Understanding Bills for Collection in Bank Accounting

Banks often act as intermediaries in the collection process, helping both businesses and individuals manage their financial transactions more effectively. This article explains what bills for collection are, the process involved, and how banks handle these transactions.

What are Bills for Collection?

Bills for collection in the context of bank accounting refer to various financial instruments and documents that banks collect on behalf of their clients. These include drafts, notes, and invoicing documents. Each of these instruments is a formal order or document requiring payment, which banks may collect through their services.

Drafts: A draft is a written order directing one party to pay a specified sum to another party. Banks can collect these drafts on behalf of their clients to facilitate payment.

Notes: Promissory notes or other debt instruments that require payment from a borrower to a lender. Banks often act as intermediaries in the collection process of these payments.

Invoicing Documents: Bills or invoices sent by sellers to customers for goods or services delivered. Banks may collect these documents on behalf of the seller to ensure timely payments.

Checks: Banks may also process checks, payable to their customers, through the banking system for collection purposes.

The Process of Collection

The collection process involves several key steps:

Submission: The customer submits the bill or instrument to the bank for collection.

Verification: The bank verifies the authenticity and details of the bill to ensure the transaction is legitimate.

Presentation: The bank then presents the bill to the drawee—the party expected to pay.

Payment: Upon receiving payment, the bank credits the customer's account and handles any necessary documentation, ensuring accurate and secure transactions.

Fees Associated with Collection Services

Banks charge fees for their collection services, which can vary based on the type of instrument and the amount involved. These fees help cover the costs associated with handling and verifying the transaction.

Accounting Treatment of Bills for Collection

In bank accounting, bills for collection are initially recorded as assets on the bank's balance sheet. Once payment is received, the asset is reduced and the corresponding liability is eliminated if any had been created.

Journal Entries:

Bills sent for collection: Debit Bill sent for collection account, Credit Bill receivable account. No entry in the book of creditor: Because no transaction has happened in the creditors business.

Process of Clearing Cheques: If a customer has a cheque drawn on their bank branch that is payable only in that branch, and the branch is located outside the state, the cheque can be sent for clearance through another bank. This is referred to as 'bills sent for collection'. The bank that receives the cheque will credit the customer's account once the funds are cleared.

Finance Against Bills for Collection

Banks also offer financing options against bills sent for collection. This can include providing clients with short-term financing to meet their immediate financial needs, based on the value of the bills they have for collection.

By understanding the process of collection and the roles of banks in it, businesses and individuals can better manage their financial transactions, ensuring timely payments and effective cash flow management.