Endorsement, Dishonor, and Related Accounting Treatments in Accounting
1. Introduction
In accounting, the endorsement and dishonor of negotiable instruments such as bills of exchange and promissory notes have specific financial implications. This tutorial explains these concepts with real-world examples and the necessary journal entries.
2. Endorsement of a Bill
Endorsement occurs when the holder of a negotiable instrument transfers it to another party by signing on the back of the document or its attached slip.
Example:
On 1st December 2024, Company ABC received a bill of exchange of $5,000 from Customer LMN. On 5th December 2024, ABC endorsed this bill to Supplier XYZ in settlement of its payable.
Journal Entries:
| Date | Particulars | Debit | Credit |
|---|---|---|---|
| 01-12-2024 | Bills Receivable | $5,000 | Accounts Receivable (Customer LMN) $5,000 |
| 05-12-2024 | Accounts Payable (Supplier XYZ) | $5,000 | Bills Receivable $5,000 |
3. Dishonor of a Bill
Dishonor occurs when the drawee of a bill of exchange fails to make the payment on the due date.
Example:
On 10th December 2024, the bill endorsed to Supplier XYZ was dishonored due to insufficient funds.
Journal Entries:
| Date | Particulars | Debit | Credit |
|---|---|---|---|
| 10-12-2024 | Accounts Payable (Supplier XYZ) | $5,000 | Bills Receivable $5,000 |
| 10-12-2024 | Accounts Receivable (Customer LMN) | $5,000 | Accounts Payable (Supplier XYZ) $5,000 |
4. Accounting Treatment for Dishonored Bills
- The drawer must reverse the earlier entries made for the bill.
- The dishonored amount is reinstated as accounts receivable.
- If additional charges such as protest fees are incurred, they are recorded as an expense.
5. Summary
Endorsement facilitates the transfer of negotiable instruments, while dishonor requires corrective accounting entries to reflect the failure of payment. Proper handling of these situations ensures accurate financial reporting.