Discounting Of A Bill Of Exchange

        Discounting Of A Bill Of Exchange

An Other Use Of Bill:

  When the acceptor of the bill is a reputable person the bill is as good as money, and any bank will discount it.

    

        If the drawer of the bill does not want to wait till the due date and he is in need of money, he may sell his bill to a bank at a certain rate of discount. The bill will be endorsed by the drawer with a signed and dated order to pay the bank. The bank will become then the holder and the owner of the bill. After getting the bill, the bank will pay cash to the drawer equal to the face value less interest or discount at an agreed rate from the number of days it has to run. This process is known as Discounting Of Bill.

For Example:

A drawer has a bill for Rs.10,000. He discounted his bill with his banker two months before its due date at 15%  p.a rate of discount. Discount will be calculated as,

             10,000× 15/100× 2/12 = 250

Thus the drawer will receive cash worth Rs.9750 and will bear the loss of Rs.250.

The bank will keep this bill in its possession till the due date. On maturity the bank will present the bill to the acceptor and will receive cash from him (if the bill is honoured). In case, the acceptor does not make the payment to the bank, then the drawer or any person who has discounted the bill will have to take his liability (he will pay cash to the bank).

Discounted bill is a contingent liability of the drawer:

There for we see that until a bill is honoured on the due date, there is always a chance that the drawer will become liable on the  bill. This is called a contingent liability-- a liability that will only arise if a certain event occurs -- acceptor does not honour the bill.