Bills of exchange

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Bills of exchange

Indian Negotiable Instrument Act, 1881 defines Bill of exchange as, “A bill of exchange is an instrument in writing containing an unconditional order, signed by the drawer, directing a certain person to pay a certain sum of money only at a specified time to a certain person or according to his order or to the holder of the instrument.”

It is also known as letter of exchange.

The acceptance of any bill is very situational but it could be considered as a bill through following features

  • It must be in writing. Any oral order cannot be considered as a bill.

  • It is an unconditional order to pay. Which means it shouldn’t be to any condition and must not be a request.

  • The order to pay should be in the form of Indian currency not for a product or anything in consideration of money.

  • The bill must be addressed to a particular person. The amount mentioned in the bill must be clear.

  • The duration i.e. date mentioned on the bill should be certain and clear.

  • The bill must be signed by the person who is writing the bill.

  • The payment of the bill is done on the demand by the drawer or after the specified period.

There are different parties’ w.r.t this instrument. The three parties in bill of exchange are :

  • Drawer : He is the creditor or is the one who is selling (seller). He is the person who makes and draws the bill. He is entitled to receive money from the debtor.

  • Drawee : He is the debtor or the one who has purchased the goods. The person upon whom the bill is drawn. He is the acceptor of the bill, the one who has to pay.

  • Payee : Usually he is the drawer of bill or the person who is going to receive the money or the one who holds it.

Specimen of Bill of exchange

Shilp Society,
Rs 10,000 Navrangpura, Ahmedabad
Date: 25/09/2019

For the value received by you, pay Rupees Ten thousand only to Mitesh or as per his order after three months from today.

To, Shri Soham (Soham) (Hitesh)
Sanidhya Flats, Signature of acceptor Signature of Drawer

Jodhpur, Ahmedabad

From the above specimen of Bill of exchange, the contents of the bill are as under :

Date : The date at which the bill is drawn should be written on top right

  • Corner. This is important as to determine the maturity of bill.

  • Amount : the amount of the bill should be mentioned in figures as well as in words. It should be clear and same at both the places.

  • Definite person : in each bill each party must be definite individuals. All the names of parties as well as their addresses must be mentioned.

  • Period : this is the term or tenure of the bill which runs from the date of issue of such bills. The period should be clearly mentioned after which the amount is payable.

  • Signature : it must contain the signature of two persons. The drawer and the drawee.

  • Stamp : In order to recognize a bill legally, it is mandatory to fix a revenue stamp in the proportion of the amount of the bill.

Bills Receivable and Bills Payable

A bill can mainly be of two types namely Bills Receivable and Bills Payable. A person or trader who has to receive money from other person, he/she draws a bill on that person. The person on whom the bill is drawn is the acceptor. So in this situation where we have two parties, it is a bill receivable for the person who draws the bill and for the acceptor it is bills payable.

For e.g. Kashish has to receive Rs 40000 from Ganesh. So in this case kashish would draw a bill on Ganesh for Rs 40000 and Ganesh would accept the same. Hence this bill becomes Bills receivable for kashish and becomes bills payable for Ganesh.

As we know a bill receivable is an asset for the drawer while liability for the acceptor. Both the items are placed under current assets and current liability.

Terms of Bill, Due Date and Days of Grace

As read above date is one of the important components to be mentioned on the bill of exchange. The date which is mentioned on the bill of exchange is called as Date of drawing of the bill. The similar period is allowed for the payment by the bills drawer to the bill acceptor is termed as Terms of the bill which could be two months, three months.

As the bill acceptor has to pay back to the bill drawer whichever amount mentioned on the bill. Hence by the adding the period to the date of the bill on which the bill was drawn becomes the Due date or the Maturity date of the bill.

For e.g. the date on the bill is 21–1–2019 and the period is three months. The due date can be decided as :

Date of drawing of the bill : 21–1–2019
Period of bill : 3 months
Due date of the bill : 21–4–2019

In order to facilitate the payment of money there is some extra period given to the acceptor to pay his due which as known as Grace period of Three days. It means time period of three more days is added to the due date of the bill. So if a bill is dated of 5th march is payable after 3 months, it falls due on 5th June but if we add grace days which are 3 days then the maturity date with days of grace would be 8th June.

There are few conditions to be understood that if maturity date falls on a Sunday or public holiday then the day preceding to the date of maturity of the bill is to be considered. And if the payment of the bill cannot be made on the maturity date due to abnormal circumstances like natural calamities, curfew, riots, close down etc.

then the next working day after the maturity date will be considered as the new maturity date.If the terms of bill is given in days instead of months then number of days should be considered to decide maturity date. E.g. date of drawing the bills is 21– 6–2019 and period of bill is 90 days.

Date of drawing of the bill : 21–6–2019
Period of bill : 90 days
Due date of the bill : 21–9–2019

Disposal or Uses of a Bill

As discussed above there are three parties in a bill– Drawer, drawee and payee. Mostly the drawer and receiver of the money both are the same. The possession of the bill remains with the drawer of the bill or holder of the bill. The following alternatives are possible to the person possessing the bill for the disposal or use of the bill :

Keep the bill with oneself up to maturity

This is general or normal condition in which the drawer of the bill keeps the bill as he doesn’t need the money earlier or the duration of maturity is of short duration and hence can collect the money on maturity date.

