We know that now-a-days in business transactions on credit are on the rise. When goods are sold on credit a huge amount of capital is blocked. Then there is no certainity when the amount will be paid. A solution of the problem is giving this fact in writing in proper form so that the buyer or debtor has to pay a definite sum to the seller/creditor on demand or after the expiry of a certain period. Such a formal document duly signed by both the parties is called a Bill of Exchange.
When such a document is given by the debtor/buyer from his own side it is called a promisory note. These two documents when prepared as per provisions of the Negotiable Instruments Act, 1881 attains the position of money and are used for settlement of the amount due. In this lesson you will learn about these two instruments and their accounting treatment in the books of parties concernced.
BILLS OF EXCHANGE – MEANING
A bill of exchange is an instrument is writing containing an unconditional order signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument.
Features of Bill of Exchange
- It is an instrument drawn by the creditor upon his debtor.
- It contains an unconditional order to pay a specified amount.
- The specified amount is payable to the person named in the bill or to his order or to the bearer.
- The bill must be signed/accepted by the maker.
- The bill specifies the date by which the amount should be paid.
- It can be payable to the bearer.
Parties to a Bill of Exchange
- Drawer : Drawer is a person who writes/makes the Bill of Exchange. He is generally the creditor who had sold goods on credit.
- Drawee : Drawee is a person upon whom the bill is drawn. He is generally the debtor to whom goods have been sold on credit. Bill is generally signed and accepted by the Drawee.
- Acceptor : He is the person who accepts the bill of exchange. Generally debtor/ drawee is the acceptor but sometimes a bill of exchange may be accepted by some one also on behalf of the debtor/drawee. Normally the drawee and acceptor are the same parties.
- Payee : Payee is the person named in the Bill of exchange. The amount in the bill is paid to the payee. In most cases Drawer and the payee will be the same.
Promissory Note : According to secton 4 of 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 to pay a certain sum of money only to or to the order of a certain person.
Features of a Promissory Note
- It is an unconditional written undertaking to pay the specified amount.
- It is drawn and signed by the maker/promisor.
- It specifies the name of the payee.
- The specific amount is payable to the specified person or to his order or to the bearer.
- Proper stamp duty is paid on Promissory Note.
- It is not payable to the bearer.
TERMS OF BILL Computers
- Due Date : It is the date on which the payment of the bill becomes due.
- Days of Grace : To ascertain the period of the bill, three extra days are added, which can be called as ‘Days of Grace’ to calculate the date of maturity.
- Bill at Sight :Bills which are payable on presentation to the Drawee are known as ‘Bill at Sight or Demand’.
- Bill After Date : The period is counted from the date of acceptance of the bill in ‘Bill After Date’.
- Discounting of Bill : The process of receving the bill amount at a date earlier than the due date from the bank, is known as ‘Discounting the Bill’. When the bill is discounted the bank credits the trader’s account after decucting some discount. The discount is calculated at the lending rate of the bank for the period that extends between the date of discounting of the bill to the date of maturity.
- Endorsement of the Bill : The drawer may transfer the bill in favour of his creditor to settle the creditor’s account. The process of transferring the ownership of the bill in favour of somebody by putting the signature of the holder at the back of the instrument and delivering the same to transferee is known as endorsing the bill. The person who delivers it is endorser and the person to whom it is delivered is called the endorsee.
- Terms of the Bill : Bills is generally drawn for a certain period, say for two months or three months. Bills may be drawn payable at sight on demand, on presentation, after date and so on.
- Date of Maturity : It is the date of which the payment of the bill is due. It is calculated by adding three days of grace. For example a bill drawn on 1.1.2013 for a period of two months will mature on (2 months + 3 days) 3rd March, 2013.
- Dishonour of a Bill : Dishonour means that the bill is not paid by a Drawee on the due date. It arises when the acceptor refuses or is unable to pay the amount of bill, i.e., Bill of Exchange, Promissory Note or cheque.
- Notary Public : Notary Public is an officer appointed by the Central or State Government to exercise the power and functions relating to noting and protesting of negotiable instruments for dishonour. ‘Noting’ authenticates the fact of dishonour.
- Noting Charges : Noting Charges is the fee paid to the Notary Public for noting and protesting the Bill of Exchange of it’s dishonour.
- Renewal of Bill : When the acceptor of a bill is not in a position to meet the bill on due date, he may, with the consent of the holder accept a fresh bill in place of the old bill, it is called Renewal of a Bill. The fresh bill may include interest for the extended period (or it may be paid separately), stamp duty and other incidental expenses incurred by the holder.
- Retirement of Bill : When the Drawee pays the bill before its due date, it is called Retirement of a Bill. The holder allows him a rebate of certain amount calculated at a certain rate per cent per annum, from the date of retirement to the date of maturity.
Part 2 is work in Progress