CBSE Class 11 Accountancy Accounting For Bills Of Exchange Notes Set C

UNIT-6

ACCOUNTING FOR BILLS OF EXCHANGE

“Bills of Exchange are instrument of credit which facilitate the credit sale of goods.”

INTRODUCTION - A Bill of Exchange and Promissory Note both are legal Instruments which facilitate the credit sale of goods by assuring the seller that the amount will be recovered after a certain period. Both of these are legal instruments under the Negotiable Instruments Act, 1881.

BILL OF EXCHANGE - “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.” Section 5 of the Negotiable Instrument Act, 1881.

FEATURES OF A BILL OF EXCHANGE ARE

1. A Bill of Exchange must be in writing.

2. It must contain an order (and not a request) to make payment.

3. The order of payment must be unconditional . 

4. The amount of bill of exchange must be certain.

5. The date of payment should be certain.

6. It must be signed by the drawer of the bill.

7. It must be accepted by the drawee by signing on it.

8. The amount specified in the bill of exchange is payable either on demand or on the expiry of a fixed period.

9. The amount specified in the bill is payable either to a certain person or to his order or to the bearer of the bill.

10. It must be stamped as per legal requirements.

PARTIES TO A BILL OF EXCHANGE

1. DRAWER: Drawer is the person who makes or writes the bill of exchange. Drawer is a person who has granted credit to the person on whom the bill of exchange is drawn. The drawer is entitled to receive money from the drawee (acceptor).

2. DRAWEE: Drawee is the person on whom the bill of exchange is drawn for acceptance. Drawee is the person to whom credit has been granted by the drawer. The drawee is liable to pay money to the creditor/drawer.

3. PAYEE: Payee is the person who receives the payment from the drawee. Usually the drawer and the payee are the same person. In the following cases. drawer and payee are two different persons : (i) When the bill is discounted by the drawer from his bank- payee is the bank. (ii) When the bill is endorsed by the drawer to his creditors: payee is the endorsee.

ADVANTAGES OF BILL OF EXCHANGE

1. It helps in purchases and sales of goods on credit basis.

2. It is a legally valid document in the eyes of law. It assures a easier recovery to the drawer if drawee fails to make the payments.

3. A bill can be discounted from the bank before its date of maturity. By discounting with the bank, drawer can get the money before due date if required.

4. It can be easily transferred from one person to another by endorsement.

5. It helps in recovery of debt without sending reminders to the debtor.

6. It assures the seller about the timely recovery of debt. So a drawer and drawee can plan about its cash management.

PROMISSORY NOTE

A Promissory note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking signed by the maker to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.

FEATURES OF A PROMISSORY NOTE

1. There must be an unconditional promise to pay a certain sum of money on a certain date.

2. It must be signed by the maker.

3. The name of the payee must be mentioned on it.

4. It must be stamped according to its value.

PARTIES TO A PROMISSORY NOTE

1. The maker : The maker is the person who makes the promise to pay the amount on a certain date. Maker of a bill must sign the promissory note before giving it to the payee.

2. The payee : The payee is the person who is entitled to get the payment from the maker of promissory note. Payee is the pesson who has granted the credit.

IMPORTANT TERMS

1. Term of Bill : The period intervening between the date on which a bill is drawn and the date on which it becomes due for payment is called „Term of Bill‟.

2. Due Date :

          Due date is the date on which the payment of the bill is due.

Due date is ascertained in the following manner :

(i) In case of „Bill at sight‟ -

                        Due date is the date on which a bill is presented for the payment.

(ii) In case of „Bill after Date‟ -

                        Due Date = Date of Drawing + Term of Bill.

(ii) In case of „ Bill after sight‟ –

                        Due date = Date of Acceptance + Term of Bill.

3. Days of Grace : Drawee is allowed three extra days after the due date of bill for making payments. Such 3 days are known as „Days of Grace‟. It is a custom to add the days of grace.

4. Date of Maturity : The date which comes after adding three days of grace to the due date of a bill is called „Date of maturity‟.

Illustration: 1

A bill of exchange for ` 25000 is drawn by A on B on 1st April, 2011 for 3 Months. B accepted the bill on 10th April, 2011.

Find the DUE DATE and DATE OF MATURITY if

Cash I - The bill is Bill After date

Case II - The bill is Bill After Sight

5. Bill at sight/Bill on Demand: When no time for payment is mentioned in the bill of exchange and the bill is payable whenever it is presented to the drawee for the payment, such bills are known as "Bill at sight" or "Bill on Demand".

3 days of grace are not allowed when bill is payable on demand.

6. Bill after Date: Bill after date is the bill in which due date and date of maturity is ascertained from the date on which the bill is drawn.

3 days of grace are allowed for ascertaining the date of maturity in case of bill after date.

7. Discounting of Bill: When the bill is encashed from the bank before its due date, it is known as discounting of bill. Bank deducts its charges from the amount of bill and disburses the balance amount.

Illustration 2

Ram sold goods to shyam for Rs. 30,000 at credit on 1st April, 2011. Ram discounted the bill with his bank on 4th May 2011 @ 9% per annum find out :

(i) The amount of discounting charges.

(ii) The amount that Ram will receive from his bank at the time of discounting the bill.

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