Retirement of Bill of Exchange: Rebate and Journal Entries

Retirement of a bill of exchange sounds confusing at first because the word “retirement” feels unrelated to Accountancy.

In this chapter, retirement simply means early payment.

The drawee pays the bill before the maturity date. The holder receives money early. Because the payment is made before time, the holder may allow a small discount to the drawee. That discount is called rebate.

Once you understand this one idea, the entries become very logical.

The whole treatment is built around three questions:

1. What is the full amount of the bill?
2. How much rebate is allowed for early payment?
3. How much cash or bank is actually paid?

If these three answers are clear, the journal entries almost write themselves.

What Retirement of a Bill of Exchange Means

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

Sometimes the drawee has enough funds before the maturity date and wants to settle the bill early. If the holder agrees, the drawee pays before the due date and the bill is cancelled.

This early settlement is called retirement of the bill.

In simple words:

Term	Meaning
Retirement of bill	Payment of a bill before maturity
Drawee or acceptor	The person who pays early
Holder	The person who receives early payment
Rebate	Discount allowed to the drawee for paying early

The bill is not renewed. It is not dishonoured. It is not replaced by another bill. It is simply settled before time.

This article focuses first on the common case where the drawer still holds the bill.

Why a Bill May Be Retired Early

Retirement of a bill is useful to both sides.

The drawee may want to pay early because:

• the drawee has available cash
• the drawee wants to close the liability
• the drawee wants to receive rebate
• the drawee wants to avoid pressure near the maturity date

The holder may agree because:

• money is received earlier
• cash flow improves
• the risk of later non-payment is removed
• the account is settled cleanly

So retirement is not a penalty. It is usually a mutual arrangement.

That difference changes the entire mood of the entry.

Retirement, Honour, and Renewal: Do Not Mix Them

Students often confuse retirement with honour and renewal because all three involve the bill being dealt with.

The difference is simple:

Point	Honour of bill	Retirement of bill	Renewal of bill
When it happens	On maturity	Before maturity	At or before maturity
Reason	Normal payment	Early payment	Drawee needs more time
Rebate or interest	Usually no rebate	Rebate may be allowed	Interest may be charged
New bill	No	No	Usually yes
Main idea	Bill is paid on time	Bill is paid early	Old bill is replaced

In retirement, the drawee is not asking for extra time. The drawee is doing the opposite. The drawee is paying before the final date.

What Rebate Means

Rebate is the discount allowed by the holder to the drawee because the drawee pays before maturity.

Suppose a bill is for Rs. 20,000 and the drawee pays it one month before maturity. The holder receives money earlier than expected. So the holder may say, “You do not need to pay the full Rs. 20,000. Pay Rs. 19,800 now and the bill will be settled.”

Here, Rs. 200 is rebate.

For the holder, rebate is a loss or expense because the holder receives less than the face value of the bill.

For the drawee, rebate is income or gain because the drawee pays less than the amount originally payable.

Person	Treatment of rebate
Holder or drawer	Expense, because less money is received
Drawee or acceptor	Income, because less money is paid

This sentence is worth remembering. It explains both sides of the entry.

How to Calculate Rebate

The usual formula is:

Rebate = Bill amount x Rate of rebate x Unexpired period

The unexpired period means the time left between the date of early payment and the maturity date.

For months, use the month fraction:

Unexpired period	Fraction of year
1 month	1/12
2 months	2/12
3 months	3/12

For example, if a bill of Rs. 30,000 is retired two months before maturity at 9 percent per annum:

Rebate = Rs. 30,000 x 9/100 x 2/12
Rebate = Rs. 450

Amount actually paid:

Rs. 30,000 - Rs. 450 = Rs. 29,550

This is one of the most common mistakes. If a three-month bill is retired one month before maturity, the rebate is for one month, not for three months.

If Dates Are Given, Find Maturity First

Sometimes the question gives exact dates instead of saying “one month before maturity”.

