Bills of Exchange
Introduction
A Bill of Exchange is a negotiable instrument governed by the Negotiable Instruments Act, 1881. It is generally used in credit sales transactions.
Definition (Section 5): "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."
Parties to a Bill of Exchange
- Drawer (Maker): The person who makes (draws) the bill. He is the Seller/Creditor who is entitled to receive money.
- Drawee (Acceptor): The person upon whom the bill is drawn. He is the Buyer/Debtor who has to pay money. He becomes 'Acceptor' only after signing the bill.
- Payee: The person to whom payment is to be made. Often, the Drawer and Payee are the same person.
Promissory Note
Definition (Section 4): An instrument in writing containing an unconditional undertaking (promise), signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person.
Parties to Promissory Note:
- Maker (Promissor): The Debtor who promises to pay.
- Payee (Promissee): The Creditor who is entitled to receive money.
Key Terms
- Term of Bill: The period for which the bill is drawn (e.g., 3 months).
- Days of Grace: 3 extra days added to the period of the bill to calculate the Due Date.
- Date of Maturity (Due Date): Date on which the payment falls due.
Due Date = Date of Drawing + Term + 3 Days of Grace. - Discounting of Bill: Encashing the bill from the bank before the due date.
- Endorsement of Bill: Transferring the bill to a third party (Creditor).
- Retiring of Bill: Making payment before the due date (usually implies a rebate).
- Dishonor of Bill: Non-payment of bill on the due date.
- Noting Charges: Fee paid to Notary Public to record the fact of dishonor. Paid by holder, but borne by Drawee.
Calculation of Due Date
| Scenario | Due Date Calculation |
|---|---|
| Public Holiday | Preceding working day. |
| Emergency Holiday | Succeeding working day. |
| Bill At Sight / On Demand | No grace days allowed. Due on presentation. |
| Bill After Date | Time starts from Date of Drawing. |
| Bill After Sight | Time starts from Date of Acceptance. |
Accounting Treament
There are four ways a holder can deal with a bill:
- Retain till Maturity: Keep it and collect money on due date.
- Discount with Bank: Get cash immediately from bank (Bank deducts discount changes).
- Endorse to Creditor: Transfer it to pay off a debt.
- Send for Collection: Send to bank just for collection purpose (Safe custody).
Accommodation Bill
A bill drawn and accepted without any consideration (sale/purchase), just to help one or both parties raise funds temporarily.
Numericals & PYQs
Part A: Numericals (10 Questions)
Period ends: 1st Jan + 2 Months = 1st March.
Add 3 Days of Grace = 1st March + 3 = 4th March 2023.
Period ends: 29th Jan + 1 Month = 28th Feb (2023 is non-leap).
Add 3 Days of Grace = 28th Feb + 3 = 3rd March 2023.
Since 26th Jan is a Public Holiday, it is payable on the Preceding Working Day (25th Jan).
Rebate = Amount x Rate/100 x Unexpired Period/12
Rebate = 10,000 x 6/100 x 1/12 = ₹50.
Amount Paid = 9,950.
Discount = 20,000 x 12/100 x 3/12 = ₹600.
Cash Received = 19,400.
Paid by Bank initially. Recovered from Drawer. Ultimately borne by Drawee.
Initially X is Payee. After endorsement, Z becomes the Payee (Holder in due course).
Days calculation: July (31-12)=19 days. August needs 11 days to make 30.
Nominal Due Date = 11th August.
Legal Due Date = 11 + 3 (Grace) = 14th August.
Emergency Holiday rule: Payable on Succeeding Working Day (1st Oct).
Interest = 10,000 x 12/100 x 2/12 = ₹200.
New Bill Amount = 10,200.
Part B: Previous Year Questions (PYQs) (10 Questions)
An Unconditional Order.
An Unconditional Promise (Undertaking).
Three (Drawer, Drawee, Payee).
Two (Maker and Payee).
Three days.
Drawee (The person responsible for dishonor).
Accommodation Bill.
Preceding Working Day.
Negotiable Instruments Act, 1881.
Retired before due date.