Chapter 8 Bill of Exchange

(i) Bills of Exchange
(ii) Promissory Note

Bills of Exchange

a. There may be three parties to it, the drawer, the acceptor and the payee.
b. There is no need of fixing the stamps on the bills payable on demand but otherwise stamps would be necessary.

Promissory Note

a. There are only two parties to it - the maker who draws the note and signs it and the payee to whom the amount is payable.
b. Stamps have to be fixed in any case.

1. A bill of exchange must be in writing.
2. It must contain an order and not request to make payment.
3. It must be signed by the acceptor (drawee).
4. It must be signed by the maker (drawer) of the bill.

1. Drawer: He is seller or creditor entitled to receive money from someone. He writes or draws the bill and is known As drawer. The bill of exchange is signed by the drawer of the bill.
2. Drawer or Acceptor: He is the purchaser or the debtor on whom the bill is drawn and who is liable to pay the amount mentioned in the bill. He accepts to pay the amount by writing the word “Accepted” on the bill and then signs it. A bill is called a draft before it is accepted.
3. Payee: The person to whom the payment is to be made is called payee. The drawer himself or a third party may be the payee of the bill.

The date on which the payment of bill becomes due is called the due date or date of maturity. In other words, the date on which the duration of the bill comes to an end is called the due date.

When the acceptor of the bill refuses to pay the amount of the bill on the date of maturity or becomes insolvent, it is called dishonour of the bill of exchange.

1. Maker: He is the person who writes a promissory note and signs it. In the above specimen form of the Promissory Note, Gopal Krishan Yadav is the maker.
2. Payee: He is the person who is entitled to get the payment. There is no acceptor in case of a promissory note because the maker himself is liable to pay the amount.

Acceptance of bill of exchange is an act by which drawee accepts the drawer’s bill of exchange by signing under the words ‘accepted’ on face of the bill. It is the drawee’s signed engagement to honor the bill as presented.

To establish the fact that the bill was properly presented and dishonoured , the bill is usually handed over to a person called ‘Notary Public’, appointed by the court. The notary public again presents the dishonoured bill to the acceptor for payment and if the acceptor still refuses to make the payment , the Notary Public notes down the fact of dishonour on the bill itself. Such an act of Notary Public is called ‘Noting’.

Sometimes, the acceptor of a bill finds himself unable to meet the bill on the due date. In such a case, he may request the holder of the bill to cancel the original bill and draw a new bill in place of the old one. If the holder agrees, a new bill will be drawn either for the full amount of the old bill or for the balance Amount in case of patiala payment by the acceptor. In such a case, the drawer normally charges interest for the period of the new bill. The interest may be paid in cash or as is more common, may be added in the amount of the new bill.

Date: In this column, the date of the acceptance of the bill is recorded.

From whom received: In this column, the name of the debtor, who has accepted the bill and promised to make its payment, is recorded. The bill legally comes into existence after its acceptance.

Term or period: The bill is drawn for a specified period. This period may be one month, two months, three months, etc. or even 60 days, 90 days, 120 days, etc. Period of the bill for which the bill has been drawn is mentioned here.

Due date: Due date is the date on which the payment of the bill is actually due. It is also known as the date of maturity. In order to calculate the due date, three days of grace is added to the term of the bill.

Ledger Folio (L.F.): This column contains the page number of the ledger in which the account of the acceptor of the bill appears.

Amount of the bill: The actual amount of the bill is recorded in this column.

Remark: This column contains the details of disposal of the bill, whether the bill has been discounted or endorsed, honoured or dishonoured etc.

Bills payable book is used to record bills accepted by us. When a bill drawn by our creditor is accepted particulars of the same are recorded in this book.

1) Date of acceptance of the bill
2) To whom acceptance of bill is given
3) Term of the bill
4) Due date of the bill
5) ledger folio
6) Amount of the bill
7) Remark

When the drawee of the bill has funds at his disposal and makes a request to the drawer or holder to accept the payment of the bill before its maturity with some discount. If the holder agrees to do so, this is called the retirement of the bill of exchange.

A rebate is a payment back to a buyer of a portion of the full purchase price of a good or service. This payment is typically triggered by the cumulative amount of purchases made within a certain period of time.

The rebate is not paid until 10,000 units have been ordered by and shipped to the buyer.

Drawer                          :        Abhijit Patil, Vikram nagar, Patna
Drawee                         :        Tejas Kapare, Kothrud, Pune
Payee                           :         Amey Patki, Nagpur
Amount                         :        Rs. 7500
Period                           :        60 days
Term                              :        After sight
Date of Bill Drawn         :       1st June 2006
Date of Acceptance       :       11th June 2006
Accepted bill for Rs.      :        7000 only

According to Negotiable Instrument Act, 1981, “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.” A bill of exchange contains an unconditional promise to pay a certain sum of money on an agreed date to the drawer or the bearer by the drawee of the bill.

An unconditional order to pay: It is one of the important characteristic of a negotiable instrument. Unconditional order implies no condition should be attached by the acceptor regarding the payment. The conditions like, payment of bill (only in case of profit on sales), payment of bill (only if the prices of goods increase), etc. should not be attached with the bill. Moreover, the language of the bill should not be ambiguous.

When the acceptor of the bill refuses to pay the amount of the bill on the date of maturity or becomes insolvent, it is called dishonour of the bill of exchange.

To establish the fact that the bill was properly presented and dishonoured, the bill is usually handed over to a person called ‘Notary Public’, appointed by the court. The notary public again presents the dishonoured bill to the acceptor for payment and if the acceptor still refuses to make the payment, the Notary Public notes down the fact of dishonour on the bill itself. Such an act of Notary Public is called ‘Noting’. Dishonour of a bill means refusal to pay or inability to pay by the debtor because of insolvency. In other words, a bill is said to have been dishonoured when the drawee fails to make the payment on the date of maturity. In this situation, liability of the acceptor is restored. When a bill is dishonoured, it is always better if it is certified by a notary which is known as noting.

