Table of Content
Meaning of Bill of Exchange
According to the Negotiable Instruments Act 1881, a bill of exchange is defined as “an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument”.
Features of Bill of Exchange
- It is important to have a bill of exchange in writing
- It must contain a confirm order to make a payment and not just the request
- The order should not have any condition
- The bill of exchange amount should be definite
- Fixed date for the amount to be paid
- The bill must be signed by both the drawee and the drawer
- The amount stated on the bill should be paid on-demand or on the expiry of a fixed time
- The amount is paid to the beneficiary of the bill, specific person, or against a definite order
Also Read: Important Questions for Bills of Exchange
Types of Bill of Exchange
- Documentary Bill- In this, the bill of exchange is supported by the relevant documents that confirm the genuineness of sale or transaction that took place between the seller and buyer.
- Demand Bill- This bill is payable when it demanded. The bill does not have a fixed date of payment, therefore, the bill has to be cleared whenever presented.
- Usance Bill- It is a time-bound bill which means the payment has to be made within the given time period and time.
- Inland Bill- An Inland bill is payable only in one country and not in any other foreign country. This bill is opposite to the foreign bill.
- Clean Bill- This bill does not have any proof of a document, so the interest is comparatively higher than the other bills.
- Foreign Bill- A bill that can be paid outside India is termed as a foreign bill. Two examples of a foreign bill are an export bill and import bill.
- Accommodation Bill- A bill that is sponsored, drawn, accepted without any condition is known as an accommodation bill.
- Trade Bill- This kind of bill is specially related only to trade.
- Supply Bill- The bill that is withdrawn by the supplier or contractor from the government department is known as the supply bill.
Must Read: Accounting for Bills Exchange
Advantages of Bill of Exchange
- Legal Document- It is a legal document, and if the drawee fails to make the payment, it will be easier for the drawer to recover the amount legally.
- Discounting Facility- In cases where the drawer is in immediate need of money, the bill can be converted into cash by discounting it from a bank by paying some nominal charges.
- Endorsement Possible- This bill of exchange can be exchanged from one individual to another for the adjustment of the debt.
Bill of Exchange Format
In the above-mentioned bill of exchange format, Kunal Singh is the drawer as well as the payee of the bill.
|Related Read: DK Goel Solutions for Bills of Exchange|
Parties of Bill of Exchange
A bill of exchange has three parties:
- The drawer is the maker of a bill of exchange.
- The bill is signed by Drawer.
- A creditor who is entitled to receive payment from the debtor can draw a bill of exchange.
- Drawee is the person upon whom the bill of exchange is drawn.
- Drawee is the debtor who has to pay the money to the drawer.
- He is also known as ‘Acceptor’.
- The payee is the person to whom payment has to be made.
- The payee may be the drawer himself or a third party.
What is Promissory Note
The promissory note is defined as an instrument in writing (not being a banknote or a currency note), containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to or to the order of a certain person, or to the bearer of the instrument.
Importance of Promissory note in Bill of Exchange
According to the Negotiable Instruments Act 1881, the meaning of promissory note is ‘an instrument in writing (not being a banknote or a currency note), containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to or to the order of a certain person, or to the bearer of the instrument. However, according to the Reserve Bank of India Act, a promissory note payable to bearer is illegal. Therefore, a promissory note cannot be made payable to the bearer.’
Parties to a Promissory Note
There Are Two Parties to a Promissory Note:
(1) Maker: Maker or drawer is an individual or entity who makes or draws the promissory note with a promise to pay a certain sum as is specified in the promissory note. Maker is also known as promsior.
(2) Payee: The payee is the person in whose favour the promissory note is drawn.
The above mentioned is the concept, that is elucidated in detail about ‘Bill of Exchange’ for the Commerce students.
|Q.1 Define the Terms:
(a) Term of Bill or Period of Bill
(B) Due Date
(C) Days of Grace
(D) Date of Maturity
|(a) Term of Bill or Period of Bill||It is the time period between the date on which a bill is drawn and the date on which it is payable.|
|(B) Due Date||It is the date on which the payment of the bill is due.|
|(C) Days of Grace||These are the three extra days added to the period of bill.|
|(D) Date of Maturity||The date which comes after adding three days of grace to the period of bill.|
|Q.2 Briefly Explain the Terms :
(a) Discounting of Bill
(B) Endorsement of Bill; and
(C) Bill Sent for Collection.
|(a) Discounting of Bill||
|(B) Endorsement of Bill||
|(C) Bill Sent for Collection||
|Q.3 Briefly Explain the Terms
(a) Dishonour of Bill;
(B) Noting of a Bill; and
(C) Nothing Charges.
|(a) Dishonour of Bill||
|(B) Noting of a Bill||
|(C) Noting Charges||
|Q.4 What Do You Mean by Retiring of a Bill and Renewal of a Bill?|
|(a) Retiring of a Bill||
|(B) Renewal of a Bill||
Important Points Regarding Due Date or Date of Maturity
|Q.1 Briefly Explain the Following Situations Related to Due Date of a Bill.
