Accounting for Bills Purchased and Discounted by Banks

Accounting for bills purchased and discounted is one of those JAIIB AFM topics that looks like pure bookkeeping on paper but shows up constantly in a branch's day-to-day bill finance book. Every time a customer walks in with a usance bill drawn on a buyer and asks the bank to fund it before maturity, someone has to record the margin, the discount income, and the contingent liability correctly. Get the entries wrong and your trial balance — and your exam answer — both go wrong together. This article walks through the accounting treatment step by step, with the entries, the IRAC angle, and the exact distinction examiners love to test between a bill "purchased" and a bill "discounted."

📄 What Are Bills Purchased and Discounted (BP/BD)?

A bill of exchange is a negotiable instrument where the drawer (usually the seller) orders the drawee (the buyer) to pay a fixed sum either on demand or after a specified usance period. When a bank buys such a bill before its due date and credits the proceeds (less discount) to the customer's account, it is financing trade — and the accounting treatment depends on whether the bill is a demand bill or a usance bill.

Banks typically call financing against demand bills "bills purchased" (BP) and financing against usance bills "bills discounted" (BD), though many banks use both terms loosely for any bill finance limit. The customer gets immediate liquidity; the bank earns discount/interest income for the unexpired period and holds a contingent asset until the drawee pays on the due date. For the underlying instrument mechanics — drawer, drawee, payee, acceptance, and endorsement — the bill of exchange chapter is essential background before you tackle the accounting entries.

The bank sanctions a bill limit, retains a margin (commonly 10-25% depending on the drawee's credit standing), and credits the balance to the party's account. On the due date, the bill is presented for payment; if honoured, the bank recovers its outlay and the transaction closes. If dishonoured, the bill is returned and the amount is debited back to the customer with the bank now holding a clean overdue exposure instead of a self-liquidating bill.

💰 Accounting Entries for Bills Purchased and Discounted

The core entries a JAIIB candidate must know, in sequence, are straightforward once you separate "money going out" from "income accrued."

• At purchase/discount: Debit Bills Purchased/Discounted (asset) with the face value; Credit Customer's Account with (face value − margin − discount); Credit Discount Received (Unexpired) with the discount retained; Credit Margin Account with the margin held back.
• On realisation at maturity: Debit cash/nostro or the drawee bank's account; Credit Bills Purchased/Discounted account, squaring off the asset. The unexpired discount is transferred to Discount Income (P&L) proportionately over the period it relates to.
• On dishonour: Debit the customer's account (or a Bills Returned/Overdue account) with the full amount plus noting/protest charges; Credit Bills Purchased/Discounted. This effectively converts the bill exposure into an advance, and IRAC classification norms then start applying from the date of dishonour, not from the original due date.

Basic accountancy conventions — accrual for the discount income, matching principle for the period it belongs to, and prudence in holding margin — all apply here, which is why revisiting basic accountancy procedures alongside this topic pays off in the exam.

💡 Exam Tip: When a question gives you face value, margin percentage, and discount rate, always compute margin on face value first, then discount on the net amount actually financed — examiners frequently swap this order to test carelessness.

📊 Bills Purchased vs Bills Discounted — Key Differences

Both are forms of bill finance, but the underlying instrument and the risk profile differ enough that IIBF questions routinely test the distinction directly.

Notice that recourse to the drawer applies in both cases — the bank is not taking a pure credit risk on the drawee alone, which is a common point of confusion in mock tests.

⚠️ IRAC Norms and Provisioning on Bill Finance

Bill finance is treated as an advance for asset classification purposes. If a discounted or purchased bill remains overdue beyond the period prescribed under RBI's income recognition and asset classification norms, the account slips from standard to sub-standard, and the discount income already booked on an accrual basis has to be reversed. Unrealised discount on a bill that turns into an NPA cannot continue sitting in the P&L as income — it gets reversed and taken to an interest suspense-type treatment consistent with the bank's IRAC policy.

This is also where the bank's overall accounting standards framework matters: classification, provisioning, and disclosure of bill finance in the balance sheet follow the same accounting standards including Ind AS that govern the rest of a bank's books, not a separate rulebook just for bills.

⚠️ Common Mistake: Students often assume discount income is recognised fully at the time the bill is purchased. In practice it is spread and recognised over the unexpired period, and reversed on default — treating it as day-one income is a frequent exam trap.

🏦 Back Office Role and Book-Keeping for Bill Finance

In practice, the accounting entries above don't happen in isolation — they flow through the branch's back office and its subsidiary registers. Bills purchased and discounted are recorded in a dedicated Bills Register (a subsidiary book), cross-checked against the general ledger control account, and reconciled daily against outstanding limits. Understanding how these entries move from voucher to subsidiary book to the general ledger is covered in cash and subsidiary books maintenance, and the operational side — scrutiny of documents, limit tracking, and follow-up for overdue bills — sits with the back office functions team at most banks.

Periodic checks on the bills portfolio — ageing analysis, overdue tracking, and verification that margin and discount computations match the sanction terms — form a routine part of internal and statutory bank audit and inspection, since bill finance is a favourite area for auditors to test compliance with sanction conditions.

📌 Remember: A bill limit is a sub-limit within the working capital assessment, not a separate credit facility — its accounting always ties back to the customer's overall exposure and drawing limits.

🧮 Worked Example: Computing Margin and Discount

Say a bank purchases a demand bill of Rs 5 lakh with a 20% margin and charges discount at 12% per annum for an average transit period of 15 days. Margin retained = Rs 1 lakh (20% of Rs 5 lakh). Amount eligible for discounting = Rs 4 lakh. Discount = Rs 4,00,000 × 12% × 15/365 ≈ Rs 1,972. The customer's account is credited with roughly Rs 3,98,028 (Rs 4,00,000 − Rs 1,972), while Rs 1 lakh margin and the discount amount are held back in separate ledger heads until realisation.

This numerical works alongside broader financial ratio analysis questions in the AFM paper, since examiners often combine a bill-finance computation with a balance sheet or ratio question in the same case study. Cross-checking how bill finance appears under loans and advances is easier once you know the bank balance sheet format, and the bookkeeping mechanics tie back to subsidiary books and ledger posting covered in an earlier AFM article.

🧠 Practice MCQs: Bills Purchased and Discounted

Want chapter-wise mock tests with 100+ MCQs? Start practising free →

Accounting for bills purchased and discounted ties together negotiable instrument law, accrual accounting, and IRAC provisioning in one compact topic — which is exactly why JAIIB AFM tests it so often. For a broader look at how banks manage customer facilities beyond fund-based limits, see how a reverse mortgage for senior citizens is structured in the Retail Banking and Wealth Management paper — a useful contrast in how differently banks account for asset-backed versus trade-finance products. Browse more chapter guides on the AFM topic hub, cross-check current RBI norms on the Reserve Bank of India website, and when you're ready to test yourself properly, work through full-length mocks on the JAIIB course page.