Chapter 8 — Bills Of Exchange

Definition: A bill of exchange is a written, signed instrument containing an unconditional order by one person (the drawer) directing another person (the drawee) to pay a certain sum of money to a specified person (the payee) or to the bearer of the instrument, either on demand or at a fixed determinable future time. (This follows the legal definition used in commercial law and CBSE Accountancy.)

Key parties:

• Drawer: the person who draws (creates) the bill and orders payment (usually the seller/creditor).
• Drawee: the person on whom the order is drawn (usually the buyer/debtor).
• Acceptor: the drawee who signs the bill accepting the order to pay.
• Payee: the person to whom payment is to be made (may be the drawer or a third party).
• Endorsee/Holder: a person who obtains the bill by endorsement or delivery and may receive payment.

Essential features (characteristics):

• Written and signed instrument.
• Contains an unconditional order to pay.
• Sum payable must be certain and in money.
• Payable to order or to bearer.
• Payable on demand or at a fixed/ascertainable future time (time bill).
• Negotiable: it can be transferred by endorsement or delivery.

Types (brief): Demand bill (payable on demand) and time bill (payable after a specified period, e.g., 30/60/90 days). A bill can also be inland (within same country) or foreign.

Difference from promissory note (short): A bill of exchange contains an order to pay (drawer orders drawee), while a promissory note contains a promise to pay (maker promises the payee).

Lifecycle (short): Goods supplied on credit → drawer draws bill on buyer → drawee accepts by signing → bill may be held, endorsed, discounted with bank → on maturity payment is made by acceptor or dishonoured and noted/protested.

Definition & context
A bill of exchange is a written, unconditional order by one person to another to pay a certain sum of money to a specified person or to the bearer, either on demand or at a fixed future date. The parties to a bill are the persons or entities who have rights or obligations under the bill.

Main parties (with roles)

• Drawer: The person who draws (creates and signs) the bill. Usually the creditor or seller who asks the drawee to pay. Example role: a supplier drawing a bill on a buyer.
• Drawee: The person on whom the bill is drawn and who is ordered to pay. Usually the debtor or buyer. When the drawee accepts the bill, they become the acceptor.
• Payee: The person to whom payment is to be made. The drawer and payee can be the same person, or the bill may be payable to a third party.
• Acceptor: The drawee who signs the bill to signify acceptance and thereby makes himself primarily liable to pay at maturity.
• Holder: Any person in possession of the bill who has a right to receive payment. The holder may be the payee or a subsequent transferee (endorsee).
• Endorser: A holder who transfers the bill to another person by signing (endorsement) on the back of the bill. The endorser guarantees payment to subsequent holders.
• Endorsee: The person to whom the bill is endorsed and who becomes a holder with right to receive payment.
• Accommodation party: A person who signs the bill to lend their name/credit but receives no value—e.g., accommodation acceptor or accommodation endorser.

Legal and practical points

• Acceptance: When the drawee signs (accepts) the bill, they become directly liable to pay at maturity. Without acceptance, the drawer may still be liable but the bill is not formally accepted by the drawee.
• Endorsement transfers title: Endorsement transfers the right to receive payment from one person to another. Endorsers give a warranty of title and further liability on dishonour.
• Holder in due course: A holder who takes the bill for value, in good faith and without notice of defects, has stronger rights against prior parties.
• Dishonour and notice: If the bill is not paid on maturity, it is dishonoured and the holder must give notice of dishonour to obtain recourse against endorsers and drawer.

How the parties interact (short workflow)

• Supplier (Drawer) supplies goods → draws bill on Customer (Drawee) payable to Supplier (Payee).
• Customer (Drawee) accepts the bill → becomes Acceptor and promises to pay at maturity.
• Supplier (Payee/Holder) may keep the bill until maturity, discount it at a bank, or endorse it to a creditor (Endorsee).
• At maturity the Acceptor must pay the Holder; if not paid, the bill is dishonoured and the Holder notifies parties for recourse.

Common classroom emphasis: Identify each party on a sample bill, understand acceptance, endorsement, dishonour procedure, and the liabilities each party bears.

Definition (brief): A bill of exchange is a written, unconditional order by one person (the drawer) directing another (the drawee) to pay a fixed sum of money to a specified person (the payee) or to bearer, either on demand or at a fixed future date.

Essential characteristics / features:

• In writing: The instruction must be in a written form (not oral).
• Unconditional order to pay: It must contain an unconditional order (not a request or condition) to pay money.
• Certain sum of money: The amount must be definite and expressed in currency.
• Names of parties: It must identify the drawer (who gives the order), the drawee (who is to pay), and the payee (who is to receive payment) — a person can be in more than one role.
• Signature of the drawer: The bill must be signed by the drawer (person who makes the bill).
• Payable on demand or at a determinable future time: The instrument must specify when payment is due — on sight (demand) or after a specified period/at a specified future date.
• Payable to order or bearer: It must be payable either to a named person (order) or to bearer (whoever holds it), making it transferable.
• Transferability / negotiability: Bills are negotiable instruments — they can be transferred by endorsement and delivery (if payable to order) or by delivery (if payable to bearer).
• Acceptance by drawee (when required): A bill drawn on a person becomes enforceable against the drawee only after the drawee accepts it (by signing) when it is not payable on demand.
• Stamps and legal formalities: The bill must comply with applicable stamping and formal requirements under the law for admissibility and enforceability.
• Delivery: The bill must be delivered to the payee or holder to take effect as an instrument of credit/transfer.

