Bill of Exchange

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Test Your Understanding – I

Write True or False against each statement regarding a bill of exchange.
  1. A bill of exchange must be accepted by the payee. (❌ False)
  2. A bill of exchange is drawn by the creditor. (✔ True)
  3. A bill of exchange is drawn for all cash transactions. (❌ False)
  4. A bill payable on demand is called Time bill. (❌ False)
  5. The person to whom payment is to be made in a bill of exchange is called payee. (✔ True)
  6. A negotiable instrument does not require the signature of its maker. (❌ False)
  7. The hundi payable at sight is called Darshani hundi (✔ True)
  8. A negotiable instrument is not freely transferable. (❌ False)
  9. Stamping of promissory note is not mandatory. (❌ False)
  10. The time of payment of negotiable instrument need not be certain. (❌ False)
Test Your Understanding – II
Fill in the blanks with suitable word(s)
  1. The person to whom the amount mentioned in the promissory note is payable is known as _________________. (Promisee)
  2. Transfer of a negotiable instrument to another person by signing on it is, is known as _________________. (Endorsement)
  3. In a promissory note, the person who makes the promise to pay is called as _________________. (Promissor)
  4. A person who endorses the promissory note in favour of another is known as _________________. (Endorser)
Test Your Understanding – III
Fill in the blanks
  1. A bill of exchange is a _________________ instrument. (Negotiable)
  2. A bill of exchange is drawn by the _________________ upon his _________________. (Drawer, Drawee)
  3. A promissory note is drawn by _________________ in favour of his _________________. (Debtor, Creditor)
  4. There are _________________ parties to a bill of exchange. (Three)
  5. There are _________________ parties to a promissory note. (Two)
  6. Drawer and _________________ can not be the same parties in case of a bill of exchange. (Drawee)
  7. Bill of exchange in Indian languages is called _________________. (Hundi)
  8. _________________ days of grace are added in terms of the bill to calculate the date of its _________________. (3, Maturity)
Short Answers

1. Name any two types of commonly used negotiable instruments.
The commonly used negotiable instruments are
  1. Bill of exchange
  2. Cheque
  3. Promissory note
2. Write two points of distinction between bills of exchange and promissory note.
The following are the differences between a bill of exchange and a promissory note.
S.No.
Basis
Bill of Exchange
Promissory Note
1
Drawer
Creditor
Debtor
2
Order or Promise
Includes an order to make payment.
Includes a promise to make payment.
3
Parties
Upto three parties namely drawer, drawee and payee
Only two parties namely the drawer and payee
4
Acceptance
Requires acceptance either by drawee or someone on behalf of the drawee.
No acceptance is required.
5
Payee
Drawer can be the payee also
Drawer and payer can not be the same party
6
Notice
In case of dishonour, the holder should give due notice of dishonour to the drawee.
In case of dishonour, no notice is required.
3. State any four essential features of bill of exchange.
  1. A bill of exchange must be in writing.
  2. Bears an order to make payment
  3. Conditionality: The order to make payment is unconditional.
  4. Drawer or the maker of the bill of exchange must sign it.
  5. Ensures that the payment to be made must be certain.
  6. Fortifies that the date on which the payment must be made is certain.
  7. Gives certainity that the bill of exchange must be payable to a certain person.
  8. Honours the fact that the amount mentioned in the bill of exchange is payable either on demand or on the expiry of a fixed period of time.
  9. In accordance with the requirement of law, it must be stamped.
4. State the three parties involved in a bill of exchange
The following are the three parties involved in a bill of exchange.

  1. Drawer: Drawer is the maker of the bill of exchange. He/she is the seller/creditor who is entitled to receive money from the debtors. Drawer draws the bill of exchange upon the buyer or debtor. Drawer, being the maker of the bill of exchange, is required to sign it .
  2. Drawee: Drawee is the person upon whom the bill of exchange is drawn. Drawee is the purchaser or debtor of the goods or services upon whom the bill of exchange is drawn.
  3. Payee: Payee is the person to whom the payment need to be made. The drawer and the payee are the same if he/she keeps the bill till the date of maturity. The payee can change when
    1. when the drawer gets the bill discounted, the party who has discounted the bill will become the payee.
    2. When the drawer endorses the bill to a creditor of the drawer, the creditor will be the payee.

