Maharashtra Board Class 12 Book Keeping and Accountancy Chapter 7 Bills of Exchange PDF Download

Chapter 7: Bills Of Exchange

Content

7.1 Introduction - Necessity, Meaning, Definition of Bill of Exchange

7.2 Draft, Format of Bill of exchange, Parties to the bill of exchange, acceptance of bill, term of bill, days of grace, date of maturity, due date, types of bills

7.3 How Using of bill, Dishonor of bill, noting and protesting of bill, Notary public and Noting charges

7.4 Accounting treatment of bill by the drawer/holder, drawee in the following cases:

A. Retaining the bill till due date. Honour/dishonour. Insolvency of drawee/acceptor

B. Endorsement of the bill. Honour/dishonour. Insolvency drawee/acceptor

C. Discounting the bill with the bank. Honour/dishonour. Insolvency of drawee/acceptor

D. Sending the bill to the bank for collection. Honour/dishonour. Insolvency of drawee/acceptor

E. Renewal of bill - reasons for renewal of the bill with or without charging interest

F. Making Part Payment of the basic amount interest and noting charges and drawing of new bill

G. Honour/Dishonour of new bill

H. Insolvency of the acceptor and settlement of his account

I. Retirement of bill

J. Journal entries and Ledger (Only Drawer's A/c / Drawee's A/c.)

Competency Statements

Students are able to:

Know the meaning of bill of exchange

Understand the different concepts used in bills of exchange

Prepare a draft of bill of exchange and know the various types of bills of exchange

Understand retaining, sending bill for collection, discounting, endorsing, honour, renewal and retiring of the bill

Learn various accounting treatment of bills of exchange

7.1 Introduction

The ability of a customer to obtain goods or services before payment, based on trust is important in business. When goods or services are obtained and payment will be made in the future it is known as credit transaction. Credit transactions play a significant role in the world of business. Credit motivates the customers to increase the amount of their spending. Moreover, business enterprises offer credit to gain a competitive advantage in the market. To balance the potential for increased sales with the risk of decreased cash flow and large outstanding debts the seller requires some sort of commitment or promise from the customer that he would pay the amount of goods, due from him on a particular date in future. To avoid any conflict or misunderstanding about payments, instruments of credit like Bill of Exchange and Promissory Notes are issued. In India instruments of credit have been in use a long time and are popularly known as Hundies.

Teacher's Note

A bill of exchange is like a cheque but with a time period. It is a written promise to pay money on a future date. For example, if you buy goods from a shop and promise to pay after one month, the shopkeeper can write a bill of exchange.

Exam Trick

Remember: Bill of Exchange = Cheque + Time Period. A bill is written by the seller on the buyer and the buyer must accept it. Think of it like booking a movie ticket online and paying later.

Points to Remember

A bill of exchange is a written order to pay money.

It must be accepted by the person who is ordered to pay.

The seller writes it and the buyer accepts it.

It always has a fixed date when payment must be made.

It is used for credit transactions in business.

7.1 a. Necessity

Commercial practice has flourished to treat bill of exchange and promissory notes as valuable instruments of credit to an extent that when a written promise is made in proper form and on proper stamp paper it is understood that the customer has discharged his debt and the seller has received payment. Also, these written promises are accepted by bank and money is advanced against it. Moreover, the instruments being negotiable instruments, can be transferred from one person to another.

Teacher's Note

Bills of exchange help sellers get money before the due date by showing the bill to a bank. The bank gives them cash immediately. This is very helpful in businesses like wholesale trading.

Exam Trick

Remember: Bill of Exchange = Trust Document = Can be cashed early at bank. Just like you can withdraw money from ATM before your salary date using a cheque, you can get cash from a bill before the due date.

Points to Remember

Bills of exchange are trusted documents in business.

Banks accept them and give cash against them.

They can be transferred from one person to another.

They help sellers get money early if needed.

7.1 b. Meaning

Negotiable instrument Act, 1881 states that Negotiable instrument means promissory note, bill of exchange or cheque payable either to order or bearer. A bill of exchange is a written acknowledgment of debt and also a promise to pay the debt according to the terms of the bill. A bill of exchange is generally drawn by the creditor on his debtor and should be accepted by the debtor.

Teacher's Note

In simple words, a bill of exchange is a letter written by the seller to the buyer asking him to pay money on a fixed date. It is like saying "I am giving you goods today. Please pay me this amount on this date."

Exam Trick

Remember: Bill = Seller writes to Buyer = Pay me on this date. It is not a request but a written order to pay. The buyer must accept it by signing.

Points to Remember

A bill of exchange is written by the creditor or seller.

It is sent to the debtor or buyer for acceptance.

It shows that money is owed and when it must be paid.

It is an important legal document.

7.1 c. Definition Of Bill Of Exchange And Promissory Note

Section 5 of the Negotiable Instruments Act, 1881 defines Bill of Exchange as: "A bill of exchanges is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay certain sum of money only to, or to the order of a certain person, or to the bearer of the instrument".

Features of Bill of Exchange

It should be in writing.

It must be stamped as per the Indian Stamp Act, 1899.

It must be dated.

It must contain an order to pay certain sum of money.

The order must be unconditional.

The amount must be payable either to a certain person or his order to the bearer of the bill.

It must be signed by the maker.

Section 4 of he Negotiable instruments Act, 1881defines Promissory Note as: "A Promissory Note is defined as 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 money only to or to the order of certain person, or the bearer".

Teacher's Note

A bill must always be in writing and must be stamped. It is like a legal paper. A promissory note is almost the same but one person makes a promise to pay, not asking someone else to pay.

Exam Trick

Remember: Bill = Two people (Seller and Buyer). Promissory Note = One person promises to pay. A bill is like ordering someone to pay. A note is like promising to pay yourself.

Points to Remember

Bill of exchange must be in writing and stamped.

It must have a date and a fixed amount.

It must be signed by the person who writes it.

A promissory note is one person's promise to pay.

A bill involves two people - the seller and the buyer.

7.2 Parties To A Bill Exchange

1. Drawer: Drawer is person who draws or makes the bill and signs on it. He is the creditor, who is entitled to receive the money from debtor. For the Drawer the instrument is his "Bills Receivable", since he has to receive the amount of the bill.

2. Drawee: Drawee is the person on whom the bill is drawn. He has to accept the bill drawn on him. He is the debtor who has to pay money to creditor. For the Drawee the instrument is his "Bills payable", since he has to pay the amount of the bill.

3. Payee: Payee is the person to whom the payment is to be made.

Teacher's Note

In a simple buy-sell situation: The seller is the Drawer. The buyer is the Drawee. Usually the Drawer is also the Payee. For example, Raj sells goods to Sham and writes a bill. Raj is the Drawer. Sham is the Drawee. Raj will receive the payment, so he is the Payee.

Exam Trick

Remember: Drawer = the one who DRAWS (writes) the bill = the creditor. Drawee = the one on whom it is DRAWN = the debtor. Think: "Draw" sounds like "creditor" and "Drawee" sounds like "debtor".

Points to Remember

Drawer writes the bill and is owed money.

Drawee is the one who must pay the money.

Payee is the one who receives the money.

Drawer records the bill as Bills Receivable (an asset).

Drawee records the bill as Bills Payable (a liability).

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