Chapter 4: Bills of Exchange

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Bills of Exchange and Promissory Note

 

Bills of Exchange and Promissory Notes are financial instruments used in commercial transactions:

 

- Bills of Exchange:

  - Defined as an unconditional written order to pay a certain sum of money to a specified person (payee) at a future date.

  - Features include parties like drawer (issuer), drawee (debtor), and payee, along with a specimen demonstrating its format and structure.

  - It distinguishes from a promissory note by being an order to pay rather than a promise.

 

- Promissory Note:

  - A written promise by one party (maker) to pay another party (payee) a specified sum of money at a determined future date.

  - It's distinguished by being a direct promise to pay, not an order.

 

 Important Terms

 

Understanding key terms related to Bills of Exchange:

 

- Terms of Bill: Specifies conditions such as amount, date of payment, and parties involved.

- Due Date: The date when the payment is due.

- Days of Grace: Additional days after the due date allowed for payment without penalty.

- Date of Maturity: The date when the bill becomes due for payment.

- Bill at Sight: Payable immediately upon presentation.

- Bill after Date: Payable after a specified number of days from the date of issuance.

- Discounting of Bill: Process of selling a bill to a bank at a discount before its maturity.

- Endorsement of Bill: Transfer of rights to another party by signing the back of the bill.

- Bill sent for Collection: Process of sending the bill to the bank for payment.

- Dishonour of Bill: Failure of the drawee to honor payment on the due date.

- Noting of Bill: Recording the dishonor of a bill by a notary public for legal purposes.

 

 Accounting Treatment of Bills of Exchange till Dishonour

 

The accounting treatment involves several stages:

 

1. Recording the Bill: Initial entry in the books of the drawer and drawee.

2. Acceptance: Acknowledgment by the drawee of the obligation to pay.

3. Discounting: If the drawer needs immediate funds, the bill may be discounted at a bank.

4. Endorsement: Transfer of rights to another party.

5. Collection: Submission to the bank for payment at maturity.

6. Dishonour: If the drawee fails to pay, the bill is dishonored.

7. Noting: Recording of dishonor by a notary public, marking the legal start of recovery actions.

 

 References

 

- Institute of Chartered Accountants of India (ICAI). (2020). Accounting Standards. Retrieved from [https://www.icai.org](https://www.icai.org)

- Reserve Bank of India (RBI). (n.d.). Regulatory Framework. Retrieved from [https://www.rbi.org.in](https://www.rbi.org.in)

 

This chapter provides a comprehensive overview of Bills of Exchange, essential for understanding their role in commercial transactions and their accounting treatment in the Indian context.

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