What happens when a bill discounted through a financial institution is dishonored?
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Answer: A. Acceptor‘s Account is debited in the books of drawer
Explanation
When a discounted bill is dishonored, the drawer reverses the bank credit by debiting the acceptor's account and crediting the bank account. The acceptor remains legally responsible for the debt once the financial institution demands repayment. Reinstating the debtor account ensures accurate tracking of overdue receivables on the books. Dishonor occurs when the drawee fails to pay the holder upon the bill maturity date. The bank charges the drawer account for the face value plus any applicable noting charges. The drawer consequently re-establishes a receivable claim against the original defaulting customer.
Credit managers monitor dishonored bills closely to initiate legal collection or debt recovery procedures. Proper accounting entries for dishonored bills protect business cash records from unrecorded losses. Maintaining communication with defaulting acceptors helps resolve commercial disputes amicably. Crediting bills receivable incorrectly assumes the original bill was held rather than discounted. Debiting the bank account would decrease cash further when the bank actually charged the drawer. Bills payable accounts record liabilities owed by the firm rather than receivables due from customers.
- Subject
- Accounting and Finance
- Category
- Accounting
- Topic
- —
- Difficulty
- medium
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