill and has to pay on maturity.

Suppose A sells goods to B for Rs. 20,000 on credit.

A draws a bill on B. B accepts it.

In simple language:

• A is the drawer.
• B is the drawee.
• After acceptance, B is also the acceptor.
• A has Bills Receivable.
• B has Bills Payable.

When B accepts the bill, the original debtor-creditor relationship is temporarily replaced by the bill.

In A’s books, B is no longer shown as a normal debtor for that amount. Bills Receivable comes in.

In B’s books, A is no longer shown as a normal creditor for that amount. Bills Payable comes in.

This is why insolvency starts by reversing that bill relationship.

What Does Insolvency of Drawee Mean?

Insolvency means the drawee is not able to pay the full amount due. The drawee’s available estate can pay only a part of what is owed.

For example, if B owes Rs. 20,000 and the estate can pay only 40 percent, A will receive only Rs. 8,000. The remaining Rs. 12,000 cannot be recovered.

In the drawer’s books, that unrecovered amount becomes bad debt.

In the drawee’s books, that unpaid balance goes to Deficiency Account.

This is one of the most important wording traps in this topic.

The Two-Step Logic

Do not try to jump directly to bad debts.

Use this order:

1. Cancel or dishonour the old bill.
2. Record final dividend received and write off the unpaid balance.

The first step brings the personal account back.

The second step closes that personal account.

This line works for almost every school-level insolvency question in bills of exchange.

Step 1: Cancellation or Dishonour of the Old Bill

The exact entry in the drawer’s books depends on where the bill was before insolvency.

If the drawer still holds the bill:

In the books of drawer	Debit	Credit
Drawee’s A/c Dr.	Bill amount
To Bills Receivable A/c		Bill amount

If the bill was discounted with the bank:

In the books of drawer	Debit	Credit
Drawee’s A/c Dr.	Bill amount
To Bank A/c		Bill amount

If the bill was endorsed to another person:

In the books of drawer	Debit	Credit
Drawee’s A/c Dr.	Bill amount
To Endorsee’s A/c		Bill amount

If the bill was sent to bank for collection:

In the books of drawer	Debit	Credit
Drawee’s A/c Dr.	Bill amount
To Bills Sent for Collection A/c		Bill amount

The drawee’s books are simpler.

In the books of drawee	Debit	Credit
Bills Payable A/c Dr.	Bill amount
To Drawer’s A/c		Bill amount

The drawee removes Bills Payable because the accepted bill is no longer being paid in the normal way. The drawer’s personal account comes back as the amount payable.

What If Noting Charges Are Given?

If the bill is dishonoured and noting charges are paid, the drawee bears them.

For example, if the bill amount is Rs. 20,000 and noting charges are Rs. 200, the total amount due from the drawee becomes Rs. 20,200.

In the drawer’s books, the drawee is debited with the bill amount plus noting charges.

In the books of drawer	Debit	Credit
Drawee’s A/c Dr.	Rs. 20,200
To Bills Receivable A/c		Rs. 20,000
To Cash/Bank A/c		Rs. 200

In the drawee’s books:

In the books of drawee	Debit	Credit
Bills Payable A/c Dr.	Rs. 20,000
Noting Charges A/c Dr.	Rs. 200
To Drawer’s A/c		Rs. 20,200

That total usually means bill amount plus noting charges.

Step 2: Final Dividend and Bad Debts

After insolvency, the drawer may receive only a part of the amount due.

This amount may be given in three common ways:

Wording in question	Meaning
”60 paise in a rupee”	60 percent of the amount due is recovered
”40 percent from the estate”	40 percent of the amount due is recovered
”Rs. 8,000 received as final dividend”	Rs. 8,000 is the recovered amount

In the drawer’s books, the entry is:

In the books of drawer	Debit	Credit
Cash/Bank A/c Dr.	Amount recovered
Bad Debts A/c Dr.	Amount not recovered
To Drawee’s A/c		Total amount due

In the drawee’s books, the entry is:

In the books of drawee	Debit	Credit
Drawer’s A/c Dr.	Total amount due
To Cash/Bank A/c		Amount paid
To Deficiency A/c		Amount not paid

The drawer writes off the loss as Bad Debts because the drawer is the creditor who could not recover the full amount.