5. What is meant by maturity of a bill of exchange?
Maturity of a bill of exchange refers that the bill of exchange has reached the due date for payment. To calculate the maturity date, we need to add three days, also known as days of grace, to the date on which the period of credit ends and the bill of exchange is payable. If the maturity date is a public holiday, the instrument will become due on the preceding business day. However, if an emergency holiday is declared under the Negotiable Instruments Act 1881, by the Government of India, then the date of maturity will be the next working day immediately after the holiday.
6. What is meant by dishonour of a bill of exchange?
Dishonour of a bill of exchange occurs when the drawee fails to settle the payment on the date of maturity. When the bill of exchange is dishonoured, the liability of the acceptor is restored (he/she becomes the debtor again). To reflect this, the receipt of the bill of exchange should be reversed.
7. Name the parties to a promissory note.
The following are the parties to a promissary note.
  1. Maker or Drawer: The person who draws or prepares the promissory note to pay a specific amount as mentioned in the promissory note. The maker or drawer is also called as promisor.
  2. Drawee or Payee: The person in whose favour the promissory note is drawn. The drawee or payee is also called the promisee. Generally, the drawee is also the payee, unless it is specifically mentioned in the promissary note.
8. What is meant by acceptance of a bill of exchange?
A bill of exchange is generally drawn by the creditor upon his debtor and 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. However, mere preparation will simply make it just a draft. It must be accepted by the drawee or debtor or someone on his/her behalf to make the debtor liable to pay. Thus the acceptance involves the writing of the word accepted on it and signing it to declare his acceptance to the terms of the bill of exchange. This process is known as acceptance.
9. What is noting of a bill of exchange?
When the payee presents the bill of exchange to the drawee upon maturity of bill of exchange and when the drawee fails to make the payment, it is said that the bill is dishonoured, despite its due presentation. When the bill of exchange is dishonoured, it must be noted by the Notary public. The authentication by the notary of dishonouring of the bill of exchange is called as Noting.
10. What is meant by renewal of a bill of exchange?
When the acceptors foresees that he/she may not be able to meet the obligation of the bill on maturity, they approach the drawer requesting them to extend the time of payment. When both the parties agree to do so, the old bill of exchange is cancelled and a fresh bill of exchange is drawn with new terms of payment. As per the protocol, this bill should again be accepted by the drawee and delivered. This process is known as the renewal of the bill of exchange.
11. Give the proforma of a Bills Receivable Book.
The following is the proforma of a Bills Receivable Book.
Bills Receivable Book
No. of Bill
Date Received
Date of Bill
From Whom Received
Drawer
Acceptor
Where payable
Term
Due date
Ledger Folio
Amount
Cash Book Folio
Remarks
12. Give the proforma of a Bills Payable Book.
The following is the proforma of a Bills Payable Book.
Bills Payable Book
No. of Bill
Date of Bill
To Whom Given
Drawer
Payee
Where payable
Term
Due date
Ledger Folio
Amount paid
Date
Cash Book Folio
Remarks
13. What is retirement of a bill of exchange?
In the instance, when the drawee of the bill has funds at hir/her disposal and makes a request to the drawer or holder to accept the payment of the bill before its maturity, and upon mutual agreement to do so, the bill of exchange is retired before maturity date. This is known as retirement of a bill of exchange.
14. Give the meaning of rebate.
The bill of exchange might retire before meeting the maturity date, when the holder of the bill of exchange and payee mutually agree to do so. To encourage such early retirement of the bill, the holder allows some discount called Rebate on bills for the period between the date of retirement and maturity. This rebate is computed at a specific rate of interest.
15. Give the proforma of a Bill of Exchange

The following is the proforma of a bill of exchange.
Sanju
Hyderabad
₹ 15,000
Mar 01, 2019
Three months after date pay to me or my order, the sum of Rupees Fifteen thousands only, for value received.
Stamp
Accepted
(signed)
(Signed)
Benedict Cumberbatch
Sanju
01.03.2019
2018, Begumpet
123-D, Ameerpet
Hyderabad
Hyderabad
To
Benerdict Cumberbatch
123-D, Ameerpet
Hyderabad – 500 072
Long Answers
1. A bill of exchange must contain an unconditional promise to pay. Do you agree with this statement?

