Promissory Notes, Bills of Exchange, and Journal Entries in Accounting
1. Introduction
Promissory notes and bills of exchange are vital financial instruments used in business transactions. Understanding how to record them in accounting through journal entries is crucial for accurate bookkeeping.
2. Promissory Notes
A promissory note is a written promise by one party to pay a specific sum of money to another party on a predetermined date.
Example:
On 1st December 2024, Company ABC issued a promissory note to Supplier XYZ for $5,000, payable in 90 days.
Journal Entries:
| Date | Particulars | Debit | Credit |
|---|---|---|---|
| 01-12-2024 | Purchases Account | $5,000 | |
| 01-12-2024 | Promissory Note Payable | $5,000 |
3. Bills of Exchange
A bill of exchange is a written order by one party to another to pay a specified sum to a third party on demand or at a future date.
Example:
On 2nd December 2024, Supplier LMN drew a bill of exchange for $3,000 on Company DEF, payable in 60 days. Company DEF accepted the bill.
Journal Entries:
| Date | Particulars | Debit | Credit |
|---|---|---|---|
| 02-12-2024 | Accounts Payable (Company DEF) | $3,000 | |
| 02-12-2024 | Bill Payable Account | $3,000 |
4. Key Points
- Promissory notes are recorded as liabilities for the issuer and assets for the holder.
- Bills of exchange involve three parties: the drawer, the drawee, and the payee.
- Accurate journal entries ensure the proper reflection of these instruments in financial statements.
5. Summary
Promissory notes and bills of exchange play a significant role in credit transactions. Proper accounting treatment, supported by clear journal entries, is essential for financial accuracy and compliance.