Class 11 Accountancy Chapter 8 BILL OF EXCHANGE
NCERT Notes for Class 11 Accountancy Chapter 8 BILL OF EXCHANGE, (Accountancy) exam are Students are taught thru NCERT books in some of state board and CBSE Schools. As the chapter involves an end, there is an exercise provided to assist students prepare for evaluation. Students need to clear up those exercises very well because the questions withinside the very last asked from those.
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NCERT Notes for Class 11 Accountancy Chapter 8 BILL OF EXCHANGE
Class 11 Accountancy Chapter 8 BILL OF EXCHANGE
BILL OF EXCHANGE
- A bill of exchange is a written acknowledgement of a debt given by one person to another.
- It is drawn by the creditor to his debtor. It directs the debtor to pay a definite amount on demand or after the expiry of the period stated there in.
- Sec. 5 of the Indian negotiable instrument 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 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
- Bills of exchange must be in writing.
- Bills of exchange are not a request to pay and an order to pay.
- The order must be signed by the drawer, i.e. the maker.
- The order must be for the payment of money only.
- The money payable not vague and must be certain.
- The bills of exchange must be payable to a certain person mentioned in the instrument or to his order or to the bearer of the document.
- The order must be unconditional, i.e. no condition should be attached to the order.
- It should bear stamp with appropriate value
Parties to Bill of Exchange
- Drawer/maker: The person who makes the bill, or who gives the order to pay a certain sum of money, is the drawer of the instrument. He is the creditor.
- Drawee/Acceptor: The person who accepts the bill of exchange, or who is directed to pay a certain sum, is called drawee. He is the debtor.
- Payee: The person receiving payment is called the payee, who can be a designated person or the drawer himself.
Advantages of Bills of Exchange:
The bills of exchange are used frequently in business as an instrument of credit due to the following reasons:
1.Legal Relationship:
Issuing bills of exchange establishes a legal relationship between seller and buyer, from creditor and debtor to drawer and drawee. In the case of any dispute between the parties, this relationship provides a conclusive proof in the court of law.
2. Terms and Conditions:
Bill of exchange contains all terms and conditions of payments ie. amount of the bill, date of payment, place of payment, interest to be paid,etc. The maturity date of the bill is also known to the parties of the bill so they can make necessary arrangement for funds
3. Mode of Credit:
The buyer can buy the goods on credit and pay after the period of credit with the help of bill of exchange. In case of urgency, the drawer can also get the payment through discounting the bill from the bank and without waiting for the maturity period.
4. Easy Transferability:
Bill of exchange can be used for settling the debt of the creditors. Mere delivery and endorsement of the bill give a valid title to the endorsee.
5. Wider Acceptance:
In case of foreign bill, wider acceptance is given to the parties through which payments can be received and made easily.
6. Mutual Accommodation:
Sometimes, bill can be issued for mutually accommodating the parties so that financial help can be given to each other.
7. Easy recovery
- If the bill is dis honoured it would be easier to recover in comparison to ordinary debt.
- Promissory note A promissory note is a written agreement to pay a specific amount at a future date or on demand to a specific party.
- Acceptance is not required in promissory notes because the maker of the promissory notes himself/herself promises to make the payment.
Definition
According to the Sec. 4 of the Negotiable Instrument 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, or to the bearer of the instrument.’’
Features of promissory notes
- It must be in writing
- It must contain an unconditional promise to pay.
- The sum payable must be certain.
- The promissory notes must be signed by the maker.
- It must be payable to a certain person.
- It should be properly stamped. Parties to the Promissory Note
1. Maker or drawer:
Also called the promisor, he is the person makes or draws the promissory note to pay the specified the amount as mentioned in the promissory note. He is the debtor.
2. Payee or drawee:
Also called the promise, he is the person in whose favour promissory note is drawn. Usually, the drawer is also the payee. He is the creditor.
3. Drawing a bill
When goods are sold on credit the seller of goods, as per their agreement writes a bill on the buyer asking him to pay the amount on demand or on a stipulated date to himself or to another person named in the instrument. This is called drawing a bill and the instrument is called draft.
Acceptance of a bill
A bill becomes a valid bill of exchange only when the drawee accepts the bill. This is done by writing the word ‘’accepted’’ across the face of the bill together with his signature and date. This is called acceptance of bill. A bill of exchange before acceptance is called draft. The drawer must accept the bill within 48 hours of its receipts from the drawer, otherwise the bill will be considered as dishonoured by non-acceptance.
Term of bill
The period for which a bill is drawn is known as term of bill. It is the time period between the drawing a bill and the date of maturity.
Date of maturity
- The date on which a bill of exchange becomes payable is the due date or date of maturity.
- The date of maturity is calculated by adding three more days to the nominal due date.
- The three extra days over the nominal due date legally given to the acceptor for making payment of a bill are called days of grace.
- If the date of maturity is a public holiday the maturity date of the bill will be the preceding business day.
- When an emergency holiday will be declared on the maturity date of the bill, then the date of maturity will be next working day immediately after the holiday.
Discounting of bill
Discounting of the bill means encashing the bill with the banker on the security of the bill before the maturity. The banker will deduct a certain sum from the bill as discount. Discount is calculated for the date of discounting to the date of maturity.
Endorsement of bill
- Endorsement is a written order on the back of the instrument by the payee or the holder for transferring his right to another person.
- This is done by putting his signature on the back of the instrument.
