Friday, January 30, 2015

Bill Discounting

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If the drawer of the bill does not want to wait till the due date of the bill and is 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 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 for the number of days it has to run. This process is known as discounting of a bill of exchange.

For example, a drawer has a bill of Rs. 10,000. He discounted this bill with his bank 2 months before its due date, at 15 % p.a. rate of discount. Discount will be = Rs. 1,000 x 15/100 x 2/12 = Rs. 250. Thus the drawer will receive a cash worth Rs. 9,750 and will bear a loss of Rs. 250.
The bank will keep this bill in possession till the due date. On maturity (due date) the bank will present the bill to the acceptor and will receive cash from him (if the bill is honored). In case, the acceptor does not make the payment to the bank, then the drawer or any person who has discounted the bill have to take this liability and will pay cash to the bank.

N.B. Until the bill is honored on the due date, there is always a chance 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 – the acceptor does not honor the bill.

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