1. Meaning
A Bill of Exchange is a written instrument in writing, containing an unconditional order, signed by the maker (creditor/drawer), directing a certain person (debtor/drawee) to pay a certain sum of money to a certain person (payee) or to the bearer, either on demand or at a fixed or determinable future time.
2. Parties to a Bill of Exchange
- Drawer: The person who draws (creates/writes) the bill. The creditor who is owed money. Holds the bill after drawing.
- Drawee / Acceptor: The person on whom the bill is drawn. The debtor who must pay. After signing/accepting the bill, called the ACCEPTOR.
- Payee: The person to whom payment is to be made. Often same as the drawer (if not endorsed).
3. Promissory Note
A Promissory Note is a written instrument in which the maker (debtor) promises unconditionally to pay a certain sum to a specific person or to the owner/bearer.
| Basis | Bill of Exchange | Promissory Note |
|---|---|---|
| Drawn by | Creditor (Drawer) | Debtor (Maker) |
| Parties | Three: Drawer, Drawee, Payee | Two: Maker, Payee |
| Order vs Promise | Contains an ORDER to pay | Contains a PROMISE to pay |
| Acceptance | Requires acceptance by Drawee | No separate acceptance needed |
| Noting on Dishonour | Can be noted/protested | Can be noted (not protested in India) |
4. Key Terms
- Term of Bill / Tenor: The period for which the bill is drawn (e.g., 3 months).
- Date of Maturity / Due Date: The date on which the bill falls due for payment. 3 days of grace are added to the nominal due date.
- Days of Grace: 3 extra days allowed by law for payment of bill (added to the bill's date).
- Face Value / Amount of Bill: The amount written on the face of the bill.
- Holder: The current owner of the bill who is entitled to receive payment.
5. Operations on a Bill
Discounting of Bill
The drawer can discount (sell) the bill to the bank before its due date in exchange for immediate cash. The bank deducts a discount (interest) and gives the net amount.
Endorsement of Bill
The holder can transfer the bill to a third party (creditor) by writing their name on the back. The holder becomes the endorser; the recipient becomes the endorsee.
Keeping the Bill till Maturity
Drawer retains the bill and presents it on the due date to collect the face value from the drawee/acceptor.
Sending Bill for Collection
Drawer hands the bill to the bank for collection on the due date. Bank collects and credits the net amount (after charges).
6. Dishonour of Bill
A bill is dishonoured when the acceptor fails to make payment on the due date.
- Holder/Bank informs drawer of dishonour.
- Bill proceeds are reversed — the drawee's account is charged with the amount plus any noting charges.
- Noting Charges: Fees paid to a Notary Public to officially record the dishonour.
- Protest: Formal legal certificate of dishonour issued by a Notary Public (more formal than noting).
7. Renewal of Bill
If the drawee is unable to pay on due date, the drawer may agree to cancel the original bill and draw a NEW bill for a fresh period (usually incorporating interest).
- Original bill is cancelled: Reverse original entries.
- Drawee pays interest for the extension period.
- New bill is drawn for the principal + unpaid interest (or interest may be paid immediately in cash).
8. Accounting Entries Summary
| Transaction | In Drawer's Books |
|---|---|
| Bill drawn & accepted | Bills Receivable A/c Dr. / Drawee A/c Cr. |
| Bill discounted with bank | Bank A/c Dr. + Discount A/c Dr. / Bills Receivable A/c Cr. |
| Bill endorsed to creditor | Creditor A/c Dr. / Bills Receivable A/c Cr. |
| Bill met at maturity (kept) | Cash/Bank A/c Dr. / Bills Receivable A/c Cr. |
| Bill dishonoured | Drawee A/c Dr. / Bills Receivable A/c Cr. (+noting charges) |
| Transaction | In Drawee's Books |
|---|---|
| Bill accepted | Drawer A/c Dr. / Bills Payable A/c Cr. |
| Bill met at maturity | Bills Payable A/c Dr. / Cash/Bank A/c Cr. |
| Bill dishonoured | Bills Payable A/c Dr. / Drawer A/c Cr. (+ Noting charges expense) |