Bill of Exchange Notes Class 11 Accountancy | Concept and Accounting Treatment

Meaning of Bill of Exchange - A written instrument 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

1. Drawer is the maker of the bill of exchange. A seller/creditor who is entitled to receive money from the debtor can draw a bill of exchange upon the buyer/debtor. The drawer after writing the bill of exchange has to sign it.
2. Drawee is the person upon whom the bill of exchange is drawn. Drawee is the purchaser or debtor of the goods upon whom the bill of exchange is drawn. Also known as acceptor.
3. Payee is the person to whom the payment is to be made. The drawer of the bill himself will be the payee if he keeps the bill with him till the date of its payment. 

Features of a Bill of Exchange

1. A bill of exchange must be in writing. 
2. It is an order to make payment. 
3. The order to make payment is unconditional. 
4. The maker of the bill of exchange must sign it. 
5. The payment to be made must be of a certain amount. 
6. It must be payable on a certain date. 
7. The bill of exchange must be payable to a certain person.
8. The amount mentioned in the bill of exchange is payable either on demand or on the expiry of a fixed period of time. 
9. It must be stamped as per the requirement of law. 

Meaning of Promissory Note - A written instrument containing an unconditional promise/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. It must be in writing.
2. It must contain an unconditional promise to pay. 
3. The sum payable must be certain.
4. It must be signed by the maker.
5. It must be payable to a certain person.
6. It should be properly stamped.

Difference between Bill of Exchange and Promissory Note

Basis	Bill of Exchange	Promissory Note
Order/Promise	It contains an order to make payment.	It contains a promise to make payment.
Drawer	It is drawn by the creditor.	It is drawn by the debtor.
Acceptance	It requires acceptance by the drawee.	It does not require any acceptance.
Drawer & Payee	Drawer and payee can be the same party.	Drawer and payee can not be the same party.
Notice of Dishonour	In case of its dishonour due notice of dishonour is to be given by the holder to the drawer.	No notice needs to be given in case of its dishonor.

Maturity of the Bill

• The date on which a bill of exchange or a promissory note becomes due for payment.
• Three days, known as days of grace, must be added while arriving at the maturity date. 
• In case of public holiday – due date shall be the preceding day.
• In case of emergency holiday – due date shall be after one day from the date of maturity.

Alternatives/Options available to a Bill Holder

• Retaining the bill till maturity
• Discounting the bill with the bank
• Endorsing the bill
• Sending the bill to bank for collection

IMPORTANT ACCOUNTING TREATMENT

Accounting Treatment (in different options available to the bill holder)

Transaction	In the books of Drawer	In the books of Drawee
Sale/Purchase of Goods	Drawee/Debtor        Dr.                 To Sales A/c	Purchase A/c       Dr.           To Drawer/Creditor
Drawing or Accepting of Bill	Bills Receivable A/c Dr.            To Drawee’s A/c	Drawer’s A/c Dr.                To Bills Payable A/c
Bill retained till maturity and honoured on maturity date	Cash/Bank A/c Dr.                   To Bills Receivable A/c	Bills Payable A/c Dr.          To Cash/Bank A/c
Bill discounted with the bank    Bill met on maturity	Bank A/c     Dr.                   Dis. Charge A/c  Dr.                 To Bills Receivable A/c                                                  No Entry	No Entry                                       Bills Payable A/c Dr.        To Cash/Bank A/c
Bill endorsed to the third party   Bill met on maturity	Endorsee’s A/c     Dr.           To Bills Receivable A/c   No Entry	No Entry   Bills Payable A/c Dr.          To Cash/Bank A/c
Bill sent to bank for collection   Bill met on maturity	Bill sent for collection Dr          To Bill Receivable A/c   Cash/Bank A/c Dr          ToBill sent for collectionA/c	No Entry     Bills Payable A/c Dr.     To Cash/Bank A/c

Accounting Treatment in case of Dishonour of a Bill

In the books of Drawer

In the books of Drawee

•      If bill was retained till maturity Drawee’s A/c       Dr.                          To Bill Receivable A/c                           To Cash A/c (noting charges) •      If bill was discounted with the bank Drawee’s A/c Dr.                                           To Bank A/c •      If bill was endorsed Drawee’s A/c A/c Dr.                                           To Endorsee’s A/c •      If bill was sent to bank for collection Drawee’s A/c Dr.                                    To Bill sent for collection A/c              To Bank A/c

•      In all four cases Bill Payable A/c       Dr.                  Noting Charges A/c    Dr.                                 To Drawer A/c