The Negotiable Instruments Act 1881 difines Bill of Exchange 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.
According to this definition the Bill of Exchange contains an unconditional order which requires the drawee to oblige to pay the drawer without considerting conditions. In otherwards, the drawee is not allowed to quote any conditional like he would only pay if all his debtors pay him on time or his business has made this many sales in that month etc. He is obliged to pay on the date of payment and the sum promised to pay. In fact, The order to make payment is unconditional is one of the features of the Bill of Exchange
We can say that

  1. To avoid any conflicts at the time of payment
  2. to comply with the definition provided by Negotiable Instruments Act 1881
  3. and also to satisfy one of the essential features of the bill of exchange

the bill of exchange must contain an unconditional promise to pay.

2. Briefly explain the effects of dishonour and noting of a bill of exchange.
A dishonoured bill implies that the drawee has failed to make the payment on the date of maturity. Consequently, the liability of the acceptor is restored and the entries made upon receiving the bill should be reversed.
The following entries will be recorded in the books when the bill of exchange is dishonoured
The bill is retained by Drawer till the date of maturity
Drawee A/c
Dr
To Bills Receivable A/c
(Being Bill of Exchange Dishonoured)
The bill is endorsed by the drawer to his creditor
Drawee A/c
Dr
To Creditor A/c
(Being Bill of Exchange Dishonoured)
The bill is discounted by the drawer with his bank
Drawee A/c
Dr
To Bank A/c
(Being Bill of Exchange Dishonoured)
The bill is sent for collection by the drawer
Drawee A/c
Dr
To Bill Sent for Collection A/c
(Being Bill of Exchange Dishonoured)
The corresponding entry in the drawee’s books will be
Bills Payable A/c
Dr
To Drawer A/c
(Being Bill of Exchange Dishonoured)
To prove that the bill is dishonoured beyond doubt, despite its due presentation, it may preferably to be got noted by Notary Public. Noting authenticates that the bill is indeed dishnoured. To avail the notary servies for this purpose, the Notary Public charges a fee named Noting Charges.
The notary notes the following facts.
  1. Date, fact and reasons of dishonour.
  2. If the bill is not expressly dishonoured, the reasons why the drawer considers it as dishonoured.
  3. The noting charges details.
The following entries are recorded for noting charges in the drawer’s books.
When the noting charges are paid by the drawer
Drawee A/c
Dr
To Cash A/c
(Being Notary Charges Paid)
When the endorsee pays
Drawee A/c
Dr
To Endorsee A/c
(Being Notary Charges Paid)
When the bill is discounted and the bank pays the noting charges
Drawee A/c
Dr
To Bank A/c
(Being Notary Charges Paid)
When the bill is sent for collection to the bank and the bank pays the noting charges
Drawee A/c
Dr
To Bank A/c
(Being Notary Charges Paid)
It is worth noting that the noting charges are always borne by the drawee, regardless of who paid the noting charges. This is represented by the drawee always getting debited in the drawer’s books. This is explained by the fact that the drawee is always the reason that why the bill got dishonoured in the first place. The drawee maintains the Noting Charges Account to record the noting charges. In this case, the drawee debits the noting charges account and credits the drawer’s account.
Noting Charges A/c
Dr
To Drawer A/c
(Being Notary Charges Paid)
3. Explain briefly the procedure of calculating the date of maturity of a bill of exchange. Give example.