The drawee does not record Bad Debts. The drawee records Deficiency because the drawee is the insolvent person whose estate cannot pay the full liability.

Full Solved Example With Partial Recovery

Let us take a complete example.

A drew a bill on B for Rs. 20,000. B accepted it. A retained the bill till maturity. On the due date, B became insolvent and the bill was dishonoured. Noting charges paid by A were Rs. 200. B’s estate paid 60 paise in a rupee as final dividend.

We need entries in the books of A and B.

Step 1: Find the Total Amount Due

Bill amount = Rs. 20,000

Noting charges = Rs. 200

Total due from B = Rs. 20,200

Step 2: Calculate the Amount Recovered

60 paise in a rupee means 60 percent.

Amount recovered = 60 percent of Rs. 20,200

Amount recovered = Rs. 12,120

Bad debt or deficiency = Rs. 20,200 - Rs. 12,120

Bad debt or deficiency = Rs. 8,080

Entries in the Books of A, the Drawer

First, record dishonour and noting charges.

Particulars	Debit	Credit
B’s A/c Dr.	Rs. 20,200
To Bills Receivable A/c		Rs. 20,000
To Cash A/c		Rs. 200

Now record final dividend and bad debts.

Particulars	Debit	Credit
Cash/Bank A/c Dr.	Rs. 12,120
Bad Debts A/c Dr.	Rs. 8,080
To B’s A/c		Rs. 20,200

After this, B’s account closes in A’s books.

Entries in the Books of B, the Drawee

First, record dishonour and noting charges.

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

Now record the amount paid from the estate and the deficiency.

Particulars	Debit	Credit
A’s A/c Dr.	Rs. 20,200
To Cash/Bank A/c		Rs. 12,120
To Deficiency A/c		Rs. 8,080

After this, A’s account closes in B’s books.

Why Bad Debts and Deficiency Are Different

This is a small point, but it saves a lot of marks.

Bad Debts Account is used by the person who cannot recover money.

Deficiency Account is used by the insolvent person to show the liability that could not be paid.

So in our example:

Person	What happened	Account used
A, the drawer	Could not recover Rs. 8,080	Bad Debts A/c
B, the drawee	Could not pay Rs. 8,080	Deficiency A/c

Both amounts are the same, but the viewpoint is different.

If the Bill Was Discounted With the Bank

Now let us change only one detail.

Suppose A had discounted B’s accepted bill with the bank. On maturity, B became insolvent and the bill was dishonoured.

In A’s books, the cancellation entry will not credit Bills Receivable, because A no longer has the bill. The bank has it.

So the entry becomes:

In the books of A	Debit	Credit
B’s A/c Dr.	Bill amount plus noting charges, if any
To Bank A/c		Bill amount plus noting charges, if any

After this, the final dividend entry remains the same:

In the books of A	Debit	Credit
Cash/Bank A/c Dr.	Amount recovered
Bad Debts A/c Dr.	Amount not recovered
To B’s A/c		Total amount due

In B’s books, the entries do not become complicated just because A discounted the bill. B still removes Bills Payable and credits A. Then B records the cash paid and deficiency.

If the Bill Was Endorsed

If A endorsed the bill to C, then C is the holder at maturity.

When B becomes insolvent and the bill fails, A becomes liable to C. Then A will recover whatever is possible from B.

In A’s books, the cancellation entry is:

In the books of A	Debit	Credit
B’s A/c Dr.	Bill amount plus noting charges, if any
To C’s A/c		Bill amount plus noting charges, if any

Then A records the final dividend:

In the books of A	Debit	Credit
Cash/Bank A/c Dr.	Amount recovered
Bad Debts A/c Dr.	Amount not recovered
To B’s A/c		Total amount due

The same logic continues. First bring B back as debtor. Then close B’s account through cash recovered and bad debts.

