Bill of Exchange

In our day-to-day lives, we pay different bills of products or services we utilise. There are different types of bills depending upon the transactions the customer has made. Class 11 Accountancy chapter, Bill of Exchange educates us about the same in a descriptive manner. A bill of exchange is an essential part of account keeping and recordkeeping of various transactions in a business enterprise. Through this blog, we aim to present simplified study notes on Bill of Exchange to help you understand its meaning, significance, types and much more.

Bill of Exchange

According to the Negotiable Instruments Act, 1881, a Bill of Exchange and a Promissory Note are legal instruments that enable the sale of goods on credit basis. 

This bill is a medium to assure the seller of goods that the amount due is recoverable after a definite period.  As contained in Section 5 of the Negotiable Instruments Act, 1881, A Bill of Exchange is a legal instrument containing an unconditional command signed by the drawer, directing a certain person to a remit a certain amount only to, or to the order of, a certain person or the bearer of this legal instrument. 

Important Terminologies Related to Bill of Exchange

Now that you are familiar with the basic definition of a Bill of Exchange, here are some terminologies associated with the same:

• Term of Bill: It refers to the period between the date in which the bill is drawn and the day on which it becomes due.
• Due Date: It is the date on which a bill becomes due for payment. In case the bill is ‘Bill at Sight,’ then the due date is the date on which the bill is presented for payment. In case it is ‘Bill After Date,’ then the date of drawing will be counted in the term of bill. In case it is ‘Bill After Sight,’ then the due date is calculated from the date of acceptance of the bill.
• Grace Days: Three days of grace is granted to the drawee for making the payment. It is customary to allow grace days. However, in the case of ‘Bill at Sight’ or ‘Bill on Demand,’ grace days are not permitted.
• Date of Maturity: This is when the bill matures, i.e., the date after the term of bill + grace days.
• Discounting the Bill: When the bill is encashed with the bank before the due date, it is called discounting. The bank deducts discounting charges and recovers the amount on the due date of the bill.
• Endorsement of a Bill: In this case, the drawer endorses or transfers the title of the bill in favour of his creditors.
• Dishonour of a Bill: When the drawee fails to make the payment on the date of maturity, it is called as dishonour of a bill.
• Retirement of Bill: When the drawee honours the bill before the bill matures, it is known as the retirement of a bill.
• Renewal of Bill: When the drawee requests to cancel the old bill and draw a new bill with an extended due date, it is known as renewing a bill.
• Noting of Bill: To obtain evidence of dishonour, the drawee re-sent the bill via a legal authority known as Notary Public. It is called Noting of the Bill.

Bills of Exchange and Parties Involved 

As per the class 11 chapter Bill of Exchange, three parties are usually involved whenever a bill is exchanged. Tabulated below are the details of the parties involved in the exchange of a bill:

Parties	Features
Drawer	-Drawer prepares, draws and signs the bill -A drawer can discount and endorse the bill -A creditor who is entitled to receive money from his debtor can draw a bill of exchange -The bill is shown as Bills Receivable in his books
Drawee	-Also known as the Acceptor, drawee is the person upon whom the bill is drawn -He is the debtor who owes the money to the drawer -The bill will be shown as Bills Payable in his books
Payee	-Payee is the person entitled to receive the payment -It could be the drawer or a third party depending upon the scenario

Types of Bills of Exchange

As we move further with our notes on Bill of Exchange class 11, the next important topic is the various types of bills that we come across on a daily basis. Take a look at the major types of bills of exchange:

Demand Bill: This type of bill does not have a fixed payment date. It is payable when demanded. Therefore, this bill clears whenever it is presented.
Inland Bill: This bill is the opposite of Foreign Bill. It can be remitted only in one country. 
Foreign Bill: This type of bill can be paid outside India. Import Bills and Export Bills are examples of Foreign Bills.
Documentary Bill: This bill is backed by supporting documents evidencing the existence and authenticity of the sale or transaction. 
Usance Bill: Usance Bills are time-bound bills. It means the payment has to be made within a definite period. 

Solved Examples

This chapter on Bill of Exchange also encompasses many numerical questions which aim to evaluate students on how well they can calculate the due dates, perform journal entries or accumulate the total bills. To help you understand these problems, here are some solved questions on Bills of Exchange:

Q. Calculate the due dates of the following bills.

Date of the Bill	Period of the Bill
29th May, 2017	4 Months
28th January, 2018	1 Month
1st December, 2017	60 Days
23rd November, 2017	2 Months
30th April, 2018	2 Months

Solution:

Date of the Bill	Date of the Bill
29th May, 2017	2nd October, 2017 but since it is a national holiday, the due date will be 1st October, 2017.
28th January, 2018	3rd March, 2018
1st December, 2017	2nd February, 2018
23rd November, 2017	26th January, 2018 but the due date will be 25th January, 2018 since 26th is a national holiday.
30th April, 2018	3rd July, 2018

Q. Pass Journal Entries in the Books of D and S. 

• D received acceptance from S on 1st September 2016 for Rs. 3000 at 3 months
• D discounted the bill at 9% p.a.
• S paid the amount due on the date of maturity. 

Solution: As per the bill of exchange chapter, you can use the following format to pass journal entries for a bill.
In the Books of D: Journal

Date	Particulars	LF	Debit (INR)	Credit (INR)
2016
Sep 01	Bills Receivable A/c Dr.		3,000
	To S A/c			3,000
	(Being S’ acceptance received.)
Sep 01	Bank A/c Dr.		2,932
	Discount Charges A/c		68
	To Bills Receivable A/c			3,000
	(Being S’s acceptance discounted with the bank and discounting charges paid.)

In the Books of S: Journal

Date	Particulars	LF	Debit (INR)	Credit (INR)
2016
Sep 01	D A/c Dr.		3,000
	To Bills Payable A/c
	(Being a bill drawn by D accepted.)			3,000
Dec 04	Bills Payable A/c Dr.		3,000
	To Bank A/c			3,000
	(Being Bill discharged on the due date.)

Q. What is the importance of bills of exchange?

Bills of exchange are important as they provide adequate time to the creditor to pay for the purchases made while also serving as a basis on which the seller can take legal action against the buyer in case payments are not made in time

Q. Differentiate between Bill of Exchange and Cheque.

While a Bill of exchange can be drawn on anyone which includes a banker, a cheque can only be drawn on the banker. Secondly, a bill of exchange needs to be accepted before any demand for payment can be made. On the other hand in case of cheque, there is no requirement of acceptance.

Q. Mention 2 characteristics of a bill of exchange.

• Bill of Exchange must be in written form.
• The offer for a bill of exchange must be unconditional.

Practice Questions

Now that you have gone through the study notes on the bill of exchange, here are some practice questions which are frequently asked in the Class 11 Accountancy exams:

1. What are the advantages/merits of using Bills of Exchange?
2. Prepare a Specimen of a Bill of Exchange.
3. Distinguish between a Bill of Exchange and a Promissory Note. 
4. What are the characteristics of a Bill of Exchange? 

Hopefully, after going through this blog about the bill of exchange class 11 chapter, you are now familiar with all the important concepts covered under this unit. Planning to pursue Accounting courses after 12th? Our Leverage Edu experts are here to assist in picking the best course and university to steer towards your dream career! Sign up for a free career counselling session today!