In that case, follow this order:

1. Find the maturity date of the bill.
2. Find the date on which the bill is retired.
3. Count the unexpired period.
4. Calculate rebate for that unexpired period.
5. Subtract rebate from the bill amount.

For time bills, remember that the maturity date usually includes three days of grace.

Let us see a small example.

Particular	Detail
Bill amount	Rs. 24,000
Rebate rate	12 percent p.a.
Retired	1 month before maturity

Rebate:

Rs. 24,000 x 12/100 x 1/12 = Rs. 240

Amount paid:

Rs. 24,000 - Rs. 240 = Rs. 23,760

So the drawee pays Rs. 23,760 and receives rebate of Rs. 240.

Basic Journal Entry in the Books of the Drawer

Let us assume the drawer still holds the bill.

The drawer has Bills Receivable. When the drawee pays early, the drawer receives bank or cash, allows rebate, and removes Bills Receivable.

The entry is:

Bank/Cash A/c             Dr.   Amount received
Rebate on Bills A/c       Dr.   Rebate allowed
    To Bills Receivable A/c      Full bill amount

Why is Bank or Cash debited?

Because money is received.

Why is Rebate on Bills debited?

Because rebate is an expense for the holder.

Why is Bills Receivable credited?

Because the bill asset is cancelled.

The entry balances because the drawer gives up a Rs. 20,000 bill and receives two things in accounting terms: Rs. 19,700 as money and Rs. 300 as rebate allowed.

Basic Journal Entry in the Books of the Drawee

The drawee has Bills Payable. When the bill is retired early, the drawee removes Bills Payable, pays bank or cash, and records rebate received.

The entry is:

Bills Payable A/c         Dr.   Full bill amount
    To Bank/Cash A/c             Amount paid
    To Rebate on Bills A/c       Rebate received

Why is Bills Payable debited?

Because the liability is cancelled.

Why is Bank or Cash credited?

Because money is paid.

Why is Rebate on Bills credited?

Because rebate is income for the drawee.

If you remember this opposite treatment, the entries stay clear.

Full Solved Example: Bill Retired Under Rebate

Let us take a complete example.

A sold goods to B for Rs. 24,000. A drew a bill on B for three months. B accepted the bill and returned it to A. Later, B retired the bill one month before maturity under a rebate of 12 percent per annum.

We will write the entries in the books of A and B.

Working Note

Particular	Amount
Bill amount	Rs. 24,000
Rebate rate	12 percent p.a.
Unexpired period	1 month
Rebate	Rs. 24,000 x 12/100 x 1/12 = Rs. 240
Amount paid	Rs. 24,000 - Rs. 240 = Rs. 23,760

The two important figures are:

Particular	Amount
Rebate	Rs. 240
Bank paid or received	Rs. 23,760

Entries in the Books of A, the Drawer

First, A sold goods to B:

Particulars	Debit	Credit
B’s A/c Dr.	Rs. 24,000
To Sales A/c		Rs. 24,000

Then B accepted the bill:

Particulars	Debit	Credit
Bills Receivable A/c Dr.	Rs. 24,000
To B’s A/c		Rs. 24,000

When B retires the bill under rebate:

Particulars	Debit	Credit
Bank A/c Dr.	Rs. 23,760
Rebate on Bills A/c Dr.	Rs. 240
To Bills Receivable A/c		Rs. 24,000

This closes Bills Receivable in A’s books.

Entries in the Books of B, the Drawee

First, B purchased goods from A:

Particulars	Debit	Credit
Purchases A/c Dr.	Rs. 24,000
To A’s A/c		Rs. 24,000

Then B accepted the bill:

Particulars	Debit	Credit
A’s A/c Dr.	Rs. 24,000
To Bills Payable A/c		Rs. 24,000

When B retires the bill under rebate:

Particulars	Debit	Credit
Bills Payable A/c Dr.	Rs. 24,000
To Bank A/c		Rs. 23,760
To Rebate on Bills A/c		Rs. 240

This closes Bills Payable in B’s books.

