Riaz Academy
Accounting For Bills of Exchange
Learning Objectives:
- Learn Definition and
explanation bills of exchange. - What are advantages of Bills of Exchange (B/E)?
- What is difference between Bills of Exchange and promissory note?
- How a bill of
exchange functions? - What are the
accounting treatments of drawing, accepting, discounting, paying, dishonoring, Retiring a
bill.
Now-a-days, business transactions are usually conducted on credit basis. It means that the purchaser of goods pays the price of goods purchased within a specific fixed period of time after the
date of the transaction.
date of the transaction.
On the other hand, the
seller/vendor has to wait for his money. In many cases, the vendor cannot afford to do
so. He desires payment at the time of selling the goods; but the buyer is not
in a position to pay. Then how the matter can be settled so that both the buyer
and seller are satisfied? The bill of exchange is one of the means of
doing this.
seller/vendor has to wait for his money. In many cases, the vendor cannot afford to do
so. He desires payment at the time of selling the goods; but the buyer is not
in a position to pay. Then how the matter can be settled so that both the buyer
and seller are satisfied? The bill of exchange is one of the means of
doing this.
Definition and Explanation of Bill of Exchange
Section 5 of the Negotiable Instruments Act 1981 defines Bill of Exchange as “an unconditional order in writing addressed by one person
to another; signed by the person giving it, requiring, the person to whom it is
addressed to pay on demand or at a fixed or
determinable future time, a certain sum in money to or to the order of a
specified person or to bearer.“
to another; signed by the person giving it, requiring, the person to whom it is
addressed to pay on demand or at a fixed or
determinable future time, a certain sum in money to or to the order of a
specified person or to bearer.“
The students should keep in mind the following
points to understand the definition.
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points to understand the definition.
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(a) The person who writes out the order to pay
is called the drawer.
is called the drawer.
(b) The person upon whom the bill of exchange is
drawn (who is ordered to pay) is called the drawee.
drawn (who is ordered to pay) is called the drawee.
(c) The drawee may ‘accept’ the bill. This
is a special
use of the word
‘accept’ because it means
that he accepts
to pay the
amount payable expressed
in the bill,
i.e. If he accepts the obligation
to pay he writes ‘accepted’ across the face of the bill and signs it. From that time on
he is known
as the ‘acceptor‘
of the bill and
has absolute liability to
honor the bill on the due date.
is a special
use of the word
‘accept’ because it means
that he accepts
to pay the
amount payable expressed
in the bill,
i.e. If he accepts the obligation
to pay he writes ‘accepted’ across the face of the bill and signs it. From that time on
he is known
as the ‘acceptor‘
of the bill and
has absolute liability to
honor the bill on the due date.
(d) The amount of money must be mentioned
clearly. For example,
I cannot make
out a bill requiring someone
to pay the value of my car or house. That is an uncertain sum. It must say ‘Five thousand rupees or ten
thousand rupees.
clearly. For example,
I cannot make
out a bill requiring someone
to pay the value of my car or house. That is an uncertain sum. It must say ‘Five thousand rupees or ten
thousand rupees.
(e) The time must be fixed or at least be
determinable. For example, ‘60 days
after date’ is quite easily determinable.
If the bill is made out on 1st July, it will be 29th August.
determinable. For example, ‘60 days
after date’ is quite easily determinable.
If the bill is made out on 1st July, it will be 29th August.
(f) The person who is entitled to receive the
money from the acceptor is called the ‘payee’.
It is usually the drawer who is supplying goods to the value of the
bill, and wants to be paid for them. If
the drawer decides, the bill can be made payable to
someone else by endorsing it.
That is why the
definition says, to pay…….
to, or to the
order of, a specified person.
money from the acceptor is called the ‘payee’.
It is usually the drawer who is supplying goods to the value of the
bill, and wants to be paid for them. If
the drawer decides, the bill can be made payable to
someone else by endorsing it.
That is why the
definition says, to pay…….
to, or to the
order of, a specified person.
(g) A
bill can be
made payable to a
bearer, but it
is risky, since
any finder of the
bill or any thief, can claim the money from the
acceptor.
bill can be
made payable to a
bearer, but it
is risky, since
any finder of the
bill or any thief, can claim the money from the
acceptor.
Now read the definition again and see the Sample given below.
Specimen/Sample of a Bill of Exchange:
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Points to be Noted:
a)
This bill is drawn by
Waseem & Co., so the drawer of the bill is Waseem & Co.
This bill is drawn by
Waseem & Co., so the drawer of the bill is Waseem & Co.
b)
The bill is drawn upon
Riaz & Co., so they are drawee of the bill.
They have not yet accepted the bill, and so are not liable to pay it at
maturity.
The bill is drawn upon
Riaz & Co., so they are drawee of the bill.
They have not yet accepted the bill, and so are not liable to pay it at
maturity.
c)
The bill is an
unconditional order in writing. It says
‘pay ten thousand rupees to Waseem & Co.’ it does not say ‘provided you are
in funds. It just says ‘pay!
The bill is an
unconditional order in writing. It says
‘pay ten thousand rupees to Waseem & Co.’ it does not say ‘provided you are
in funds. It just says ‘pay!
d)
It is addressed by one
person (Waseem & Co.) to another (Riaz & Co.) and is
signed by the person giving it (Waseem & Co.).
It is addressed by one
person (Waseem & Co.) to another (Riaz & Co.) and is
signed by the person giving it (Waseem & Co.).
e)
There should be acceptance
by Riaz & Co., without acceptance of Drawee there will be no more legal
status of bills of exchange.
There should be acceptance
by Riaz & Co., without acceptance of Drawee there will be no more legal
status of bills of exchange.
f)
The date is easily
determinable, it is 90 days after lst July, which is 29 September, 2016.
The date is easily
determinable, it is 90 days after lst July, which is 29 September, 2016.
g)
The sum of money is
very certain, ten thousand rupees.
The sum of money is
very certain, ten thousand rupees.
h)
The bill is payable
to, or to the order of, Waseem & Co.
The bill is payable
to, or to the order of, Waseem & Co.
Parties to a Bill of Exchange:
There are three parties in a bill:
1. Drawer:
2. Drawee:
3. Payee :
See some other Samples of Bills of Exchange below:
Further Reading:
Further Reading : Further Study Material from this Topic .
- Accounting for Bills of Exchange, Definition, Explanation & Parties
- How a Bills of Exchange Works?
- Types of Bills of Exchange
- ACCEPTANCE OF A BILL OF EXCHANGE
- HOW TRANSACTIONS
RELATING TO BILLS OF EXCHANGE ARE RECORDED? - ACCOUNTING TREATMENT FOR
BILLS RECEIVABLE AND BILLS PAYABLE - SHORT QUESTIONS WITH ANSWERS
- Practical Problems with Solutions
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