(a) When the Period of Bill is Given in Months
(b) When the Period of Bill is Given in Days
(c) When Maturity Date Falls on a Public Holiday
(d) When the Maturity Date Has Been Declared as Emergency Holiday
|(a) When the Period of Bill is Given in Months||
For example: – if a bill dated 4th May, 2017 is payable 3 months after date:-
= Then the maturity date will be 4th August 2017 + 3 Days of Grace = 7th August 2017.
|(B) When the Period of Bill is Given in Days||
=25 Days of June + 31 Days of July + 9 Days of August + 3 Days of Grace=12th August 2017
|(C) When Maturity Date Falls on a National Holiday||
|(D) When the Maturity Date Has Been Declared as Emergency Holiday||
|Q.2 What Do You Mean by the Following Terms-
(a) Maturity Date in Case of ‘bill at Sight’ or ‘instrument Payable on Demand’.
(B) Maturity Date in Case of ‘bill After Date’.
(C) Maturity Date in Case of ‘bill After Sight’.
|(a) Maturity Date in Case of ‘bill at Sight’ or ‘instrument Payable on Demand’.||
|(B) Maturity Date in Case of ‘bill After Date’.||
|(C) Maturity Date in Case of ‘bill After Sight’.||
Accounting Treatment of Bill of Exchange or Promissory Note
|Q.1 What Are the Options Available to the Holder of the Bill?|
|The Holder of the Bill Can Use It in Either of the Following Ways||
|Q.2 What Do You Mean by Bills Receivable and Bills Payable?|
|(a) Bills Receivable or B/R||
|(B) Bills Payable or B/P||
When Bill Is Discounted With the Bank
|Q.1 When Bill is Discounted With the Bank. Give the Necessary Journal Entries in the Books of Drawer and Drawee.|
The journal entries are as follows:
In case of Drawers Books
Drawee’s A/c Dr.
In case of Drawee’s Books
To Drawer’s A/c
Renewal of Bill
|Q.1 What Do You Mean by Renewal of a Bill?|
|Renewal of Bill||
Dishonour of a Bill
|Q.1 What Do You Mean by Dishonour of Bill?|
|Dishonour of a Bill||
|Q.1 Explain the Concept of Accommodation Bill.|
|Q.2 Distinguish Between an Accommodation Bill and a Trade Bill.|
|Parameters||Trade Bills||Accommodation Bills|
|Objectives||These bills are drawn to facilitate the trade transactions of sale and purchases of goods.||These bills are drawn to help someone in need of financial assistance.|
|Consideration||There is a definite consideration for which the bill is accepted.||These bills are drawn without consideration.|
|Extension of Credit||Trade bills are a form of credit extension.||These bills are not a form of credit extension.|
|Proceeds||When trade bills are discounted, the proceeds remain with the holder.||When these bills are discounted, the proceeds may be shared by two parties in an agreed ratio.|
|Recovery||If trade bills are dishonoured, the amount may be recovered easily through the court.||In case of dishonour of these bills, the drawer cannot file a suit against the drawee.|
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Frequently Asked Questions on Bills of Exchange
What is the importance of bills of exchange?
Bills of exchange are important in the following ways:
- Provide adequate time to the creditor to pay for the purchases made.
- It serves as a basis on which the seller can take legal action against the buyer in case payments are not made in time.
What is the difference between Bill of Exchange and Cheque?
The difference between a bill of exchange and cheque is that
- Bill of exchange can be drawn on anyone which includes a banker, while a cheque can only be drawn on the banker.
- Bill of exchange needs to be accepted before any demand for payment can be made, while in case of cheque, there is no requirement of acceptance, it requires immediate payment.
Why is a bill of exchange unconditional?
Bill of exchange is unconditional as it contains a written order by the drawer to the drawee, signed by drawer, and requires the drawee to pay on demand, or at a fixed or determinable future time, a sum certain in money to, or to the order of, a specified person (the payee) or to the bearer.
What are the 2 characteristics of a bill of exchange?
Two characteristics of the bill of exchange are:
- Bill of exchange should be in writing.
- The order should be unconditional.