Another Example: Rebate Given as an Amount

Sometimes the question gives the rebate amount directly. In that case, do not calculate it again.

Suppose C holds D’s accepted bill of Rs. 15,000. D retires the bill before maturity and C allows rebate of Rs. 250.

Amount paid:

Rs. 15,000 - Rs. 250 = Rs. 14,750

In C’s books:

Particulars	Debit	Credit
Bank A/c Dr.	Rs. 14,750
Rebate on Bills A/c Dr.	Rs. 250
To Bills Receivable A/c		Rs. 15,000

In D’s books:

Particulars	Debit	Credit
Bills Payable A/c Dr.	Rs. 15,000
To Bank A/c		Rs. 14,750
To Rebate on Bills A/c		Rs. 250

What If No Rebate Is Allowed?

If a bill is paid before maturity but the question does not mention rebate, do not invent rebate.

The bill is simply settled for its full amount.

In the drawer’s books:

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

In the drawee’s books:

Bills Payable A/c         Dr.
    To Bank/Cash A/c

Retirement can happen with rebate or without rebate. Most questions include rebate because that is the main learning point, but the entry should always follow the information given.

What If the Bill Is Not With the Drawer?

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

But a bill may have moved before retirement. It may have been:

• discounted with a bank
• endorsed to a creditor
• sent to bank for collection

In such cases, ask one question first:

Who is holding the bill right now?

The holder is the person who receives early payment and allows rebate.

If the bill is with a bank, the bank receives payment and allows rebate.

If the bill is with an endorsee, the endorsee receives payment and allows rebate.

If the bill is with the drawer, the drawer receives payment and allows rebate.

The drawee’s entry still follows the same logic:

Bills Payable A/c         Dr.
    To Bank/Cash A/c
    To Rebate on Bills A/c

The drawer will not automatically pass a retirement entry if the drawer no longer holds the bill. Follow the exact wording of the question.

This is the same habit that helps in discounting, endorsement, collection, dishonour, and insolvency questions.

Rebate on Bills in Final Accounts

Rebate also has final account treatment.

For the holder or drawer, rebate on bills is an expense. It is similar to discount allowed.

For the drawee, rebate on bills is income. It is similar to discount received.

Person	Account nature	Final account side
Holder or drawer	Expense	Debit side of Profit and Loss Account
Drawee	Income	Credit side of Profit and Loss Account

This does not mean you should write final accounts inside every journal question. It simply helps you understand why rebate is debited in one book and credited in the other.

Rebate Is Not the Same as Bank Discount

The word “discount” can create confusion in bills of exchange.

There are two different ideas:

Point	Bank discounting of bill	Rebate on retirement
When it happens	Drawer gives bill to bank before maturity	Drawee pays bill before maturity
Who wants cash early	Drawer	Drawee wants to settle liability early
Who deducts the amount	Bank	Holder of the bill
Account in drawer’s books	Discount A/c or Bank charges type account	Rebate on Bills A/c, if drawer is holder
Result	Bill is transferred to bank	Bill is paid and cancelled

In discounting, the drawer gets money early from the bank.

In retirement, the drawee pays early to the holder.

If you keep this difference clear, the two chapters stop mixing with each other.

Common Mistakes in Retirement of Bill

Retirement entries are short, but the mistakes are very predictable.

Mistake 1: Calculating Rebate for the Full Bill Period

Rebate is allowed only for the unexpired period.

If the bill was for three months and it is retired one month before maturity, calculate rebate for one month.

Mistake 2: Recording Rebate on the Wrong Side

For the drawer or holder, rebate is debited.

For the drawee, rebate is credited.

The same amount appears on opposite sides because it has opposite meanings.

Mistake 3: Crediting the Drawee Instead of Bills Receivable

If the drawer still holds the bill, retirement closes Bills Receivable.

