Ch 4Accounting for Bills of Exchange — Class 11 Accountancy, concept-first.

Goods can be bought or sold either for cash or on credit. In a cash deal the payment is received at once, but in a credit deal the payment is put off to a future date, and the seller has to rely on th…

According to the Negotiable Instruments Act, 1881, 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 su…

There are three parties to a bill of exchange:

According to the Negotiable Instruments Act, 1881, a promissory note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking, signed by the maker…

There are two parties to a promissory note:

Bills of exchange are used frequently in business because of the following advantages:

Maturity is the date on which a bill of exchange or promissory note becomes due for payment. To arrive at the maturity date, three days of grace are added to the date on which the period of the bill a…

If the holder of a bill needs funds before the due date, he can approach a bank to encash the bill. The bank pays the amount of the bill after deducting some interest, which in this case is called dis…

Any holder may transfer a bill, unless the bill has been drawn with words prohibiting its transfer. The bill is transferred by the drawer (or a later holder) signing on the back of the bill along with…

For the person who draws the bill and gets it back after its acceptance, the bill is a bill receivable; for the person who accepts it, the same bill is a bill payable.

A bill receivable can be dealt with by its receiver (the drawer/holder) in one of four ways. He can:

In the books of the acceptor (or the maker of a promissory note), the entries are the same whatever the drawer does with the bill — whether he retains, discounts, endorses or pledges it:

A bill is said to be dishonoured when the drawee fails to make payment on the date of maturity. When this happens the liability of the acceptor is restored, so the entries made on receipt of the bill…

A bill of exchange should be duly presented for payment on the date of its maturity; the drawee is absolved of liability if the bill is not duly presented.

Sometimes the acceptor foresees that he will not be able to meet the bill on maturity and asks the drawer to extend the time for payment.

Sometimes a bill is arranged to be retired before the due date by mutual understanding between the drawer and the drawee.

When a business handles only a few bills, it records them directly in the journal. But a business that deals in a large number of bills maintains two special subsidiary books — the Bills Receivable Bo…

So far, every bill discussed has been a trade bill — a bill drawn and accepted for a genuine trade transaction (a real sale or purchase of goods on credit).

The key terms introduced in this chapter, with a short meaning for each.

1. Bill of exchange as an instrument. A bill of exchange is a device by which the debtor in a credit transaction need not pay immediately, but satisfies the creditor by accepting in writing the liabil…