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.
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.