What is Bill Of Exchange? Features, Examples

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 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  • Supply Bill- The bill that is withdrawn by the supplier or contractor from the government department is known as the supply bill.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- The bill bearer has to wait till the due date of the bill to receive the payment and it from the bank before its due date.
  • Endorsement Possible- This bill of exchange can be exchanged from one individual to another for the adjustment of the debt.

Bill of Exchange Format

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.

Parties of Bill of Exchange

A bill of exchange has three parties:

(1) Drawer:

  • 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.

(2) Drawee:

  • 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’.

(3) Payee:

  • The payee is the person to whom payment has to be made.
  • The payee may be the drawer himself or a third party.

Also Check: Difference between Bill of Exchange and Promissory Note

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.’

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.

Parties to a Promissory Note

There Are Two Parties to a Promissory Note:

(1) Maker OR Drawer:

  • Maker is the person who makes or draws the promissory note.
  • Who promises to pay a certain sum as specified in the promissory note.
  • He is also called the ‘Promisor’.

(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.

Important Terms:

Q.1 Define the Terms:

(a) Term of Bill or Period of Bill;

(B) Due Date;

(C) Days of Grace; and

(D) Date of Maturity.

Answer:
(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.

Answer:
(a) Discounting of Bill
  • It means encashment of bill before the date of its maturity.
  • The bank deducts its charges from the bill.
(B) Endorsement of Bill
  • Endorsement means the transfer of bill or promissory note to another person.
  • It is transferred on account of the settlement of debts and dues.
(C) Bill Sent for Collection
  • When a bill is sent to the bank for collection with instruction, that it will be retained till the maturity date.
  • Bill will be realized on its due date. It is known as ‘Bill sent for collection’.
Q.3 Briefly Explain the Terms

(a) Dishonour of Bill;

(B) Noting of a Bill; and

(C) Nothing Charges.

Answer:
(a) Dishonour of Bill
  • When payment is not made by the acceptor of the bill on its due date. It is known as ‘Dishonor of Bill’.
  • Non-payment may be due to insufficient balance or insolvency.
(B) Noting of a Bill
  • On dishonour of a bill, when this fact is brought to the notice of a Notary Public, it is termed as ‘Noting of a bill’.
  • Notary public charges to record or take a noting of dishonour.
(C) Noting Charges
  • It is the fee paid to the Notary Public for noting of dishonour of a bill.
Q.4 What Do You Mean by Retiring of a Bill and Renewal of a Bill?
Answer:
(a) Retiring of a Bill
  • When the Drawee pays the bill before its due date, It is termed as the retirement of a bill.
  • It happens with the mutual understanding between the Drawer and the Drawee.
  • To encourage Retiring of the bill, the holder allows some discount called Rebate on the bill amount from the date of retiring the bill to the maturity.
(B) Renewal of a Bill
  • When the holder of a bill is not in a position to meet the bill on its due date, Drawee approaches the Drawer with a request of extension of time for payment.
  • If Drawer agrees, the old bill is canceled and a fresh bill with the new terms of payment is drawn and duly accepted and delivered. This is called Renewal of the 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

Answer:
(a) When the Period of Bill is Given in Months
  • In this case, the maturity date is calculated according to calendar months.
  • Ignoring the number of days in a month.
  • 3 days of the Grace period are added.

For example: – if a bill dated 4th May, 2017is payable 3 months after date:-

= Then the maturity date will be 4th August 2017 + 3 Days of Grace = 7 August 2017.

(B) When the Period of Bill is Given in Days
  • The maturity date will be calculated in days,
  • This excludes the date of transaction but includes the date of payment.
  • 3 days of the Grace period are added in this case also.
  • For example: -if a bill dated 5th June 2017 is payable after 65 days, then the maturity date will be:-

=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
  • If the due date of the bill is on the national holiday,
  • Then the maturity day of the bill shall be the preceding business day.
  • Example:-If due date of the bill falls on 26th January (Republic Day), then its due date will be 25th January.
  • If the due date is 15th August (Independence Day), then the due date will be 14th August.
(D) When the Maturity Date Has Been Declared as Emergency Holiday
  • If the due date of the bill is declared as an emergency holiday,
  • Then the due date of the bill shall be after 1 day from the date of maturity.
  • Example:- if the due date of a bill is 25th July and it is declared as an emergency holiday, then the due date will be 26th July.
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’.

Answer:
(a) Maturity Date in Case of ‘bill at Sight’ or ‘instrument Payable on Demand’.
  • The bill at sight becomes due for payment as soon as, it is presented for payment.
  • In case of ‘Instrument payable on demand’, No time for payment is mentioned.
  • Such Bills are not entitled to the Days of Grace. `
(B) Maturity Date in Case of ‘bill After Date’.
  • In the case of ‘Bill after date,’ the time for payment is mentioned.
  • Three Days of Grace is allowed on such a bill.
(C) Maturity Date in Case of ‘bill After Sight’.
  • In case of ‘Bill after Sight, payable at a fixed period ‘after sight’, and
  • the period begins from the date of accepting the bill.
  • Three Days of Grace is allowed on such a bill.

Accounting Treatment of Bill of Exchange or Promissory Note

Q.1 What Are the Options Available to the Holder of the Bill?
Answer:
The Holder of the Bill Can Use It in Either of the Following Ways
  1. Bill can be Retained till the date of Maturity
  2. Bill can be discounted with the bank
  3. Bill can be Endorsed or Negotiated in favour of Creditor
  4. Bill can be sent to Bank for collection
Q.2 What Do You Mean by Bills Receivable and Bills Payable?
Answer:
(a) Bills Receivable or B/R
  • For the person who draws the bill of exchange and is entitled to receive its payment is known as Bill Receivable.
  • The drawer of the bill will show B/R on the assets side of the Balance Sheet.
(B) Bills Payable or B/P
  • For the person who accepts the bill, and is liable to make its payment, is known as Bills Payable.
  • The Drawee of the bill will show B/P on the liabilities side of the Balance Sheet.

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.
Answer:

  • Discounting of the bill means encashing the bill before the date of its maturity.
  • Bank charges an amount (Discounting charges) from the bill amount.

Renewal of Bill

Q.1 What Do You Mean by Renewal of a Bill?
Answer:
Renewal of Bill
  • When the acceptor is not in his capacity to pay his bill on the due date.
  • He may request the drawer of the bill to cancel the original bill and draw a new Bill in place of the old Bill.
  • If drawer agrees and a new bill is drawn, it is known as Renewal of a Bill.

Dishonour of a Bill

Q.1 What Do You Mean by Dishonour of Bill?
Answer:
Dishonour of a Bill
  • A bill is said to be dishonoured when the drawee fails to make the payment on the date of maturity.
  • The bill may get dishonoured when the drawee does not have sufficient funds to pay the bill or he becomes insolvent.
  • In this situation, the liability of the acceptor is restored.

Accommodation Bill

Q.1 Explain the Concept of Accommodation Bill.
Answer:
Accommodation Bill
  • Accommodation bill is drawn and accepted for the purpose of mutual help.
  • It is accepted by the drawee to accommodate the drawer.
  • Hence, the drawee is called the ‘Accommodating Party’ and the drawer is called the ‘Accommodation Party’.
  • Accounting entries are made for accommodation bills in the same manner as for other bills.
Q.2 Distinguish Between an Accommodation Bill and a Trade Bill.
Answer:
Basis 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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