## Renewal of Bill of Exchange: Definition

A **renewal of bill of exchange** is an act in which an old bill is canceled before maturity in return for a new bill, including interest, for an extended period. It is performed by a drawer at the request of a drawee.

## Renewal of Bill of Exchange: Explanation

Sometimes, a drawee may not be in a position to pay the amount of a bill on the due date. In this case, they may ask the drawer to cancel the old bill and draw a fresh one for an extended period.

## Process of Renewal

The steps involved in the renewal of a bill of exchange are the following:

**1.** The old bill is canceled. The journal entry for cancellation of the bill is the same as the entry made if a bill is dishonored. Under each option used by the drawer (i.e., when the drawer keeps the bill with themselves, gets the bill discounted, or endorses or sends it for collection).

**2.** Entry made for partial payment of the bill, including interest if paid in cash.

**3.** Entry made for charging interest if not paid in cash.

**4.** Entry for drawing a fresh bill for the outstanding amount.

### Different Ways of Renewing a Bill of Exchange

A bill can be renewed in any of the following ways:

**1.** Drawee pays nothing and accepts a new bill for the original amount plus interest.

**2.** Drawee pays a partial amount and accepts a new bill for balance plus interest.

**3.** Drawee pays interest in cash and accepts a new bill for the original amount.

**4.** Drawee pays a partial amount and interest in cash and accepts a new bill for the balance amount.

## Journal Entries for Renewal of Bill of Exchange

### Example 1: **Drawee pays nothing and accepts new bill for original amount plus interest**

P draws a two-month bill on Q for $15,000 on 1 January 2019. Q returns the bill to P after accepting it.

On 1 March, Q is unable to pay the bill. Therefore, they ask P to cancel the first bill and draw a fresh bill for the amount of the first bill plus interest @ 10% p.a.

P agrees to the proposal and does so Q. The new bill is for two months. On the due date, the second bill is met.

**Required:** Pass journal entries in the books of both parties.

**Solution:**

**W-1:**

### Example 2: **Drawee pays partial amount and accepts new bill for balance plus interest**

On 1 January 2019, A sold goods to B for $10,000 on credit. On the same date, A drew a three months bill of exchange on B, who accepted it and returned it to A.

Before the due date, B paid A $4,000 and asked them to draw a new three-month bill for the balance plus interest @10% p.a. A agreed and B met the new bill.

**Required:** Pass journal entries in the books of A and B.

**Solution:**

**W-1:**

### Example 3: **Drawee pays interest in cash and accepts bill for original amount**

K accepted a three-month bill from R for $25,000. Before the due date, K asked R to renew the bill and R agreed. The terms were that K would pay $500 in cash in cash as interest and would accept a new two-month bill for the original amount of the first bill.

**Required:** Pass journal entries in the books of both parties.

**Solution:**

### Example 4: **Drawee pays partial payment and interest in cash and accepts new bill for balance amount**

On 1 April 2019, John drew a three-month bill on Yasir for $12,000, which was duly accepted and agreed to be returned by David.

John immediately got the bill discounted @ 12% p.a. At maturity, David was able to pay $2,300 only, out of which $300 was for interest. David asked John to draw another bill for the balance amount. John did so, with a new two-month bill created that was eventually met on the due date.

**Required:** Pass journal entries in the books of John and David.

**Solution:**