Bill of Exchange

Sometimes, the acceptor of the bill foresees that it may be difficult to meet the obligation of the bill on maturity and may, therefore, approach the drawer with the request for extension of time for payment. If it is so, the old bill is cancelled and the fresh bill with new terms of payment is drawn and duly accepted and delivered. This is called renewal of the bill. Since the cancellation of bill is mutually agreed upon noting of the bill is not required.

The dreawee may have to pay interest to the drawer for the extended period of credit. The interest is paid in cash or may be included in the amount of the new bill. Sometimes, a part of the amount due may be paid and the new bill may be drawn only for the balance. For example, a bill of Rs.

, is cancelled on a cash payment of Rs. , and acceptance of a new bill for the balance of Rs. , plus interest as agreed between the parties. The journal entries in the books of the drawer and the drawee will be the same as that of dishonour of bill.

As for the interest invalued, if it is not paid in cash, the drawer debits the drawee’s account and credits the interest account, and the drawee debits the interest and credits the drawer’s account in his books.