The drawee’s personal account was already closed when the bill was accepted. So the retirement entry should credit Bills Receivable, not the drawee’s account.

Mistake 4: Forgetting to Subtract Rebate From the Amount Paid

The bank or cash amount is not always the full bill amount.

Use this:

Amount paid = Bill amount - Rebate

Mistake 5: Treating Retirement Like Renewal

In retirement, no new bill is drawn.

If you are writing a new Bills Receivable or Bills Payable entry after retirement, pause and reread the question. That usually belongs to renewal, not retirement.

A Simple Method for Any Retirement Question

Use this order every time:

1. Identify the drawer and drawee.
2. Check who is holding the bill.
3. Write the full bill amount.
4. Find the unexpired period.
5. Calculate rebate, if it is not already given.
6. Calculate amount paid.
7. Close Bills Receivable in the holder’s books, if asked.
8. Close Bills Payable in the drawee’s books, if asked.

Here is the three-line working note format:

Particular	Amount
Bill amount	Rs. …
Less: Rebate	Rs. …
Amount paid	Rs. …

Then place these figures in the entries.

Quick Journal Entry Chart

When the drawer holds the bill:

Books	Journal entry
Drawer	Bank/Cash A/c Dr., Rebate on Bills A/c Dr. To Bills Receivable A/c
Drawee	Bills Payable A/c Dr. To Bank/Cash A/c, To Rebate on Bills A/c

When no rebate is allowed:

Books	Journal entry
Drawer	Bank/Cash A/c Dr. To Bills Receivable A/c
Drawee	Bills Payable A/c Dr. To Bank/Cash A/c

The first chart is the one you will usually need.

Final Thought

Retirement of a bill is a small topic, but it teaches a very important accounting habit: always follow the asset and liability.

For the drawer, Bills Receivable is an asset. When the bill is retired, that asset goes away. The drawer receives money, but allows rebate.

For the drawee, Bills Payable is a liability. When the bill is retired, that liability goes away. The drawee pays money, but receives rebate.

That is the whole story.

The bill was supposed to end on maturity. It ends earlier. Rebate is simply the small reward for ending it early.

Frequently Asked Questions

What is retirement of a bill of exchange?

Retirement of a bill of exchange means payment of the bill before its maturity date. The drawee or acceptor pays early, and the bill is cancelled before the normal payment date.

Who retires a bill of exchange?

The drawee or acceptor retires the bill by paying it before maturity. The holder of the bill receives the payment.

What is rebate on a bill?

Rebate is the discount allowed by the holder to the drawee for making early payment. It reduces the amount actually paid by the drawee.

How is rebate calculated?

Rebate is calculated as bill amount x rate of rebate x unexpired period. The unexpired period is the time left from the date of early payment to the maturity date.

Is rebate an expense or income?

For the holder or drawer, rebate is an expense because less money is received. For the drawee, rebate is income because less money is paid.

What is the entry for retirement in the drawer’s books?

If the drawer holds the bill, the entry is: Bank or Cash A/c Dr., Rebate on Bills A/c Dr., to Bills Receivable A/c.

What is the entry for retirement in the drawee’s books?

The entry is: Bills Payable A/c Dr., to Bank or Cash A/c, to Rebate on Bills A/c.

Is retirement of bill the same as renewal of bill?

No. Retirement means early payment of the bill. Renewal means the old bill is cancelled and a new bill is drawn because the drawee needs more time.

Is retirement of bill the same as dishonour?

No. Dishonour means the drawee fails to pay when required. Retirement means the drawee pays before maturity, so the bill is settled early.

What if the question does not mention rebate?

Do not calculate rebate unless the question gives a rebate rate or rebate amount. If no rebate is mentioned, record the early payment for the full bill amount.

What is the biggest mistake in retirement of bill questions?

The biggest mistake is calculating rebate for the full term of the bill instead of the unexpired period. Rebate is allowed only for the time still left until maturity.