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 Bills of Exchange Receivable: Introduction

Bills of exchange are a form of short-term finance. If your customer pays by bill of exchange, he does not make payment immediately, but only once the period specified on the bill has elapsed (three months, for example). Bills of exchange can be passed on to third parties for refinancing ( bill of exchange usage ).

A bill of exchange can be discounted at a bank in advance of its due date (discounting) . The bank buys the bill of exchange from you. Since it does not receive the amount until the date recorded on the bill, it charges you interest (discount) to cover the period between receiving the bill of exchange and its eventual payment. Some form of handling charge is also usually levied.

If you do not use the bill for refinancing in this way, you can either present it to your customer for payment on the due date, or deposit it at a bank shortly before the due date for collection . The bank charges you a collection fee for this service.

In some countries, you can also pass on a bill of exchange to a third party as a means of payment. You may pass it on to a vendor, for example, to clear your own payables ( means of payment ).

You can also sell your bills of exchange receivable abroad ( forfaiting ). When you use the bill in this way (otherwise known as non-recourse financing of receivables) you are freed, on the sale of the bill, from any liability to recourse.

When you deposit a bill of exchange receivable at a bank, you can make use of the following two functions offered by the system:

You can create a bill of exchange presentation list for your bank. If required, the system posts this bill of exchange usage automatically. This procedure applies to bills of exchange not yet due, for example in Italy.

You can present the bill of exchange at your bank and post the bill of exchange usage manually .

In the general ledger, the bill liability is managed in separate G/L accounts that offset the entry in the bank account.

Once the due date has been reached and the country-specific protest period has elapsed, you reverse the bill liability . You are no longer subject to any liability to recourse. The protest period enables the last holder of a bill to make use of his or her right of recourse whereby he or she demands that one of the parties recorded on the bill of exchange make payment of the amount. The protest is an official record that the drawee has not paid the bill of exchange.

By accepting a bill of exchange you incur costs which the customer pays if the bill is due later than the invoice. When you post a bill of exchange payment, you therefore levy bill of exchange charges on your customer. These can include interest charges (discount), and collection fees. You can enter the bill of exchange charges when you post the bill or you can have the system calculate them automatically. Any combination of the above-mentioned bill of exchange charges is possible. The charges are levied on the customer automatically. Generally, bill of exchange charges are due net immediately. If you require special terms of payment for the charges, these can be defined in the customer master record.

In some countries, you must record bills of exchange receivable in a bill of exchange list . The bill of exchange list is a subsidiary ledger and contains all the essential data of incoming bill of exchange receivables. The day of expiration of the bill of exchange and the address data of the issuer are included in this list.

In the system, you can distinguish between rediscountable and non-rediscountable bills of exchange. Rediscountable bills of exchange must meet country-specific conditions that allow a commercial bank to pass on the bill of exchange for rediscounting to the State Central Bank. In Germany for example, the following conditions exist:

  • Three "good" signatures on the bill of exchange.

  • Remaining life may not exceed three months.

  • Bill of exchange must be payable at a State Central Bank city, that is a city in which the State Central Bank has an office.

Commercial banks cannot pass on non-rediscountable bills of exchange to the State Central Bank for rediscounting. By distinguishing these two types of bills during entry, you can have the system display them separately in the balance sheet. The special G/L indicator indicates the type of bill of exchange entered. The bills of exchange are posted to different special G/L accounts. When a change to the status of a bill of exchange occurs, transfer postings are necessary before preparation of the balance sheet. For example, a non-rediscountable bill of exchange becomes rediscountable if its remaining life has changed.

If such a distinction is not required in your country, you will post all bills of exchange receivable using the same special G/L indicator.

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