Rebate on Bills Discounted: Meaning, Method of Computation and Accounting Treatment
A rebate on bills discounted is a reduction in the price of a good or service that has been paid for in advance. Typically, this type of rebate is offered to customers who have paid their bills in full and on time. The discount may be a percentage of the total amount owed, or it may be a fixed amount. Rebate on bills discounted can be a powerful incentive to encourage customers to pay their bills on time and can help businesses improve their cash flow.
In the event that the maturity dates of some bills fall after the date of preparation of final accounts, the discount credited to those bills cannot be treated as earned in the current year. Therefore, the discount for the unexpired period is debited to the discount account to cancel the credit previously given, then credited to the Rebate on Bills Discounted Account’ or Unexpired Discount Account.
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Interest received in advance is treated similarly.
If it is given only in the Trial Balance: The liability will be shown in the liability side of the Balance Sheet.
If it is given in adjustment: In that case, the same is deducted from Income from Interest and Discount, and it also appears on the liability side of the Balance Sheet.
Method of Computation of Rebate on Bills Discounted
If a customer discounts ₹ 60,000 for 3 months at 12% on 1st March 2010, it will be calculated as follows:
Bank will earn discount @ 12% for 92 days i.e., = ₹ 60,000 x 12/100 x 92/365 = Rs. 1814.
However, this discount is only valid for March, April and May. Due to accounts being prepared on 31st March every year, discount received for 61 days (30 + 31) for April and May is not actually earned. Thus, discount of 61 days i.e., Rs. 601 is called Rebate on Bill Discounted. So, actual income is ₹ 1213 (i.e., 1814 – Rs. 601).
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(i) At the end of the year
Discount A/c Dr.
To Rebate on Bills Discounted A/c
(ii) At the beginning of the year
Rebate on bills discounted A/c Dr.
To Discount A/c