Introduction:

A bill of exchange or "draft" is a written order by the drawer to

the drawee to pay money to the payee. A common type of bill of exchange
is the cheque (check in American English), defined as a bill of exchange
drawn on a banker and payable on demand. Bills of exchange are used
primarily in international trade, and are written orders by one person to his
bank to pay the bearer a specific sum on a specific date. Prior to the advent
of paper currency, bills of exchange were a common means of exchange.
They are not used as often today.
A bill of exchange is essentially an order made by one person to another
to pay money to a third person. A bill of exchange requires in its inception
three partiesthe drawer, the drawee, and the payee. The person who
draws the bill is called the drawer. He gives the order to pay money to the
third party. The party upon whom the bill is drawn is called the drawee. He
is the person to whom the bill is addressed and who is ordered to pay. He
becomes an acceptor when he indicates his willingness to pay the bill. The
party in whose favor the bill is drawn or is payable is called the payee. The
parties need not all be distinct persons. Thus, the drawer may draw on
himself payable to his own order.
A bill of exchange may be endorsed by the payee in favour of a third
party, who may in turn endorse it to a fourth, and so on indefinitely. The
"holder in due course" may claim the amount of the bill against the drawee
and all previous endorsers, regardless of any counterclaims that may have
disabled the previous payee or endorser from doing so. This is what is
meant by saying that a bill is negotiable.

Special Characteristics:
An Instrument, in order to amount in law to as bill of exchange, must fulfill
the following conditions (i) it must be in writing (ii) signed by the maker; (iii)
it must contain an order iv) which must been unconditional; v) it must direct
a certain person vi) to pay certain sum of vii) money only viii) to a certain
person or his order or to bearer. Ix) It must be properly stamped. Briefly
speaking, before a document can be called a bill of exchange, the drawer
must be certain, the order must be certain, the drawee must be certain, the
payee must be certain and the sum payable must also be certain. These
are popularly called the five certainties of a bill of exchange.

Parties of Bill of Exchange:

Drawer : Drawer is a person who drafts or prepares the bill. He is a creditor
and he has to receive the money from the debtor or buyer. He is also
known as the maker of the bill.
Eg. Shiwani draws a bill of Rs. 500 on Ashok.In this case, Shiwani is the
maker of the bill. She has signed the bill. She gives the order to pay the
amount. So she is known as the drawer of the bill.
Drawee: Second person involved in the bill of exchange is one on whom
the bill is drawn. He is a debtor. He receives an order from the creditor.
Eg. Shiwani draws a bill on Ashok. In this case the bill is drawn on Ashok
so he becomes the drawee. Drawee accepts the bill by signing the bill. He
is also known as the acceptor of the bill since he is accepting the bill. Aftrer
accepting the bill drawee becomes the acceptor.
Payee: In some case third part is also involved.
Eg. Shiwani draws a bill of Rs. 500 on Ashok and gives order to pay the
amount of the bill to Kunal.

In this case Kunal becomes the payee. He is also a creditor. Th payee is

the receiver of the amount of the bill. The payee is the third party to whom
the bill is made payable. If the bill is made payable to the drawer himself,
then the drawer and the payee are one and the same person.

Specimen of bill of exchange:

Essentials: as discussed earlier it is necessary to mention few things when
the bill is prepared. They are as follows:

Drawer
Drawee
Payee (if the transaction involves so.)
Period
Amount of bill drawn
Date of bill
Date of acceptance

In the above given bill, Mr. Hamid Zafar is the drawer of the bill. This bill is
drawn on Mr. Rashid Ahmad so he is the debtor and the drawee. The time
period is 2 months and the ate is bill is drawn is 30th November, 1997.

Important terms realted to bills of exchange:

Terms of Bill: The duration for which the bill is drawn is the term or the
tenure of the bill.

Days of grace: Days of grace means the three extra days allowed by the
law to the drawee over and above the period of the bill to prepare himself
for the payment.

Due date: Due date is the date when the drawee is supposed the drawer.
This date is mutually accepted by both the parties. The days of grace
added to the tenure/term of the bill gives us the due date.
Eg. Shiwani draws a bill on Ashok which is accepted on the 1st February
2012 for 2 months.
Here, Tenure/term of the bill is 2 months. Days of grace by law is 3 days.
Hence the due date is 2 months from 1st February 2012 i.e 1st april,2012 +
3 days of grace.
Therefore the due date is 4th april,2012.

Various entries related to bill of exchange:

Honouring of the bill: If on the due date of a bill the drawee or an

acceptor makes full payment to its drawer, the bill is said to be honoured.

Noting charges: Notary public presents the bill to the drawee and if it is
dishonoured, he records the fact of dishonor with its reasons. Then he
returns it to the holder. For this service small fee or charges are paid to the
notary public who is a person appointed by the government for specific
reasons. This noting charges are paid by the holder/drawer but however
they can be recovered from the drawee.

The drawer has 4 options after accepting a bill and honouring bill. They are
as follows:
The accepted bill can be retained by the drawer with him till the due
date.
The accepted bill is endorsed to endorsee by the drawer.
The accepted bill can be discounted with the bank by the drawer.
The accepted bill is sent to bank for collection by the drawer.

Retaining of the bill: If the drawer is not in hurry to get the money he can
keep the bill with him till the due date of the bill and can collect money from
the drawee on the due date.

Endorsement of the bill: to endorse means to transfer. The main purpose

of this endorsement Is to transfer the title of the document to some other
person. The bill can be endorsed by the drawer by signing at the back of
the bill.
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Endorser: The person who is transferring the bill.

