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Renewal of Bill of Exchange — CA Foundation Paper 1 Explained

31 May 2026·6 min read·By CA Saarthi Team

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What Is Renewal of a Bill of Exchange?

A bill of exchange is a written, negotiable instrument under the Negotiable Instruments Act, 1881, in which the drawer orders the drawee to pay a certain sum on a fixed future date. Sometimes, when that due date arrives, the acceptor (drawee) finds that he cannot pay the bill on time. Instead of letting the bill be dishonoured, he can request the drawer to cancel the existing bill and accept a fresh bill for a new period. This process of cancelling the old bill and drawing a new one is called the renewal of a bill.

Renewal is a popular topic in CA Foundation Paper 1 (Accounting), within the chapter on Bills of Exchange. Examiners like it because it tests three skills at once: your understanding of the bill cycle, your ability to calculate interest, and your accuracy in passing journal entries.

Why Is a Bill Renewed?

The **acceptor is short of funds** on the due date and needs more time to arrange payment.

Both parties agree that **extending the credit period** is more practical than dishonouring the bill and paying noting charges.

The drawer is willing to wait because the business relationship is worth maintaining.

Because the drawer is giving up the use of his money for a longer time, the acceptor normally pays interest for the extended period. This interest may be paid in cash separately, or added to the amount of the new bill, so the new bill is drawn for the old amount plus interest.

Interest Calculation on Renewal

The interest is calculated on the amount carried forward, for the extended period:

Interest = Amount of bill × Rate of interest × (Period in months / 12)

For example, if a bill of Rs. 40,000 is renewed for 3 months at 12% p.a., interest = 40,000 × 12% × 3/12 = Rs. 1,200. The new bill will be for Rs. 41,200 if the interest is included in it.

Journal Entries for Renewal of a Bill

Assume X drew a bill on Y, which Y accepted. On the due date Y requests renewal.

In the books of X (the drawer / holder):

Cancellation of the original bill: **Y's A/c Dr.** To Bills Receivable A/c (original amount)

Interest due on renewal: **Y's A/c Dr.** To Interest A/c (interest amount)

Drawing of the new bill: **Bills Receivable A/c Dr.** To Y's A/c (old amount + interest, if interest is included in the new bill)

If interest is received in cash instead: **Cash/Bank A/c Dr.** To Interest A/c

In the books of Y (the drawee / acceptor) — the mirror image:

Cancellation of the original bill: **Bills Payable A/c Dr.** To X's A/c

Interest payable on renewal: **Interest A/c Dr.** To X's A/c

Acceptance of the new bill: **X's A/c Dr.** To Bills Payable A/c

If interest is paid in cash: **Interest A/c Dr.** To Cash/Bank A/c

Renewal With Part-Payment

Sometimes the acceptor pays a part of the bill amount in cash and accepts a new bill for the balance plus interest. The steps are the same — cancel the old bill, record the cash received, record interest, and draw the new bill for the remaining balance plus interest. Read the question carefully to see whether interest is charged only on the unpaid balance (usually the case) or on the full amount.

Renewal vs Retirement of a Bill

**Renewal** = cancel the old bill and draw a **new** bill (more time, plus interest).

**Retirement** = the acceptor pays the bill **before** the due date and receives a **rebate** (discount) for early payment.

These are opposite situations and examiners often test whether you can tell them apart.

ICAI Exam Questions on Renewal of Bills

Typical CA Foundation questions (worth 5-8 marks) ask you to:

Pass journal entries in the books of the drawer and/or the acceptor for renewal.

Calculate the interest and the amount of the new bill.

Handle a renewal that also involves part-payment in cash.

Quick Revision

Renewal = cancel old bill + draw a fresh bill for a new term.

Interest = Amount × Rate × Period/12, charged for the extended period.

New bill amount = old amount (or balance) + interest, when interest is included in the bill.

The drawer credits Bills Receivable to cancel; the acceptor debits Bills Payable to cancel.

Do not confuse renewal (more time) with retirement (early payment + rebate).

Practise renewal-of-bill problems on CA Saarthi to lock in the entries before your exam.

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