Renewal of Bill of Exchange: Interest, Cash Payment, and New Bill Entries

Renewal of a bill of exchange looks difficult because one old promise is being replaced by a new promise. The question may mention interest, cash payment, part payment, a new bill, and sometimes even an old bill that was discounted or endorsed.

But the idea is simple.

The drawee cannot pay the old bill on time, so the drawer agrees to cancel it and give extra time. In return, the drawee may pay interest, make a part payment, or accept a fresh bill for the amount still due.

Once you learn this order, the journal entries stop feeling random.

What Renewal of a Bill Means

A bill of exchange is usually accepted for payment on a future date. The drawer expects to receive money on maturity, and the drawee is expected to pay.

Sometimes, before the old bill is paid, the drawee realises that payment will not be possible on the due date. The drawee requests the drawer to cancel the old bill and draw a new bill for a later date.

That is called renewal of the bill.

It normally has four parts:

1. The old bill is cancelled.
2. Interest is charged for the extra time allowed.
3. Cash or part payment is recorded, if the drawee pays any amount immediately.
4. A new bill is accepted for the balance.

Think of renewal as resetting the debt into a fresh time period.

Renewal Is Not the Same as Ordinary Payment

If the bill is paid on maturity, the entry is simple. Bills Receivable or Bills Payable is settled through cash or bank.

In renewal, the old bill is not paid in the normal way. It is cancelled by agreement. The amount comes back to the personal account of the drawee in the drawer’s books and to the personal account of the drawer in the drawee’s books.

After that, the new terms are recorded.

This is an important difference. Renewal is about extension of time. Dishonour is about failure to pay when payment is demanded.

The Main Logic in One Working Note

Before writing journal entries, prepare this small working note:

Particular	Effect on amount due
Old bill amount cancelled	Add
Interest for extra period, if not paid in cash	Add
Cash or part payment made immediately	Less
Amount of new bill	Balance

This is the heart of the chapter.

If the drawee pays nothing, the new bill may include the old bill amount plus interest.

If the drawee pays interest in cash, the new bill may be only for the old bill amount.

If the drawee makes a part payment, the new bill is usually for the remaining balance plus interest, unless the question says the interest was also paid in cash.

How to Calculate Interest on Renewal

Interest is charged because the drawer is giving extra credit time to the drawee.

The usual formula is:

Particular	Formula
Interest	Amount x Rate x Time

For school-level questions, time is usually written in months.

So:

Time given	Fraction of year
1 month	1/12
2 months	2/12
3 months	3/12
60 days	60/365, unless the question expects months

Example of Interest Calculation

Suppose a bill of Rs. 20,000 is renewed for 3 months at 12 percent per annum.

Particular	Amount
Bill amount	Rs. 20,000
Rate	12 percent p.a.
Time	3/12 year
Interest	Rs. 20,000 x 12/100 x 3/12 = Rs. 600

If the interest is not paid in cash, the new bill may be Rs. 20,600.

If the interest is paid in cash, the new bill may remain Rs. 20,000.

Journal Entries in the Books of the Drawer

The drawer is the person who draws the bill and usually treats it as Bills Receivable.

Assume first that the drawer is still holding the bill.

Transaction	Entry in the books of drawer
Old bill cancelled	Drawee’s A/c Dr. To Bills Receivable A/c
Interest charged, not paid in cash	Drawee’s A/c Dr. To Interest A/c
Interest received in cash	Cash/Bank A/c Dr. To Interest A/c
Part payment received	Cash/Bank A/c Dr. To Drawee’s A/c
New bill accepted	Bills Receivable A/c Dr. To Drawee’s A/c

The drawer first removes Bills Receivable because the old bill no longer exists. Then the drawer records interest as income. Any cash received reduces the amount due from the drawee. The new bill is recorded as a fresh asset.

If Interest and Part Payment Are Received Together

Sometimes the drawee pays part of the bill and interest in cash at the same time.

For example, part payment is Rs. 5,000 and interest received is Rs. 300.

Particulars	Debit	Credit
Cash/Bank A/c Dr.	Rs. 5,300
To Drawee’s A/c		Rs. 5,000
To Interest A/c		Rs. 300

This entry separates the two meanings hidden inside one cash receipt. Rs. 5,000 reduces the drawee’s debt. Rs. 300 is interest income.

Journal Entries in the Books of the Drawee

The drawee is the person who accepted the bill and usually treats it as Bills Payable.

Transaction	Entry in the books of drawee
Old bill cancelled	Bills Payable A/c Dr. To Drawer A/c
Interest payable, not paid in cash	Interest A/c Dr. To Drawer A/c
Interest paid in cash	Interest A/c Dr. To Cash/Bank A/c
Part payment made	Drawer A/c Dr. To Cash/Bank A/c
New bill accepted	Drawer A/c Dr. To Bills Payable A/c

For the drawee, interest is an expense. Cash payment reduces the amount owed to the drawer. The new bill creates a fresh Bills Payable liability.

