Mastering Bill Discounting: A Comprehensive Accounting SOP
Indeed, bill discounting is a powerful tool for manufacturers to maintain liquidity, especially when dealing with large OEMs like Tata Motors or Maruti. However, the accounting treatment for these transactions often causes confusion among professionals. In this guide, we break down the two most effective methods to record bill discounting entries in Finsys ERP, Tally, or any standard accounting software.
Method 1: The Direct Party Credit (Simple Approach)
Initially, many companies choose the simplest route. Specifically, when the bank or NBFC discounts the bill, the entry is made directly against the customer’s ledger. Bill Discounting Accounting Treatment
The Accounting Entry:
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Bank A/c: Debit (Net amount received)
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Discounting Charges: Debit (Expense)
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To Customer A/c (e.g., Tata Motors): Credit (Full Invoice Value)
Admittedly, this method is easy to execute. But, it has a major disadvantage: Reconciliation Problems. Because the customer’s books still show the full amount as payable while your books show it as cleared, your ledger will never match theirs. Therefore, this is only recommended if you do not perform frequent balance confirmations.
Method 2: The Liability/Hundi Approach (Recommended)
On the other hand, for better control and audit compliance, we recommend the “Hundi” or Liability method. To clarify, this approach keeps the customer’s ledger intact while creating a temporary liability for the funds received. Bill Discounting Accounting Treatment
Step 1: On Receipt of Funds
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Bank A/c: Debit
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Bill Discounting Charges: Debit
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To Bill Discounting Liability A/c (Series 16 or 06): Credit
Step 2: On Actual Payment by Customer to Bank
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Bill Discounting Liability A/c: Debit
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To Customer A/c: Credit (Knocking off the original invoice)
Why Method 2 is Superior for MSMEs:
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Correct Reconciliations: Your customer’s ledger always matches their records.
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Bank DP Accuracy: You avoid “Double Financing” risks by clearly showing what is a trade receivable and what is a loan.
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Better Follow-ups: Your marketing team can still see the full outstanding amount, ensuring they don’t lose sight of pending collections.
3. Impact on Balance Sheets and MIS
Ultimately, how you present this in your Balance Sheet depends on your preference for transparency. Notably, some companies prefer to show the discounting amount as a Secured Loan (Series 03), while others prefer to show it as a negative figure under Sundry Debtors (Series 16) to reflect the “Net Debtors.”
In addition, Finsys ERP provides a “Click-to-Go” report that tracks every bill’s age and discounting status. Consequently, you can monitor your Hundi completion and Hundi creation cycles in real-time.
Conclusion: Choose Accuracy Over Simplicity
To conclude, while Method 1 is faster, Method 2 provides the structural integrity required for a growing manufacturing business. By adopting a systematic SOP for bill discounting, you ensure that your Accounts, Marketing, and Bank Compliance teams are all on the same page.
Watch the Full Technical Discussion with Sangeet Gupta: https://youtu.be/p_LvDen-E38
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