If the Bill Was Sent for Collection

If A sent the bill to the bank for collection, the bank was only helping to collect the amount. It had not given money to A in advance.

If the bill fails because B is insolvent, A credits Bills Sent for Collection Account, not Bills Receivable.

In the books of A	Debit	Credit
B’s A/c Dr.	Bill amount plus noting charges, if any
To Bills Sent for Collection A/c		Bill amount
To Bank A/c		Noting charges, if paid by bank

Then the final dividend entry is again:

In the books of A	Debit	Credit
Cash/Bank A/c Dr.	Amount recovered
Bad Debts A/c Dr.	Amount not recovered
To B’s A/c		Total amount due

Quick Formula for Partial Recovery

Use this small working note before writing entries:

Item	Formula
Total amount due	Bill amount + noting charges, if any
Amount recovered	Total amount due x recovery rate
Bad debts in drawer’s books	Total amount due - amount recovered
Deficiency in drawee’s books	Total amount due - amount paid

If the question says “75 paise in a rupee”, the recovery rate is 75 percent.

If it says “half the amount was recovered”, the recovery rate is 50 percent.

If it gives a fixed final dividend amount, use that fixed amount directly.

Common Mistakes to Avoid

Mistake	Correct approach
Recording only the final dividend entry	First cancel or dishonour the bill
Calculating recovery only on bill amount when noting charges are included	Use bill amount plus noting charges, unless told otherwise
Writing Bad Debts in the drawee’s books	Use Deficiency Account in the drawee’s books
Crediting Bills Receivable even when the bill was discounted	Credit Bank Account
Forgetting the endorsee when the bill was endorsed	Credit Endorsee’s Account
Treating “60 paise in a rupee” as Rs. 60	Treat it as 60 percent

A Simple Memory Table

Situation	Drawer records	Drawee records
Old bill cancelled	Drawee becomes debtor again	Drawer becomes creditor again
Final dividend paid	Cash received and bad debts written off	Cash paid and deficiency recorded
Partial recovery	Loss goes to Bad Debts A/c	Unpaid balance goes to Deficiency A/c

The names of accounts change with the position of the bill, but the story remains the same.

The bill has failed. The drawee’s personal account returns. The recovered amount is recorded. The unpaid balance is closed.

Frequently Asked Questions

What is insolvency of drawee in bills of exchange?

It means the drawee or acceptor of the bill cannot pay the full amount due. The bill is treated as failed, and the amount recoverable from the drawee’s estate is recorded separately from the amount that cannot be recovered.

Is insolvency of drawee the same as dishonour of a bill?

Insolvency usually leads to dishonour or cancellation of the bill, but it adds one more step. After the bill is dishonoured or cancelled, the final dividend is received and the unpaid balance is written off.

What is partial recovery in insolvency of drawee?

Partial recovery means only part of the amount due is received from the drawee’s estate. For example, if Rs. 20,000 is due and only Rs. 12,000 is received, the remaining Rs. 8,000 is not recovered.

How do I treat 60 paise in a rupee?

Treat it as 60 percent recovery. If the total amount due is Rs. 20,200, then 60 percent recovery is Rs. 12,120.

Which account is debited for the unrecovered amount in the drawer’s books?

Bad Debts Account is debited for the amount that the drawer cannot recover from the drawee.

Which account is credited for the unpaid balance in the drawee’s books?

Deficiency Account is credited for the amount the insolvent drawee cannot pay.

Are noting charges included while calculating recovery?

Usually yes. If noting charges are charged to the drawee, they become part of the total amount due. Recovery is calculated on the total due unless the question gives a different instruction.

What is the first entry when the drawee becomes insolvent?

The first entry is to cancel or dishonour the old bill. In the drawer’s books, the drawee is debited. In the drawee’s books, Bills Payable is debited and the drawer is credited.