This one contrast prevents many wrong entries.

Case 1: No Cash Paid, Interest Included in New Bill

Suppose A draws a bill on B for Rs. 20,000. On the due date, B requests A to cancel the bill and draw a new bill for 3 months. Interest is charged at 12 percent per annum and is included in the new bill.

Working Note

Particular	Amount
Old bill amount	Rs. 20,000
Add: Interest for 3 months at 12 percent p.a.	Rs. 600
Amount of new bill	Rs. 20,600

Entries in the Books of A, the Drawer

Particulars	Debit	Credit
B’s A/c Dr.	Rs. 20,000
To Bills Receivable A/c		Rs. 20,000
B’s A/c Dr.	Rs. 600
To Interest A/c		Rs. 600
Bills Receivable A/c Dr.	Rs. 20,600
To B’s A/c		Rs. 20,600

Entries in the Books of B, the Drawee

Particulars	Debit	Credit
Bills Payable A/c Dr.	Rs. 20,000
To A’s A/c		Rs. 20,000
Interest A/c Dr.	Rs. 600
To A’s A/c		Rs. 600
A’s A/c Dr.	Rs. 20,600
To Bills Payable A/c		Rs. 20,600

The new bill is higher because B did not pay interest in cash.

Case 2: Interest Paid in Cash, New Bill for Original Amount

Suppose a bill of Rs. 15,000 is renewed for 2 months. Interest is Rs. 300 and is paid immediately in cash. The new bill is drawn for Rs. 15,000.

Entries in the Books of the Drawer

Particulars	Debit	Credit
Drawee’s A/c Dr.	Rs. 15,000
To Bills Receivable A/c		Rs. 15,000
Cash/Bank A/c Dr.	Rs. 300
To Interest A/c		Rs. 300
Bills Receivable A/c Dr.	Rs. 15,000
To Drawee’s A/c		Rs. 15,000

Entries in the Books of the Drawee

Particulars	Debit	Credit
Bills Payable A/c Dr.	Rs. 15,000
To Drawer A/c		Rs. 15,000
Interest A/c Dr.	Rs. 300
To Cash/Bank A/c		Rs. 300
Drawer A/c Dr.	Rs. 15,000
To Bills Payable A/c		Rs. 15,000

Notice that the new bill does not include Rs. 300 because the interest was already paid.

Case 3: Part Payment Made and Interest Included in New Bill

Suppose a bill of Rs. 18,000 is renewed. The drawee pays Rs. 6,000 immediately. Interest on the unpaid amount for 2 months is charged at 9 percent per annum and is included in the new bill.

Working Note

Particular	Amount
Old bill amount	Rs. 18,000
Less: Part payment	Rs. 6,000
Balance	Rs. 12,000
Add: Interest on Rs. 12,000 for 2 months at 9 percent p.a.	Rs. 180
Amount of new bill	Rs. 12,180

Entries in the Books of the Drawer

Particulars	Debit	Credit
Drawee’s A/c Dr.	Rs. 18,000
To Bills Receivable A/c		Rs. 18,000
Cash/Bank A/c Dr.	Rs. 6,000
To Drawee’s A/c		Rs. 6,000
Drawee’s A/c Dr.	Rs. 180
To Interest A/c		Rs. 180
Bills Receivable A/c Dr.	Rs. 12,180
To Drawee’s A/c		Rs. 12,180

Entries in the Books of the Drawee

Particulars	Debit	Credit
Bills Payable A/c Dr.	Rs. 18,000
To Drawer A/c		Rs. 18,000
Drawer A/c Dr.	Rs. 6,000
To Cash/Bank A/c		Rs. 6,000
Interest A/c Dr.	Rs. 180
To Drawer A/c		Rs. 180
Drawer A/c Dr.	Rs. 12,180
To Bills Payable A/c		Rs. 12,180

The new bill equals the unpaid amount plus interest.

Case 4: Part Payment and Interest Both Paid in Cash

Suppose the old bill is Rs. 24,000. The drawee pays Rs. 8,000 as part payment and Rs. 400 as interest in cash. A new bill is accepted for the balance.

Working Note

Particular	Amount
Old bill amount	Rs. 24,000
Less: Part payment	Rs. 8,000
Interest paid in cash	Not added to new bill
Amount of new bill	Rs. 16,000

Entry for Cash Received in the Books of the Drawer

Particulars	Debit	Credit
Cash/Bank A/c Dr.	Rs. 8,400
To Drawee’s A/c		Rs. 8,000
To Interest A/c		Rs. 400

Entry for Cash Paid in the Books of the Drawee

Particulars	Debit	Credit
Drawer A/c Dr.	Rs. 8,000
Interest A/c Dr.	Rs. 400
To Cash/Bank A/c		Rs. 8,400

After this, the new bill entry is for Rs. 16,000.