Endorsee: The person to whom the bill is transferred.

Discounting the bill: If the drawer needs the money earlier than the due
date he can discount the bill with the bank. The bank credits the amount to
the drawer but keeps some part of the amount on account of discount for
early payment before the due date. The bank owns the bill after discounting
it.

Bank for collection: When the drawer does not have the time to collect
the bill he can send such bills to the bank for collecting the amount from the
drawee on his behalf. The bank acts like an agent. On the due date the
bank collects the money on behalf of the drawer. The bank charges the
drawer for providing this service.

Dishonouring of the bill: If the drawee fails to pay or refuses to pay the
amount of a bill on its due date the bill is said to be dishonoured.

Renewal of the bill: when the drawee is unable to pay the amount on the
due date the drawee may request the drawer to accept a part of the
amount as payment and for the balance amount may may draw a new bill.
Making of a new bill is known as renewal of bill. Renewal of bill means
drafting a new bill in cancellation of earlier bill.

Insolvency of the acceptor: In some cases the acceptor/drawee becomes

insolvent. Insolvent means a point where the drawees liabilities is more
than his assets and therefore he cannot pay the amount to the drawer on
the due date or in the near future. This amount is now considered as bad
debt for the drawer. In some case the drawee pays some amount of the
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total amount from his real estate. This is known as the final dividend. This
bill is then treated as dishonoured.

Following are the journal entries in the books of ths drawer:

In the books of drawer

1.When goods are sold& purchased on credit

Drawee A/c
To sales A/c

Dr.

2.When bill is drawn and accepted

Bills receivable A/c Dr.
To Drawee A/c
3. When retained bill is honoured
Cash A/c
Dr.
To bills receivable A/c
4. When the bill is discounted
Cash/Bank A/c
Dr.
Discount A/c
Dr.
To bills receivable A/c
5.When discounted bill is honoured
NO ENTRY
6.When the bill is endorsed
endorsee A/c
Dr.
To bills receivable A/c
7.When endorsed bill is honoured
NO ENTRY
8. When bill is sent to bank for collection
Bank for collection A/c Dr.
To bills receivable A/c

9.When bill sent for collection is honoured

Cash A/c
Dr.
Bank charges A/c
Dr.
To Bank for collection A/c
10.When retained bill is dishonoured
Drawee A/c
Dr.
To Bills receivable A/c
11.When discounted bill is dishonoured
Drawee A/c
Dr.
To Bank A/c
12.When endorsed bill is dishonoured
Drawee A/c
Dr.
To endorsee A/c
13.When bill sent to bank for collection is dishonoured
Drawee A/c
Dr.
To Bank for collection A/c
14.When noting charges are paid by drawer
Drawee A/c
Dr.
To cash A/c
15.When noting charges are paid by the bank
Drawee A/c
Dr.
To bank A/c
16.When noting charges are paid by the endrosee
Drawee A/c
Dr.
To endrosee A/c
17.When noting charges are paid by bank for collection
Drawee A/c
Dr.
To bank for collection A/c
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18.Interest is charged
Drawee A/c
Dr.
To interest A/c
19. New bill is drawn and accepted
Cash A/c (if part payment)
Bills receivable (new) A/c
To Drawee A/c

Dr.
Dr.

20.when the bills is retired

Cash A/c
Dr.
Discount A/c
Dr.
To bills receivable A/c
21.When the drawee becomes insolvent
Cash/bank A/c
Dr.
Bad debt A/c
Dr.
To drawees A/c

Following are the journal entries in the books of ths drawee:

In the books of drawee

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1.When goods are sold& purchased on credit

Purchases A/c
Dr.
To Drawer A/c
2.When bill is drawn and accepted
Drawer A/c
Dr.
To bills payable A/c
3. When retained bill is honoured
Bills payable A/c Dr.
To cash A/c
4. When the bill is discounted
NO ENTRY

5.When discounted bill is honoured

Bills payable A/c Dr.
To cash A/c
6.When the bill is endorsed
NO ENTRY
7.When endorsed bill is honoured
Bills payable A/c Dr.
To cash A/c
8. When bill is sent to bank for collection
NO ENTRY
9.When bill sent for collection is honoured
Bills payable A/c Dr.
To cash A/c
10.When retained bill is dishonoured
Bills payable A/c Dr.
To drawer A/c
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11.When discounted bill is dishonoured

Bills payable A/c Dr.
To drawer A/c
12.When endorsed bill is dishonoured
Bills payable A/c
Dr.
To drawer A/c
13.When bill sent to bank for collection is dishonoured
Bills payable A/c
Dr.
To drawer A/c
14.When noting charges are paid by drawer
Noting charges A/c
Dr.
To drawer A/c

15.When noting charges are paid by the bank

Noting charges A/c
Dr.
To drawer A/c

16.When noting charges are paid by the endrosee

Noting charges A/c
Dr.
To drawer A/c

17.When noting charges are paid by bank for collection

Noting charges A/c
Dr.
To drawer A/c

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18.Interest is charged
Interest A/c
Dr.
To Drawer A/c
19. New bill is drawn and accepted
Drawer A/c
Dr.
To cash A/c
To bills payable (new) A/c
20.when the bills is retired
Bills payable A/c
Dr.
To cash A/c
To Discounted received A/c
21.When the drawee becomes insolvent
Drawers A/c
Dr.
To cash/bank A/c
To deficiency A/c

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