Vinu: Manu, this bill discounting sounds interesting, but the accounting side confuses me. Can you explain it with rupees?

Manu: Sure, Vinu. Imagine our company has a ₹10,000 bill of exchange due in 60 days from a client. We need some quick cash, so we approach a bank to discount it.

Vinu: Okay, so how would we record this in our books?

Manu: Let's break down the journal entries:

At Discounting: Cash A/c (Dr) ₹9,500 (We receive ₹10,000 minus a discount, say 5%) Discounting Charges A/c (Dr) ₹500 (This is the bank's fee) Bills Receivable A/c (Cr) ₹10,000 (We remove the bill from our accounts)

Vinu: So, our cash increases, and the bill is no longer on our balance sheet. How does this affect our profit?

Manu: The ₹500 discount charge is recorded as an expense, reducing our net profit for that period.

Vinu: I see. Now, what if our customer doesn't pay on the due date? That could be risky.

Manu: You're absolutely right, Vinu. That's called dishonouring the bill. If that happens, things get a bit complicated:

We'd have to reverse the initial discounting entries, essentially putting the liability back on our books. The bank would likely seek repayment from us for the discounted amount.

Vinu: That makes sense. Bill discounting gives us quick cash but comes with the risk of extra expense and potential liability if the customer defaults.

Manu: Exactly. It's a balancing act between immediate liquidity and those risks.