Retiring a Bill of Exchange: Definition

When a drawee withdraws a bill of exchange from circulation by paying the amount of the bill before its maturity, this is known as retiring a bill of exchange.

Retiring a Bill of Exchange: Explanation

From the drawee’s perspective, the drawee either pays or dishonors the bill on the due date. However, there is another option available to the drawee, which is known as retiring the bill of exchange.

When drawee makes the payment of the bill before maturity, the drawer allows some discount to the drawee, which is known as a rebate.

Rebate: Definition and Explanation

A rebate is a concession or discount allowed by the holder of the bill to the drawee in return for paying the amount of the bill before maturity. It is an expense for the holder and an item of revenue for the drawee.

From the holder’s point of view, a rebate is considered a discount allowed, whereas it is a discount received from the drawee’s perspective.

Example

On 1 January 2019, X sold goods to Y for $20,000 on credit. On the same date, X drew a bill payable after four months on Y. The bill was accepted by Y and returned to X.

After two months, Y wanted to pay the bill. X agreed and Y paid the bill under a rebate of 12% p.a.

Required: Make journal entries in the books of X and Y.

Journal Entries for X
W-1:Amount of Rebate Calculation
Journal Entries for Y

Frequently Asked Questions

What is the meaning of retiring a bill of exchange?

Retiring a Bill Of Exchange is when the drawee withdraws it from circulation by paying the amount of the bill before its maturity.

What are the terms used in retiring a bill?

The following are some of the terms that can be used when retiring a bill: - rebate (payment made by drawee to holder of bill in return for paying the amount of the bill before maturity) - discount (a reduction in price allowed by a buyer to a seller, or by a creditor to a debtor) - premature payment (payment of bill before it becomes due)

Why might a drawee choose to retire a bill?

The drawee might choose to retire a bill in order to get a rebate from the holder. This is an expense for the holder and an item of revenue for the drawee.

How is a rebate different from a discount?

A rebate is a concession or discount allowed by the holder of the bill to the drawee in return for paying the amount of the bill before maturity. A discount is a reduction in price allowed by a buyer to a seller or by a creditor to debtor.

What is meant by renewing a bill of exchange?

Renewing a Bill Of Exchange is when it can be extended beyond its original due date. To renew a Bill Of Exchange, the holder has to request for an extension beyond the existing due date.

Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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