In simple words, bills receivable are amounts due to the business for goods sold or services provided. If it is a bill receivable for one company, it is billed payable for another. Management of bills receivable is essential for effective working capital management and business operations.
Meaning and definition of bills receivable
A bill receivable is a bill of exchange drawn by a vendor on its customer/buyer. It serves as proof of debt. When the drawee (customer) accepts the bill and sends it back to the drawer (vendor), it becomes a bill receivable for the drawer as the money is receivable for him. On the other hand, it becomes a bill payable for the drawer as it is a liability for him. The drawer can make the following use of a bill receivable:
- He can retain the bill till maturity and collect the money from the drawee.
- He can endorse the bill in favour of his creditors.
- He can discount the bill with a bank.
In simple terms, it is a legal arrangement between the seller and buyer to recover a debt.
What happens when bills receivable are dishonoured?
A bill receivable is dishonoured if the same is not settled on the agreed due date. On dishonour of bill of exchange, the amount owed by the customer is transferred back to the account receivable account. The customer is responsible for any noting charges to be paid by the business.
Below entry is passed on dishonour of bill of exchange by the vendor:
- Account receivable account Dr.
- Bill receivable account Cr.
- Charges Cr.
The amount due is transferred from bills receivable to accounts receivable as the bill is dishonoured, but the amount is still recoverable from the customer.
Bills receivable account format
Bill receivable books are maintained in chronological order. When many transactions take place in an organisation, it is first convenient to maintain day books. These days books are used to post individual trade receivable accounts.
Further, bills receivable fall due on different dates. Some of them may not be honoured due to different reasons. Bills receivable day books are usually used to track outstanding bills and analyse the reasons for non-payment.
Bills receivable in Balance Sheet
- Short-term bills receivable- Bills due within one year from the balance sheet date are classified as current assets in the balance sheet.
- Long-term bills receivable- Bills due after one year from the balance sheet date are classified as non-current assets in the balance sheet.
Accounting or journal entries on bills receivable
Let us take an example to understand the journal entries on bills receivable. X Limited sells goods worth Rs.5,000 to Y Limited. Then, X Limited draws a bill receivable of Rs.5,000- on Y Limited to be paid after two months.
1.Journal entry for credit sale
Account receivable Dr. 5,000
Sale Cr. 5,000
2.Journal entry for drawing bills receivable
Bills receivable Dr. 5,000
Account receivable Cr. 5,000
3.Journal entry on honouring the bill after two months
Bank Dr. 5,000
Bills receivable Cr. 5,000
4.Journal entry if the bill is dishonoured on maturity
Account receivable Dr. 5,000
Bills receivable Cr. 5,000
5.Journal entry if X Limited needs cash and discounts the bill with a bank
Bank Dr. 4,500
Discount charges Dr. 500
Bill receivable Cr. 5,000
Bills receivable vs bills payable
| Particulars | Bills receivable | Bills payable |
|---|---|---|
| Meaning | It is an amount expected to be received for goods sold or services provided. It represents the amount receivable. | It represents an amount to be paid for goods purchased or services provided. It represents a debt to be discharged. |
| In balance sheet | Bills receivable are assets to the company. | Bills payable are liabilities to the company. |
| Results in | It results in cash inflow. | It results in cash outflow. |
| Outcome | It is an outcome of credit sales. | It is an outcome of credit purchases. |
Bills receivable vs accounts receivable
| Particulars | Bills receivable | Accounts receivable |
|---|---|---|
| Meaning | It is a negotiable instrument stating the amount due and its maturity date. The seller draws it on its customer (drawee). | It is a current asset indicating a balance due from the customer. |
| Creation | It is created based on outstanding amounts acknowledged by a customer to be paid by a specified date. | It is created based on a credit sale transaction which is evidenced by an invoice. |
| Transferability | It can be discounted with a bank by paying discounting charges. It can also be endorsed in favour of other entities. | There are no such provisions of transferability in the case of accounts receivable. |
| Balance Sheet | They are reported as current or non-current assets based on maturity in the seller's books. | They are reported as current assets in the seller’s balance sheet. |
| Impact of default | If a bill receivable is dishonoured, the amount receivable is transferred back to the account receivable balance. The drawee is responsible for paying noting charges on dishonour of bill. | In case of default, it becomes a bad debt and is written off from the books of account. Legal action will depend on the agreement between two parties. |