So, it is an ample proof that a bill is dishonoured which is noted down on the face to it. For this, the noting charges are something known as notary charge or noting charges which may be recovered from the person who is responsible for the dishonour of the bill.

The notary is compulsory in case of foreign bills as required under the law of that country whereas it is not so in case of inland bills. It is done with a view to have proof of dishonouring the bill. So, it is very useful. Notary has to assign reasons for dishonour of a bill along with date of dishonour and charges made by him. It is to be noted that whoever pays the noting charges, ultimately these have to be borne by the drawee.

The term maturity refers to the date on which a bill of exchange of a promissory note becomes due for payment. In arriving at the maturity date three days, known as days of grace, must be added to the date on which the period of credit expires i.e., instrument is payable e.g., if a bill dated March 15 is payable 30 days after date it, falls due on April 17, i.e. 33 days after March 15 if it were payable one month after date, the due date would be April 18, i.e., one month and 3 days after March 5.

Here, we should remember, that there is difference between one month of 30 days, when 30 days are given, we have to count 3 days above 30 days and where one month is given, we count 3 days of grace over a month as it is illustrated in the above example, where one month end on 15 April and date of maturity is 18 April in spite of 17 April. However, where the date of maturity is a public holiday, the instrument will become due on the preceding business day. In this case, if April 18 falls on a public holiday, then April 17 will be the maturity date.

But when an emergent holiday is declared under the Negotiable Instruments Act 1881, by the Government of India which may happen to be the date of maturity of a bill of exchange, then the date of maturity will be the next working day immediately after the holiday. e.g., the Government declared a holiday on April 18 which happened to be the day on which a bill of exchange drawn by Gupta upon Verma for Rs. 20,000 became due for payment. Since, April 18 has been declared a holiday under the Negotiable Instruments Act. Therefore, April 19 will be the date of maturity for this bill.

Bill of Exchange:

1. A bill of exchange is 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.
2. There may be three parties- drawer, acceptor and payee.
3. It is drawn by the creditor.
4. It needs acceptance by the drawee.
5. The liability of the drawer is secondary.

Promissory Note:

1. A promissory note is a financial instrument that contains a written promise by one party (the note’s issuer or maker) to pay another party (the note’s payee) a definite sum of money, either on demand or at a specified future date.
2. There are only two parties- the maker who draws the note and sign it and the payee to whom the amount is payable.
3. It is drawn by the debtor.
4. It does not need acceptance.
5. The liability of the maker is primary.

There are instances when a bill of exchange is arranged to be retired before the due date by mutual understanding between the drawer and the drawee. This happens when the drawee of the bill has funds at his disposal and makes a request to the drawer or holder to accept the payment of the bill before its maturity.

If the holder agrees to do so, the bill is said to have been retired. The retiring of a bill draws a curtain on the bill transactions before the expiry of its normal term.

To encourage the retirement of the bill, the holder allows some discount called rebate on bills for the period between date of retirement and maturity. The rebate is calculate at a certain rate of interest. The accounting treatment on the retirement of a bill is similar to the accounting treatment when a bill is honoured by the acceptor on the due date in the ordinary course. The only difference between the two relates to the granting of rebate.

A Bills Receivable Book is designed as a summary of information regarding a duly accepted bill received by a drawer. It contains almost all the details of the bill like bill date, acceptor’s name, amount, term place of payment etc for future reference.

The advantage of preparing the Bills Receivable Book is that we get all the information at a glance. Moreover we can get an overall idea about our Debtors and keep our collection system smooth and up to date. A Bill Receivable Book contains a number of transaction related to the bills, e.g., related to bills discounted, endorsement, retirement, renewal etc.

The bills receivable book, like any other subsidiary book, is totalled periodically. This total is debited to the ‘Bills Receivable Account’ whereas the account of every individual debtor whom the bills received is credited in the ledger. The Bills Receivable Account is the account of an asset and would always have a debt balance.

A Bills Payable Book is a special purpose book, maintained to keep records of acceptance of bills, given to the creditors. It contains details of the amount, date of bill, due date, to whom acceptance is given, etc., for future references. It is totaled periodically and its balance is transferred to the credit side of the bills payable account. Benefits of Maintaining Bills Payable Book: 

a. Availability of information: All the information related to the bills payable are recorded at one place, such as the amount, due date, etc.

b. Possibility of fraud: Since all the bills are recorded at one place, possibility of fraud is minimized.

c. Responsibility: All the transactions are recorded by the same person. Therefore, errors can be easily detected and rectified. This leads to a higher degree of responsibility and accountability of the accountant. 

d. Time efficient: Recording of bills payable through the bills payable book takes lesser time than that of journal entry.

Therefore, it saves time of the accountant in recording numerous transactions of repetitive and routine nature. The postings from these books are made to the debit of the account of every creditor to whom acceptance has been given and the periodical total of the books is credited to the ‘Bills Payable Account’ in the ledger.

The bills payable account representing the liability of the acceptor in respect of bills accepted by him, always has credit balance, if any. The credit balance of this account on any particular date must be the same as the total amount worth of bills payable yet to be presented for payment as ascertained from the bills payable book.

(i) False
(ii) True
(iii) False
(iv) False
(v) True
(vi) False
(vii) True
(viii) False
(ix) False
(x) False

(i) negotiable
(ii) drawer, drawee
(iii) debtor, creditor
(iv) three
(v) two
(vi) drawee
(vii) hundi
(viii) 3, maturity