Discount the bill with bank or Shroff before maturity

sometimes the drawer needs the money before the maturity date then the bill can be discounted with a bank or a Shroff before the maturity date and the money can be received. For this the holder of the bill must have a good credit in the market. The bank or Shroff doesn’t pay the entire amount of the bill but they do deduct a small amount of discount from the total amount. That amount is called discount of bills. This is an income for the bank or Shroff but expense for holder of the bill.

Endorse the bill before maturity date

A bill is a document and it can be transferred easily under the negotiable instrument act 1881. This process is endorsing a bill receivable in favor of his debt. The bill can be endorsed by the drawer by putting his signatures at the back of the bill along with the name of the party to whom it is transferred. The act of signing and transferring the bill is called endorsement.

Send a bill for collection to a bank or Shroff

Usually the holder of the bill or businessmen are busy, hence in order to save time they assign this task to a bank or a Shroff. The bill is sent to the bank or Shroff before its maturity date. This bill doesn’t get discounted, but the bank collects the money on the maturity date on behalf of the trader and gets that amount credited to his account or pays it to them.

Dishonor of a bill

Under normal situations the acceptor of the bill has to pay the money on its maturity but on the maturity date if the acceptor is not in a position to pay the money or does not want to pay or does not pay the money due to any other reason it can be called as dishonor of a bill. Due to dishonor of the bill, drawer or other parties might face problems for the collection of money. Usually when a bill is dishonored then it is required to be noted.

Promissory Note

Along with Bills of exchange there is another instrument also mentioned in Negotiable Instrument Act 1881 termed as Promissory Note. In promissory note the person who has to pay the money to another person, he gives a written promise to pay the amount.

The debtor writes a note which is a promise to pay to the creditor. Negotiable instrument act 1881 defines promissory note as, “An instrument in writing containing an unconditional undertaking, signed by the drawer to pay a certain sum of money only at a specified time to a certain person or according to his order or to the holder of the instrument”.

Characteristics of promissory Note

The Characteristics of promissory Note are :

  • A promissory note must be in writing and not an oral promise.

  • The note must contain a promise to pay certain amount

  • The amount mentioned in the note must be definite and clear

  • The promise mentioned in the note must be the payment of money only, not a product or consideration of money.

  • The promise to pay money should be unconditional.

  • The duration of promissory note and the date of making of the note must be clearly stated.

  • The promissory note must be drawn by a definite person and the drawer must sign it.

  • A revenue stamp of the prescribed amount must be affixed on the promissory note.

Parties to promissory Note

  • Drawer (maker): Usually he is the debtor.
  • Payee (receiver of money): He is the creditor or the holder of the note.

Specimen of Promissory Note

Luv Khush Society,
Rs 12,000 Navrangpura, Ahmedabad
Date : 30/09/2019

I promise to pay Rupees Twelve thousand only to Kulin Bhai shah or as per his order after two months from today, for the value received.

Kulin bhai shah
Jodhpur, Ahmedabad Kalpesh Patel



From the following specimen we could understand the following details of a promissory note :

  • Definite person : Maker i.e. drawer of the promissory note and the receiver of the amount must be definite person in the note. In the above specimen Kulin and Kalpesh are two definite person.

  • Date : The date mentioned on the promissory note while making it is the same date for the issue of the promissory note.

  • Period : The period after which the amount is to be returned must be clearly stated in the note.

  • Amount : The amount payable by the maker must be clearly mentioned in promissory note.

  • Signature : it is mandatory that the promissory note must be signed by its maker in order to make a note legally valid document.

  • Revenue stamp : In order to recognize the note legally in the system, it is necessary to affix the revenue stamp depending on the amount of the note. A note without the stamp cannot be considered legal.

Difference between bill of exchange and promissory note

NoBasis of
Bill of exchangePromissory not
1Order or
A bill is unconditional
order to pay money
A note is an unconditional
promise to pay money.
2Who draws
on whom
It is drawn by a creditor
on debtor
A note is made by a debtor
and sent to his creditor
3PartiesThere are three parties to a
bill– drawer, drawee and
There are two parties to a
note. Maker of the note and
4Need for
It is compulsory for the
acceptor to accept the bill
on whom it is drawn.
There is no need for any
acceptance as it is made by
the debtor himself.
of payment
The acceptor is responsible
for the payment
The responsibility of
payment in the note lies with
the drawer
6Days of
Three days of grace period
is allowed after the period
of bill to pay the amount
No days of grace are
allowed in case of
promissory note
7DishonorWhen the acceptor of a
bill fails to pay the money
on maturity date it is
known as dishonor of bill.
Notice is to be issued.
No notice is to be issued in
case of dishonor
8ConditionAny common person or
trader can draw a bill with
condition “Payment to
bearer on demand”.
Only RBI can issue a
promissory note with the
condition “Payment to
bearer on demand”
Difference between bill of exchange and promissory note

what is bills of exchange?

Indian Negotiable Instrument Act, 1881 defines Bill of exchange as, “A bill of exchange is an instrument in writing containing an unconditional order, signed by the drawer, directing a certain person to pay a certain sum of money only at a specified time to a certain person or according to his order or to the holder of the instrument.

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