Bills of Exchange
This lecture introduces the concepts of Bills of Exchange and Promissory Notes, highlighting their exam importance, structure, parties involved, differences, and key theoretical and practical points.
Overview of the Chapter
- The chapter covers Bills of Exchange and Promissory Notes, focusing on definitions, differences, types, parties involved, and related accounting concepts.
- Bills of Exchange questions are scoring and generally require knowledge of journal entries and theory, not detailed calculations.
Bills of Exchange: Meaning and Parties
- A Bill of Exchange is a written order to pay a certain sum of money, involving three parties: Drawer, Drawee, and Payee.
- Drawer: Person who makes the bill (creditor).
- Drawee: Person who accepts and is liable to pay (debtor).
- Payee: Person who receives the payment.
Promissory Notes: Meaning and Parties
- A Promissory Note is a written promise by the maker (debtor) to pay a certain sum to the payee (creditor).
- Only two parties involved: Maker (debtor) and Payee (creditor).
Differences: Bill of Exchange vs. Promissory Note
- Bill of Exchange contains an order to pay; Promissory Note contains a promise to pay.
- Bill of Exchange involves three parties (Drawer, Drawee, Payee); Promissory Note involves two parties (Maker, Payee).
- Bill of Exchange is usually drawn by the creditor; Promissory Note by the debtor.
- Acceptance is needed for a Bill of Exchange, not for a Promissory Note.
- Bills of Exchange can impose conditional acceptance; Promissory Notes cannot.
- Notice of dishonor is required for a Bill of Exchange; not required for a Promissory Note.
Types of Bills of Exchange
- Trade Bill: Drawn for genuine trade transactions.
- Accommodation Bill: Drawn without underlying trade, usually to raise money between friends.
Due Date Calculation
- Due date = Period of bill + 3 days grace.
- If due date falls on a public holiday/Sunday, payment is made on the preceding working day.
- If due date falls on an emergency holiday, payment is made on the next working day.
Types of Bills by Time
- Bill at Sight (On Presentation): Payable on demand, no grace days.
- Bill After Sight: Period counted from date of acceptance.
- Bill After Date: Period counted from date of drawing.
Foreign Bill of Exchange
- Drawn in one country, payable in another country.
Important Points Related to Due Dates
- Count in months if period in months; count in days if period in days.
- Exclude the date of the bill when counting days.
- When the due date falls at month end and next month lacks same date, take last day of next month.
Key Concepts in Bills of Exchange
- Discounting of Bill: Selling the bill to a bank before its due date for money less discount charges.
- Endorsement of Bill: Transferring the right of the bill to another person.
- Retirement of Bill: Payment of bill before due date, often with a rebate.
- Bills Sent for Collection: Keeping the bill with the bank for safe custody, not discounting.
- Dishonor of Bill: Drawee refuses payment; noting charges may apply.
- Renewal of Bill: New bill made if drawee can't pay on due date, with interest charged.
- Insolvency of Drawee: Drawee unable to pay dues, resulting in bad debts.
- Accommodation Bill: Bill drawn without trade transaction, mainly for financial help.
Key Terms & Definitions
- Drawer — Person who makes the bill of exchange (creditor).
- Drawee — Person who has to pay the amount on the bill (debtor).
- Payee — Person who receives the payment.
- Maker — Person who makes a promissory note (debtor).
- Bill of Exchange — Written order to pay a specific amount.
- Promissory Note — Written promise to pay a specific amount.
- Discounting Charges — Fee taken by bank for discounting a bill.
- Noting Charges — Fee for noting dishonor of bill by notary public.
- Grace Days — Extra 3 days added to original period for payment.
Action Items / Next Steps
- Revise definitions and differences between Bills of Exchange and Promissory Notes.
- Practice due date calculations with various periods and dates.
- Prepare a comparison table for differences between bills and notes for exams.
- Review concepts of discounting, endorsement, retirement, renewal, and dishonor for each type.