Payments of Change is an important chapter with respect to the SSC CGL examination and for UPSC examination. In SSC CGL examination, a separate paper is taken primarily based on Economics and Accounting for the submit of Assistant Audit Officer and Assistant Account Officer. This chapter can also be essential for the Specialist submit (SO) within the banking examination, and it additionally comes within the UPSC examination like EPFO (EO/AO/APFC) and so on. We have now coated all of the essential features associated to Payments of Change. After studying this chapter you’re going to get to know concerning the fundamentals of Payments of Change like Endorsement, Discounting, Maturity, and the retirement of Invoice of trade, and so on
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What’s a Invoice of Change:
A Invoice of trade is an unconditional order by the maker to the acceptor to pay a sure sum of cash to the maker after a predetermined time. Allow us to perceive it with an example-
Suppose, Aayush sells items value Rs. 10,000 on credit score to Aayushi, which is to be paid by Aayushi after 3 months. Aayush Attracts a invoice of trade in written format for 10,000 to be payable after 3 months and Aayushi accepts the Invoice of Change. Right here, it grew to become a binding settlement on Aayushi to return the cash after 3 months.Â
On this example- Aayush known as Maker/Drawer/Holder or (Vendor/Creditor)Â and Aayushi known as Drawee or (purchaser/Debtor)
Endorsement of Invoice of Change:
The state of affairs wherein the invoice’s drawer transfers the invoice to his creditor in an effort to repay his money owed. When a invoice of trade is signed, the drawer has the choice of including phrases qualifying the act. The drawer turns into the endorser after utilizing the invoice as a monetary instrument, and the occasion receiving the invoice turns into the endorsee or new holder of the invoice of trade. In the end, he will likely be known as the holder. Allow us to perceive it with an instance:
Aayush Owes 10,000 to Lavi. So, the invoice was transferred to Lavi. Right here, Aayush is the Endorser. Aayush could switch the invoice to Lavi. This course of known as Endorsement, and the individual endorsing one other occasion known as Endorser.
Discounting of Invoice of Change:
Brief-term funding is equipped by banks by means of the discounting of a invoice of trade. Earlier than the maturity date, the financial institution purchases a commerce invoice from the payee and pays the invoice quantity after subtracting service fees. The financial institution collects the cash from the drawee on the invoice’s maturity. Allow us to perceive with an example-
Instance-
If the one that withdrawal the invoice wants cash and doesn’t need to wait till the invoice’s due date, he can promote the invoice to the financial institution at a set low cost charge. On a signed dated order to pay to the financial institution, the bill is authorized by the withdrawal. Right here, the financial institution would be the invoice’s proprietor.
The financial institution pays money to the withdrawal after receiving the invoice on the agreed charge for the variety of days it must be accomplished, equal to the face worth much less curiosity or low cost, for the variety of days it must be executed. This course of is named Invoice of Change reductions.
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Who’s Payee:
Situation to being a payee-
1. Payee is identical as Drawer.Â
2. Payee is the one who has discounted the invoice.Â
3. Payee is the one in whose title the invoice has been endorsed.
Options of Payments of Change:
1. Acceptance by one other individual is a should, in any other case it could not be a legitimate invoice of Change.
2. A invoice of trade have to be in writing.
3. The order to make fee is unconditional.
4. The invoice of trade have to be signed by the one that created it.
5. The amount of cash to be paid have to be sure.
6. The date on which fee is made have to be exact as properly.
7. The invoice of trade have to be made out to a selected particular person.
8. It have to be stamped in accordance with authorized necessities.
Maturity of the Invoice of Change:
A invoice of trade that’s receivable on demand, upon sight, or on presentment is because of mature three days after the date of fee known as maturity of the Invoice of trade. Three days of grace are permitted (Part. 22). Allow us to perceive it with some examples:
Instance:
Suppose, a invoice is drawn on fifth March, is payable after 30 days then its maturity date is 4th April and the grace interval by default is the same as 3 days and its last date of maturity is seventh April.
