Bill of exchange

 • Promisory note : 

A written promise by debtor to creditor for the  purpose of payment is called  Promisory note . Maker of Promisory note is Debtors.  There are two parties are involved inPromisory note  ( creditor and Debtors).There are some of limitations in Promisory note and there is no any legal provision in  Promisory note  to recovery of cash from Debtors. 

Promissory Note – Explained (Indian Law)

A Promissory Note is a written promise made by one person to another, to pay a specific sum of money, either on demand or at a future date.

Defined Under:

Section 4 of the Negotiable Instruments Act, 1881

 “A 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 to, or to the order of, a certain person, or to the bearer of the instrument.”

Key Features:

1. Must be in writing

2. Contains an unconditional promise to pay

3. Amount must be certain

4. Must be signed by the maker

5. Payee (receiver) must be certain

6. Must be stamped as per the Indian Stamp Act

Parties Involved:

Maker – the person who promises to pay

Payee– the person to whom money is payable

 Example:

I promise to pay ₹10,000 to Mr. Rajesh on 15th July 2025."

• Bill of exchange : 

Bill of exchange is written order by creditor to Debtors for the purpose of payment in specific date .

Bill of Exchange – Explained (Indian Law)

A Bill of Exchange is a written financial document in which one person (drawer) directs

 another person (drawee) to pay a specific sum of money to a third person (payee) on

 demand or after a fixed time.

 Defined Under:

Section 5 of the Negotiable Instruments Act, 1881

• “A ‘bill of exchange’ is an instrument in writing containing an unconditional order,

 signed by  the maker (drawer), directing a certain person  (drawee) to pay a certain sum

 of money only to or to the order of, a certain person, or to the bearer of the instrument.”

 Key Elements:

1. Must be in writing

2. Must contain an unconditional order

 to pay

3. Signed by the drawer

4. Drawee (the person who is to pay)

 must be certain

5. Amount payable must be certain

6. Payment must be in money only

7. Payee must be certain

8. Can be payable on demand or after a

 specified time

9. Must be properly stamped under the

 Indian Stamp Act

Parties Involved:

Role and Meaning

Drawer  – Person who creates and signs the  bill (creditor) 

 Drawee – Person on whom the bill is drawn  (debtor) 

Payee – Person to whom the money is to be  paid (can be drawer or another party) 

Example:

• “Pay to Mr. Ramesh or order the sum of ₹50,000 on 1st August 2025.

• Signed: Suresh (Drawer), payable by:  Mukesh (Drawee).”

 Types of Bill of Exchange:

1. Inland Bill (Sec 11) – drawn and payable in India

2. Foreign Bill (Sec 12) – either drawn or payable outside India

3. Time Bill – payable after a fixed time

4. Demand Bill – payable on sight or when demanded

5. Trade Bill – used in business transactions

6. Accommodation Bill – drawn without any

 real transaction (used to help a friend)

Legal Importance:

 Acts as a egal proof of debt Helps in credit-based trade Can be endorsed (transferred to others) Used in domestic and international trade

There are three parties are involved in 

Bill of exchange 

• Drawer : 

• Drawee :

• Payee  :

 1) Drawer :

Maker of bill  is called Drawer. Drawer means a person who makes the bill.  Drawer is creditor. 

2) Drawee  :

 Drawee means a person from whom  the bill is  drawn.  Drawee is Debtors.

3) Payee : 

Payee means a person,  the amount of bill is receivable. 

• Draft : 

Before acceptance of bill is called draft .

• Date of bill  :

 Date of bill means  a date , the bill is drawn .

• Date of acceptance  : 

Date of acceptance means a date,  Drawee accept the bill. 

• Bill receivable  : 

The bill is called bill receivable by Drawer  or  the bill on which amount is receivable  from a Drawee  is called bill receivable. 

• Bill payable  :

The Bill is called  bill payable  by Drawee or the  bill on which amount is payable to Drawer  is  called bill payable. 

• Qualified acceptance  :

 Qualified acceptance means acceptance of bill  by Drawee  with their certain conditions.

• Foreign bill : 

Bill drawn in india and accepted in other country   is called foreign bill. 

• In – land bill : 

Bill drawn in india and accepted in india is called  in – land bill .

• Grace days :

 Three extra days are allowed for the purpose of payment,  is called  Grace days .

• Due date :  

Due date means a date , on which Drawee  make payment of bill .

Formula :

Due date = Date of bill + period of bill + Grace  days

                      

• Public holiday : 

  15th August,  26th January and 2nd October  these are Public holidays  . If due date is come on Public holiday at that time it consider as one day before. 

Eg, if due date came on  15th August  at that  time it considered as 14th August. 

• Dealing with bill receivable : 

Dealing means decisions  with bill receivable .  Upto the Due date of the bill,  Drawer makes the Dealing with bill receivable,  any one of the following  four methods of dealing 

1) Retained the bill still due date  Dealing by 1st methods  there is no any Journal

entries are made .

2) Bill discounted with bank / bill sale to bank before due date .

Dealing with 2nd methods,  Journal entries are made :

           Cash A/c ————— Dr 

            Discount A/c ————Dr 

                     To Bill receivable A/c 

3) Endorsement of bill / Bill transfers to our creditor 

Dealing with 3rd methods , Journal entries are made :

       Endorsee A/c ——— Dr 

          To Bill receivable A/c 

4) Bill send to bank for collection /  Bill deposited in bank 

Dealing with 4th method , Journal entries are made:  

   Bank for collection A/c ———— Dr 

   To Bill receivable A/c 

• Bad debt :  

Bad debt means the amount which is  not recovered from Debtors.

•Noting : 

To record the fact of dishonoured bill by notari public officers. 

• Noting charges : 

some charges payable to notari public officers for recording of dishonoured bill is called 

noting charges. Its recoverable from Drawee. 

• Notari public officers : 

Notari  public offices is appointed by  government for the purpose of noting of

dishonoured bill. 

• Dishonoured of bill  : 

when Drawee not paid the amount of bill on  due date,  is called dishonoured of bill .

The following  Journal entries are made 

Dealing by 1st method and dishonoured of bill 

  Drawee A/c ———— Dr 

      To Bill receivable A/c 

Dealing by 2nd methods and dishonoured of bill 

Drawee A/c ———— Dr 

    To bank A/c 

Dealing by 3rd methods and dishonoured of bill :

Drawee A/c ————— Dr 

        To Endorsee A/ c 

Dealing by 4th method and dishonoured of bill: 

Drawee A/c ————— Dr 

   To bank for collection A/ c 

• Retirement of bill : 

when Drawee makes payments of bill before  due date  is called as Retirement of bill . Some discounts are allowed to Drawee at the time of retirement of bill.

• Honoured of bill : 

On due date,  the Drawee makes the payment of bill is called honoured of bill. 

The following Journal entries are made: 

Dealing by 1st methods and bill is honoured: 

Cash A/ c  ——— Dr 

     To Bill receivable A/ c 

Dealing by 2nd methods and bill is honoured: 

    "  No entry are made "

Dealing by 3rd methods and bill is honoured: 

" No entry are made "

Dealing by 4th method and bill is honoured: 

Bank A/c ———— Dr 

    To Bank for collection A/ c 

• Reneval of bill :

 After dishonoured of 1st bill,  as per request of Drawee,  the new bill is drawn by the drawer with interest is called reneval of bill . At that time of reneval of bill partly payment is made by Drawee to Drawer and for the balance amount Drawee accept a new bill. 

Formate of bill of exchange  :