What If the Old Bill Was Discounted, Endorsed, or Sent for Collection?

So far, we assumed that the drawer still had the bill.

Sometimes the drawer may have used the bill before renewal:

• The bill may have been discounted with a bank.
• The bill may have been endorsed to a creditor.
• The bill may have been sent to bank for collection.

In such questions, the cancellation entry in the drawer’s books changes because Bills Receivable is no longer with the drawer.

Situation	Cancellation entry in drawer’s books
Bill retained by drawer	Drawee’s A/c Dr. To Bills Receivable A/c
Bill discounted with bank	Drawee’s A/c Dr. To Bank A/c
Bill endorsed to creditor	Drawee’s A/c Dr. To Endorsee’s A/c
Bill sent for collection	Drawee’s A/c Dr. To Bills Sent for Collection A/c

After this cancellation step, the renewal logic remains the same: record interest, record cash payment, and draw the new bill.

Quick Difference Between Renewal and Retirement

Students often confuse renewal with retirement because both happen before the normal final settlement.

Point	Renewal of bill	Retirement of bill
Main reason	Drawee needs more time	Drawee pays early
Old bill	Cancelled and replaced	Paid before maturity
Interest or rebate	Interest may be charged	Rebate may be allowed
New bill	Usually drawn	Not drawn
Effect	Payment is postponed	Payment is made early

In renewal, the drawer waits longer and may charge interest. In retirement, the drawer receives money earlier and may allow rebate.

Common Mistakes to Avoid

The entries are not hard, but the order matters.

Mistake 1: Drawing the New Bill Before Cancelling the Old Bill

Always cancel the old bill first. Only then can you know the balance for the new bill.

Mistake 2: Adding Interest Even When It Was Paid in Cash

If interest is paid in cash, it is not added to the new bill. It is recorded separately as interest income for the drawer and interest expense for the drawee.

Mistake 3: Treating Part Payment as Interest

Part payment reduces the amount due from the drawee. Interest is income or expense for extra time. Keep them separate.

Mistake 4: Forgetting the Opposite Treatment in the Drawee’s Books

In the drawer’s books, Bills Receivable is an asset. In the drawee’s books, Bills Payable is a liability. The entries must mirror this difference.

Mistake 5: Ignoring Where the Old Bill Was

If the bill was discounted or endorsed, do not blindly write “To Bills Receivable A/c” in the drawer’s books. The cancellation entry must reflect where the bill had gone.

A Simple Exam Method

Use this order every time:

1. Identify the drawer and drawee.
2. Check whether the old bill was retained, discounted, endorsed, or sent for collection.
3. Cancel the old bill.
4. Calculate interest for the extended period.
5. Check whether interest is paid in cash or included in the new bill.
6. Record any part payment.
7. Calculate the amount of the new bill.
8. Pass the new bill entry.

Frequently Asked Questions

What is renewal of a bill of exchange?

Renewal of a bill means cancelling an old bill and drawing a fresh bill for a later date because the drawee needs more time to pay.

Is renewal of a bill the same as dishonour?

No. Renewal is usually done by agreement between the drawer and drawee. Dishonour happens when payment is not made when the bill is presented for payment.

Why is interest charged on renewal?

Interest is charged because the drawer is allowing the drawee extra time to pay. For the drawer, it is income. For the drawee, it is an expense.

Is interest always added to the new bill?

No. If interest is paid in cash, it is not added to the new bill. If interest is not paid in cash, it is usually included in the amount of the new bill.

What happens when part payment is made during renewal?

Part payment reduces the amount due from the drawee. The new bill is drawn for the remaining amount, with interest added if it has not been paid separately.

What is the easiest way to find the new bill amount?

Start with the old bill amount, add unpaid interest, and subtract cash or part payment. The balance is the amount of the new bill.

What entry is passed for the new bill in the drawer’s books?

The drawer records the fresh bill as an asset: Bills Receivable A/c Dr. To Drawee’s A/c.

What entry is passed for the new bill in the drawee’s books?

The drawee records the fresh acceptance as a liability: Drawer A/c Dr. To Bills Payable A/c.

What if the old bill was discounted with a bank?

In the drawer’s books, the cancellation entry is usually Drawee’s A/c Dr. To Bank A/c, because the bank is now involved in settling the old discounted bill. After that, interest, cash payment, and the new bill are recorded in the normal way.

What is the biggest mistake in renewal questions?

The biggest mistake is trying to remember entries without calculating the balance. First cancel the old bill, add interest if unpaid, subtract cash payment, and then draw the new bill for the balance.