Bills Receivable Dishonoured Journal Entry
Bills Receivable Dishonored happens when the payee is unable to make payment on the bill’s maturity date.
Bills receivable is the promissory note that payees agree to make payment to the bill holder on the stated date. It is proof of payment that buyer (borrower) provides to seller. On the maturity date, seller can bring back the bill of receivable and claim payment from buyer. As promised, the buyer needs to make payment to the seller.
Bills Receivable include the following features:
- Amount: It states the exact amount which payee needs to pay back.
- Maturity Date: It is the expired date that payee must pay back the owed amount.
- Payee: is the responsible person who has the obligation to pay back.
- Drawee: is the beneficiary who will receive the payment on the maturity date. It can be the seller or the third parties.
Sometimes the seller sells the bills to the third party for a discount so that they can have access to immediate cash. The third-party will bring the bill receivable to claim the payment from the buyer on the expired date. They believe that the bill receivable will allow them to receive cash on a certain date.
Bill receivable becomes dishonored when the buyer (payee) is unable to pay the owed amount as promised. It can happen when the payee does not accept the bill or is unable to pay the bill.
The payee does not accept the bills receivable due to various reasons. It is considered not acceptable when the drawee cannot contact the payee. Moreover, they may reject the payment as well. The payee does not have enough balance to make payment.
Bills Receivable Dishonoured Journal Entry
When the seller sells goods or services, they simply record accounts receivable and sales revenue. Subsequently, the buyer writes the bill receivable with the promise amount and date, the seller will reverse the accounts receivable to bill receivable.
The journal entry is debiting bill receivable and credit accounts receivable.
| Account | Debit | Credit |
| Bills Receivable | XXXX | |
| Accounts Receivable | XXXX |
Bills receivable will be recorded as current assets on the balance sheet. It is supported by the promissory note from the buyer.
When the buyer rejects the bills receivable or is unable to make payment, it will generate the dishonored bill receivable. It means the bill is no longer valid due to the rejection.
The drawee needs to reverse the bills receivable from the balance and replace them with accounts receivable.
The journal entry is debiting accounts receivable and credit bill receivable.
| Account | Debit | Credit |
| Accounts Receivable | XXXX | |
| Bills Receivable | XXXX |
It will reverse the amount from bill receivable to accounts receivable under the current assets.
Bills Receivable Dishonoured Journal Entry Example
ABC sells goods to Mr. A for $ 10,000 on credit on 01 March. Due to the cash flow issue, Mr. A negotiate with ABC to issue bills receivable for $ 5,000 and pay cash for the remaining balance on 15 March. The bills receivable will expire on 15 April, failing to make payment, the bank will charge an additional $ 50. However, on 15 April, Mr. A fail to make payment as mentioned on the bills receivable. Please prepare a journal entry for company ABC related to bills receivable dishonored.
On 01 March, ABC sell goods for $ 10,000 on credit, so they record accounts receivable and sales revenue.
The journal entry is debiting accounts receivable $ 10,000 and credit sales revenue $ 10,000.
| Account | Debit | Credit |
| Accounts Receivable | 10,000 | |
| Sales Revenue | 10,000 |
On 15 March, Mr. A pays $ 5,000 in cash and issue bills payable for $ 5,000.
The journal entry is debiting cash $ 5,000, bills receivable $ 5,000, and credit accounts receivable $ 10,000.
| Account | Debit | Credit |
| Cash | 5,000 | |
| Bills Receivable | 5,000 | |
| Accounts Receivable | 10,000 |
On the payment date, 15 April, Mr. A fail to make payment to settle the bills receivable, so ABC needs to reverse the bills receivable.
Journal entry is debiting accounts receivable $ 5,000 and credit bills receivable $ 5,000.
| Account | Debit | Credit |
| Accounts Receivable | 5,000 | |
| Bills Receivable | 5,000 |