Class-11 Accountancy

Chapter 6 – Accounting for Bills of Exchange

Negotiable Instruments
“A negotiable instrument means promissory note, bill of exchange or cheque payable either to
order or to bearer” According to the Negotiable Instruments Act, 1881 there are just three types of
negotiable instruments i.e., promissory note, bill of exchange and cheque.

BILL OF EXCHANGE
Under section 5 of the Indian negotiable instruments act, “a bill of exchange is an instrument in
writing containing an unconditional order, signed by the maker, directing a certain person to pay
ascertain sum of money only to or to the order of ascertain person, or to the bearer of the
instrument”

Features/Characteristic or Essentials of a bill of exchange

(1) It must be in writing.
(2) It must contain an order to pay.
(3) The order contained in the bill must be unconditional
(4) It must be signed by the maker or drawer.
(5) The drawee (on whom the bill is drawn ) must be certain.
(6) The amount payable must be certain and it should be in money only.
(7) The payee must be certain.
(8) it must be stamped as per the requirement of law.

PARTIES TO THE BILL OF EXCHANGE

(i) Drawer (or maker) : A drawer is a seller of goods (on credit) and he writes or draws the bill
on the customer.

(ii) Drawee : Drawee is a customer who is buying goods on credit from the drawer. Drawee
accepts the bill to pay the amount by writing the word ‘Accepted’.

(iii) Payee : Payee is the person to whom the final payment is to be made. Drawer of bill can
be a payee of the bill or he may appoint a third party for the same.
 ADVANTAGES OF BILLS EXCHANGE

1. Purchase and sale of goods on credit ;

2. Discounting facility ;
3. Easy to recover the amount
4. Endorsement ;
5. Certainly as to payment ;
6. No reminder to debtor ;
7. Convenient means of remittance in foreign trade ;
8. Valid evidence of debt

Specimen of Bills of Exchange

Shyam Delhi
Rs.20,000 April 01, 2010

Three months after date pay to me or my order, the sum of Rupees Sixty Thousand only, for
value received.

Stamp

Accepted
(signed) (Signed)
Vinod Shyam
1.4.2010 H.Q.14 Rohni
Plot No. 138, RK Puram Delhi
Delhi

To
Davidson
Plont No. 138, Rk Puram
Delhi

Promissory note
Promissory note is a written document, which is dated and signed by the two-parties, it is an
instrument containing an unconditional promise by the maker to pay a definite sum of money to a
payee on demand or at a specified future date.
Features/characteristics or Essentials of Promissory Notes
(i) It must be in writing.
(ii) The promise to pay must be expressed a mere acknowledgment of debt without express
promise to pay is not a promissory note.
(iii) The promise to pay must be unconditional. A promise to pay ‘when able or ‘as soon as i
possibly can’ is conditional.
(iv) it Must be signed by the maker.
(v) The maker must be certain
(vi) Promise must be to pay a certain sum.
(vii) The payee must be certain
(viii) The promissory note must be properly stamped.

PARTIES TO A PROMISSORY NOTE:

(1) Drawer or Maker
(2) Drawee or Payee

Specimen of Promissory Note

Vinod Kumar Chandigarh
Rs.45,000 April 01, 2009

Three months after date I promise to pay to Mr. Basant Pandey or order a sum of
Rupees Forty Five Thousand only, for value received.

Stamp

To
Mr. Basant Pandey
151 – Bhagwan Dass Road Vinod Kumar
Near : Sukhna Lake
Chandigarh Head Office .224
Chandigarh
DISTINCTION BETWEEN A BILL OF EXCHANGE AND A PROMISSORY NOTE
BILL OF EXCHANGE PROMISSORY NOTE
1. It contains an order to pay a certain 1. It contains a promise or undertaking to
sum of money. pay a certain sum of money.
2. It is drawn by the creditor. 2. It is drawn by the debtor.
3. It needs acceptance by the drawee 3. It needs no acceptance.
or debtor.
4. It has three parties namely drawer, 4. It has two parties’ drawer and payee.
drawee and payee.

CHEQUE:
A cheque is the means by which a person who has funds of a bank with draws the same or
some part of it. A cheque is a kind of bill of exchange. It is always drawn on a specified banker
without any days of grace. It must be drawn in accordance with the requirements laid down in
section 5 of the act. It must be signed by the maker, must contain an unconditional order for
payment of a certain sum of money, to or to the order of a specified person or to the bearer. It
must also specify the banker upon it is drawn.

Cases of Bills of Exchange :

1. When the bill is retained till the date of maturity
2. When the bill is discounted with the bank
3. When a bill is endorsed
4. When bill is sent to the bank for collection
5. Dishonour of a bill
6. Renewal of bill of exchange
7. Insolvency of drawee of bill of exchange

ACCOMODATION BILLS
Accommodation bills are drawn and accepted without any consideration, there are known as
‘kite bills’. These are not legally enforceable as no valuable consideration is involved there in.
These are drawn and accepted between parties having very close relationships. Though these of
view, these are in practice just like ordinary bills.