The following is the procedure of calculating the date of maturity of a bill of exchange.
  1. Determine the date on which the period of credit expires and the credit instrument is payable. While doing so, if the credit expiration is calculated in months, the calendar month is considered. If it is mentioned in days, then it is calculated by adding the exact specified number of days.
  2. To this date three days of grace must be added to arrive at the maturity date.
  3. The date of maturity thus obtained is subject to change under the following conditions. Otherwise, it remains the same.
    1. When the maturity date falls on a holiday, the preceding date (the day before the maturity date) will be the maturity date.
    2. When the day on which the bills matures is declared by the givernment as an emergency holiday, under the Negotiable Instruments Act, 1881, the next working day (may not be the exact following day) will become the maturity date.
    3. Days of Grace will not be taken into account when the bill is payable at sight or on demand
Examples
For example, consider that the bill of exchange is prepared for 3 months on October 24, then the maturity date falls on 3 days after January 23 i.e. January 26th. As 26th January is Republic Day and is national holiday, the maturity date will be 25th January.
Consider another case, where in the maturity date has fallen on 1st October. If this date is declared as a holiday by the Government under the Negotiable Instruments Act, 1881, then the next working day i.e. 3rd October (not 2nd October as it is Gandhi Jayanthi holiday and is not a working day) will be considered as the maturity date.
4. Distinguish between bill of exchange and promissory note.
The following are the differences between a bill of exchange and a promissory note.
S.No.
Basis
Bill of Exchange
Promissory Note
1
Drawer
Creditor
Debtor
2
Order or Promise
Includes an order to make payment.
Includes a promise to make payment.
3
Parties
Upto three parties namely drawer, drawee and payee
Only two parties namely the drawer and payee
4
Acceptance
Requires acceptance either by drawee or someone on behalf of the drawee.
No acceptance is required.
5
Payee
Drawer can be the payee also
Drawer and payer can not be the same party
6
Notice
In case of dishonour, the holder should give due notice of dishonour to the drawee.
In case of dishonour, no notice is required.
5. Briefly explain the purpose and benefits of retiring a bill of exchange to the debtor and creditor.
Purpose of retiring a bill of exchange: The purpose of retiring the bill of exchange earlier is to let the drawee receive an additional discount on their bill of exchange and retire the bill of exchange before the due date.
Benefits of retiring the bill of exchange:
  1. It improves the business trust and mutual understanding between the creditor and debtor.
  2. Mobilisation of funds from the debtor to the right purpose.
  3. Leads to additional and subsequent business transactions.
  4. The creditor receives the amount ahead of anticipated time and this amount can be used for other business purposes.
  5. The rebate provided by the creditor to the debtor is revenue for the debtor.
6. Explain briefly the purpose and advantages of maintaining a Bills Receivable Book.

Purpose of maintaining a Bills Receivable Book: When the business has a huge number of bills that are drawn and accepted, recording each of their entry in the journal becomes cumbersome and timeconsuming exercise. The purpose of maintaining a separate Bills receivable subsidiary books is to separate the recording of the transactions related to these bills and maintain them separately.
Advantages:
  1. This will bring in quick, efficient and accurate recording of business transactions.
  2. As bills of exchange are of repetitive transactions in nature they can be easily recorded in the specialized bills payable books.
  3. They also prove economical and make the division of labour possible in accounting work.
  4. The format of the Bills Receivable Book is such that all the details of the bill of exchange like the amount, maturity date, drawee, payee etc are maintained at one place and provide a quick reference of all the details pertaining to a specific bill of exchange when required.
  5. As all the details of the bills of exchange are recorded at one place, the system is not prone to any fraudulent activities.
  6. The accountants responsible for maintaining the bills of exchange gain specialized expertise in maintaining them and can easily detect any errors or missing entries easily. This also creates more accountability on the person responsible.
7. Briefly explain the benefits of maintaining a Bills Payable Book and state how its posting is done in the ledger.
Benefits of maintaining a Bills Payable Book:
  1. This will bring in quick, efficient and accurate recording of business transactions.
  2. As bills of exchange are of repetitive transactions in nature they can be easily recorded in the specialized bills payable books.
  3. They also prove economical and make the division of labour possible in accounting work.
  4. The format of the Bills Payable Book is such that all the details of the bill of exchange like the amount, maturity date, drawee, payee etc are maintained at one place and provide a quick reference of all the details pertaining to a specific bill of exchange when required.
  5. As all the details of the bills of exchange are recorded at one place, the system is not prone to any fraudulent activities.
  6. The accountants responsible for maintaining the bills of exchange gain specialized expertise in maintaining them and can easily detect any errors or missing entries easily. This also creates more accountability on the person responsible.
Procedure to post the entries from the Bills Receivable Books to teh Ledger: The recordings from the Bills Payable Book are posted to the accounts of the creditors to whom acceptance has been. These books are totalled periodically and the totals are credited to the Bills Payable Account in the ledger. As the bills payable accounts represent the liability of the acceptor with respect to the bills accepted by him/her, they always end up with a credit balance, if any. This credit balance on any particular date must be same as the total worth of all the bills that are yet to be payable and yet to be presented for payment as recorded in the bills payable book.