Now suppose a invoice is drawn on fifth March and payable after 1 month then its maturity date is fifth April and its grace interval by default is the same as 3 days and its last date of maturity is eighth April.
Let Invoice be drawn on 1st April and payable after 30 days. Its last date of maturity is 4th Could.
Let Invoice be drawn on 1st April and payable after 60 days. Its last date of maturity is third June.
Accounting Remedy of Payments of Change:
Payments of Change
| Aayush | Aayushi |
| Drawer | Drawee |
| Creditor | Debtor |
| Payments Receivable | Payments Payable |
There are two books in Payments of Change-
1. Books of Creditor
2. Books of Debtor
Accounting remedy of payments of Change within the books of Creditor-Â
3 situations are there:
1. Creditor Retains the invoice until maturity –Â
There are 2 situations to gather it.
a. Collects on the date of maturity instantly
| For instance- On receiving the invoice      Payments receivable A/c               Dr.       To Debtor A/c On maturity of the invoice      Money/Financial institution A/c                   Dr.       To payments receivable A/c |
b. Collects by means of Financial institution
On receiving the invoiceÂ
|       Payments receivable A/c               Dr.       To Debtor A/c |
(Few days earlier than maturity, a invoice is distributed for assortment to the financial institution)
On sending the payments for assortment
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|      Payments despatched for assortment A/c          Dr.       To Payments receivable A/c |
On receiving the recommendation from the financial institution that the invoice has been collectedÂ
|   Financial institution A/c                        Dr.       To payments despatched for assortment |
2. Creditor can get the invoice discounted from the financial institution
For instance:
On receiving the invoice
|    Payments receivable A/c    Dr.    To Debtors A/c  |
On discounting the invoice
|   Financial institution A/c          Dr.  Low cost A/c       Dr.      To Payments receivable A/c |
Observe:Â
On maturity, accounts of collectors is not going to be impacted because the creditor has already type of bought it to the financial institution.
3. A creditor can endorse the invoice in favour of the creditor.
For Instance-
On receiving the invoice
|    Payments receivable A/c    Dr.    To Debtors A/c  |
On endorsing the invoice
|   Creditor’s A/c          Dr.   To Payments receivable A/c |
Observe:Â
On maturity, accounts of collectors is not going to be impacted, as a creditor has already transferred it to different events.
Accounting remedy of payments of Change within the Books of Debtor:
It makes no distinction whether or not the invoice is retained until maturity, discounted or endorsed.
On accepting the invoice
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| Creditor’s A/c                Dr.  To payments payable A/c |
On maturity of the invoice
|  Payments payable A/c          Dr.      To Financial institution A/c    |
Dishonour of Invoice, Retirement of Invoice, Renewal of Invoice, Lodging of Invoice:
Dishonour of a invoice implies that a invoice which was accepted by the debtor was not honoured. In different phrases, at maturity, the cash which the debtor owed was not returned.
Accounting Remedy for Dishonor of Invoice in:
1. Books of Creditor
2. Books of Debtor
Accounting remedy for the dishonour of invoice in Books of Creditor –Â
There are 3 situations for it.
1. Creditor retains the invoice until maturity-
a. Collects on the date of maturity instantly:Â
For instance-
On receiving the invoiceÂ
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| Payments receivable A/c               Dr.       To Debtor A/c |
|      Money/Financial institution A/c                   Dr.       To payments receivable A/c |
 On maturity of the invoice
Now reverse entry – when the invoice was saved together with her until maturity.