- An allonge is a slip of paper affixed to a negotiable instrument, for the purpose of receiving additional endorsements for which there may not be sufficient space on the bill itself.
- An endorsement written on the allonge is deemed to be written on the bill itself.
- The person who makes the endorsement is called endorser and in whose favour the endorsement made is called endorsee.
Accounting treatment
- Accounting treatment of bill of exchange and promissory note are similar.
- A bill of exchange is a bill receivable for the drawer and bills payable to the acceptor.
- A bill in respect of which a trader has to receive money is called bills receivable.
- A bill which is acceptable by a trader and for which he has to pay money is called bills payable.
- Bills payable and bills receivable are one and same.
A bill can be treated in the following ways by its holder
- Retain it till maturity and obtain payment from the acceptor on the due date
- He may send it to the bank for collection on the due date
- Discount it with the bank
- Endorse it in favour of another person
Journal Entries
- When the bill is retained by the holder till the date of maturity
a) In the Books of Drawer
-
-
- When goods are sold on credit
-
Debtors a/c Dr
To Sales a/c
2. On receiving bill
Bills Receivable a/c Dr.
To Debtor’s a/c
3. On maturity
Cash / Bank a/c Dr.
To Bills Receivable a/c
b) In the books of drawee / Acceptor
-
-
- When the goods are purchased on credit
-
Purchase a/c Dr.
To Creditors a/c
2. On accepting the bill
Creditors a/c Dr
To Bills Payable a/c
3. On maturity
Bills payable a/c Dr.
To Cash / Bank a/c
2. When the Bill sent to Bank for collection
a) In the Books of Drawer
-
-
- When goods are sold on credit
-
Debtors a/c Dr
To Sales a/c
2. On receiving bill
Bills Receivable a/c Dr.
To Debtor’s a/c
3. On sending the bill for collection
Bill sent for collection a/c Dr
To Bills Receivable a/c
4. On maturity Bank a/c
Dr.
To Bill sent for collection a/c
b) In the books of drawee / Acceptor
-
- When the goods are purchased on credit
Purchase a/c Dr.
To Creditors a/c
2. On accepting the bill
Creditors a/c Dr
To Bills Payable a/c
3. On maturity
Bills payable a/c Dr.
To Cash / Bank a/c
3- When the drawer gets the bill discounted with his bank
a) In the Books of Drawer
-
- When goods are sold on credit
Debtors a/c Dr
To Sales a/c
2. On receiving bill
Bills Receivable a/c Dr.
To Debtor’s a/c Dr.
When discounting the bill
Bank a/c Dr
Discount a/c Dr
To Bills Receivable a/c
b) In the books of drawee / Acceptor
-
- When the goods are purchased on credit
Purchase a/c Dr.
To Creditors a/c
2. On accepting the bill
Creditors a/c Dr
To Bills Payable a/c
3. On maturity
Bills payable a/c Dr.
To Cash / Bank a/c
4-When the bill endorsed by the drawer in favour of his creditor
a) In the Books of Drawer
-
- When goods are sold on credit
Debtors a/c Dr
To Sales a/c
2. On receiving bill
Bills Receivable a/c Dr.
To Debtor’s a/c
3. On endorsing the bill
Endorsee’s a/c Dr
To Bills Receivable a/c
b) In the books of drawee / Acceptor
-
- When the goods are purchased on credit
Purchase a/c Dr.
To Creditors a/c
2. On accepting the bill
Creditors a/c Dr
To Bills Payable a/c
3. On maturity
Bills payable a/c Dr.
To Cash / Bank a/c
Dishonour of a bill
- When the acceptor fails to meet the bill on maturity, the bill is said to have been dishonoured.
- A bill may be dishonoured either by non-acceptance or by non-payment.
- When the drawee refuses to accept the bill within 48 hours of its receipt the bill is said to be dishonoured for non-acceptance.
- If the bill is not paid on the date of maturity it is said to have been dishonoured for non-payment.
- In this situation the liability of the acceptor is restored.
- Therefore the entries made on the receipt of the bill should be reversed.
Accounting treatment for dishonour of bill by non-payment
Noting charges
- When a bill is dishonoured for non-payment the holder usually get it noted to establish the legality of dishonour.
- Noting is the act of recording the fact of dishonour of a bill by a notary public.
- Noting is done by a notary public who is an advocate appointed by the govt.
- the fee charged by the notary public for providing the service of noting is called noting charge.
- The amount of noting charge is paid by the holder and is recovered from the acceptor by the drawer.
Journal entries
Renewal of bill
Cancelling the bill by the drawer at the request of acceptor for the purpose of extension of credit and drawing a fresh bill is called renewal of bill. For renewing the bill the acceptor may have to pay interest for the extended period.
Accounting treatment for renewal of bill
Journal entries in the books of drawer
Retiring of bill
Making payment of the bill before maturity is called retiring of a bill. The holder in such a case willing to allow a deduction from the bill amount. To encourage retirement of a bill, the holder of a bill allows some discount to the accepter of bill such discount is called rebate on retired bill.
Accounting treatment for retiring of bill
Journal entries in the books of drawer
Accommodation bill
A bill of exchange or promissory note used for raising funds temporarily is called accommodation bill. It is accepted by the drawee to accommodate the drawer. Hence the drawee is called the accommodating party and drawer is called the accommodation party.
Bills Receivable book
Bills receivable book is used to record the information regarding duly accepted bill received by a drawer. All the details of the bill are entered in the bills receivable book. Bills payable book
It is used to record all the details relating to the bills accepted by a person.