| Debtor’s A/c                 Dr.  To Invoice Receivable A/c |
b. Collects by means of Financial institution:
On receiving the invoiceÂ
|       Payments receivable A/c               Dr.       To Debtors A/c |
On sending the payments for assortment
|      Payments despatched for assortment A/c          Dr.       To Payments receivable A/c |
On receiving the recommendation from the financial institution that the invoice has been collectedÂ
|            Financial institution A/c                        Dr.           To payments despatched for assortment |
Reverse entry:
When the invoice was despatched for collection-
| Debtor’s A/c                       Dr. To Invoice despatched for assortment A/c |
2. Creditor can get the invoice discounted from the financial institution:
For instance:
On receiving the invoice
|    Payments receivable A/c    Dr.    To Debtors A/c  |
On discounting the invoice
|   Financial institution A/c          Dr.  Low cost A/c       Dr.      To Payments receivable A/c |
Reverse Entry
| Debtor A/c        Dr. To financial institution A/c |
3. Creditor can endorse the invoice in favour of his creditor:
For Instance-
On receiving the invoice
|    Payments receivable A/c    Dr.    To Debtors A/c  |
On endorsing the invoice
|   Creditor’s A/c          Dr.   To Payments receivable A/c |
Reverse Entry
| Debtor A/c               Dr.  To Collectors A/c |
Accounting remedy for the dishonour of invoice in Books of Debtor:
On accepting the invoice
| Creditor’s A/c                Dr.    To payments payable A/c |
On maturity of the invoice
| Payments payable A/c          Dr.      To Financial institution A/c     |
Reverse Entry
| Payments Payable A/c         Dr.     To Creditor’s A/c |
Retirement of Invoice:
When the drawee has funds accessible to pay the invoice of trade and requests that the drawer or holder settle for fee of the invoice earlier than its maturity date with a reduction. The retirement of a invoice of trade happens when the holder agrees to take action. Allow us to perceive with an example-
Suppose that, Aayush Sells Items on Credit score to Aayushi. Aayush Attracts a Invoice of Change for 10,000 to be Payable after 3 months. Aayushi Accepts the Invoice of Change. Now suppose earlier than the completion of three months, Aayushi (Drawee /Debtor) provides to pay the cash as a result of he has some additional funds. If Aayush (Drawer) agrees, then the invoice is alleged to be retired. Aayushi would take some rebate (low cost) as a result of he’s paying the cash early. So, transaction data within the books of the holder are-
On retiring the acceptance and rebate allowed
| Money A/c                      Dr. Rebate on payments A/c              Dr.  To payments receivable A/c |
Within the books of Drawee-
| Payments payable A/c             Dr. Money A/c                    Dr.   To rebate on Payments A/c |
Renewal of payments:
When the invoice acceptor come to the drawer with a request for a fee extension, the previous invoice is cancelled and a brand new invoice with new fee phrases is drawn, formally accepted, and delivered. That is known as a invoice of trade renewal. Allow us to perceive with an example-
Instance-
Suppose that, after 3 months Aayushi isn’t in a position to pay. As an alternative of dishonouring the invoice, Aayushi requests Aayush to Renew the Invoice. Renewing means creating a brand new invoice and Cancelling the previous invoice. Since Aayush will get his cash late, he asks for curiosity for this additional period. So they may create a brand new invoice with a brand new date, cancel the previous invoice and can Pay curiosity for this additional period. This complete course of known as Renewal of Invoice
Lodging of Payments:
A invoice that’s drafted and accepted as a right is named an lodging invoice. These payments are drawn to assist one or each events in a invoice of trade financially. Allow us to perceive with an example-
Instance-
Suppose that, Aayush has want of cash. On this case, Â Aayush attracts a invoice upon Aayushi value Rs. 5000 Payable after 3 months. Aayushi accepts the identical. Aayush then goes to the financial institution and will get it discounted at 12%. So the financial institution provides him, Rs. 4850. Aayush makes use of this cash. On maturity, Financial institution will take 5000 from Aayushi. Simply earlier than maturity, Aayush provides 5000 to Aayushi. On the maturity date, the financial institution will get its 5000. Right here, the lodging occasion is Aayush and the accommodating Get together is Aayushi.
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