Commercial implications: Because a bill of exchange is an unconditional, negotiable written order for payment, it serves as a credit instrument in trade — allowing sellers to grant time credit and buyers to accept a formal promise to pay. Acceptance and endorsement create clear liabilities and make collection, discounting, and transfer easier.

What is a specimen format?
A specimen format shows the typical layout and wording used when preparing negotiable instruments (mainly a Bill of Exchange) so all required particulars are present — drawer, drawee, payee, amount (figures & words), date, tenor/maturity, signature and place of payment.

Key parts of a Bill of Exchange

• Heading (e.g., "BILL OF EXCHANGE")
• Date of the bill
• Tenor (e.g., "at 3 months after date") or specific maturity date
• Order to pay ("Pay to the order of...") and payee name
• Amount in figures and in words (both must agree)
• Name of the drawee (person on whom it is drawn)
• Place of payment (bank or address)
• Signature of drawer (and drawer's address if required)
• Endorsements (when transferring), acceptance (by drawee), noting/protest (on dishonour)

Specimen — Bill of Exchange (wording/layout)

No. _______

BILL OF EXCHANGE

Date: 15 March 2025

Three months after date pay to the order of Mr. R. Sharma
Rs. 50,000 (Rupees Fifty Thousand only) for value received.

Drawn on: M/s. K. & Co. (Drawee)
Place of Payment: State Bank of India, Connaught Place, New Delhi

(Stamp/Place)

Signature of Drawer:  A. Gupta
Address of Drawer: 12, Nehru Road, New Delhi

Specimen — Promissory Note (if applicable)

No. _______

PROMISSORY NOTE

Date: 1 April 2025

I/We promise to pay to Mr. S. Verma or order Rs. 20,000 (Rupees Twenty Thousand only)
on demand / on 1 October 2025 for value received.

Signature of Maker: P. Mehta
Address: 45 MG Road, Mumbai

Specimen — Endorsements

• Blank endorsement (just signature): "[Signature of endorser]" — converts to bearer instrument.
• Special endorsement: "Pay to the order of Mr. X" & signature of endorser.
• Restrictive endorsement: "Pay to Mr. X only" & signature (restricts further transfer).

Specimen — Acceptance (on the face of bill)

Accepted
Date: 20 March 2025
Signature of Drawee: M/s. K. & Co.
(Place/Name)

Specimen — Receipt (on payment)

Received Rs. 50,000 (Rupees Fifty Thousand only) from A. Gupta in full settlement
of the within bill dated 15 March 2025.

Date: ______
Signature of Payee/Receiver: R. Sharma

Specimen — Noting / Protest (on dishonour)

Noted for non-acceptance / non-payment on 17 June 2025.
(Signature of Notary / Noting Officer)

How to fill accurately (practical tips)

• Always write amount in words and figures; if discrepancy, words usually prevail.
• Write the tenor clearly ("2 months after date" or a specific maturity date).
• Include place of payment if payment is to be made at a specified bank/place.
• Signatures must match the drawer's authorized signature; endorsements must be signed on the back.
• For maturity calculation add the tenor to the date of the bill, then add the days of grace (commonly 3 days unless specified otherwise).

Overview
A bill of exchange is a written, unconditional order by one person (drawer) directing another (drawee) to pay a certain sum to a person (payee) either on demand or after a specified period. Bills are used in credit sales and trade finance. They can be classified by time, place, purpose and negotiability.

Main types (with short definitions)

• Demand (Sight) Bill – Payable on presentation (on demand or at sight). Example: a bill marked "Payable on demand" or a cheque.
• Time (Usance) Bill – Payable after a specified period from the date of bill or from the date of acceptance/sight (e.g., 30 days, 3 months). Time bills usually allow days of grace (commonly taught as 3 days) for maturity calculation.
• Inland Bill – Drawn, accepted and payable within the same country.
• Foreign Bill – Involves parties or payment across different countries (export/import transactions).
• Accommodation Bill – Drawn to help a party (no real exchange of goods/services). One party accommodates another by accepting or endorsing the bill; used as a loan instrument.
• Clean Bill – Drawn without supporting shipping or commercial documents; payment depends only on payer's creditworthiness.
• Documentary Bill – Accompanied by documents (e.g., bill of lading, insurance) that transfer title to goods on payment/acceptance.
• Negotiable vs Non‑Negotiable – Bills of exchange are normally negotiable (can be endorsed and transferred). If expressly marked "non-negotiable" they lose this quality.

Practical notes

• Parties involved: Drawer, Drawee (acceptor when accepted) and Payee. Negotiation adds Endorsee(s).
• Maturity and days of grace: For time bills maturity = date of bill + tenor + days of grace (commonly 3 days in school problems). If maturity falls on a holiday or Sunday, business practice adjusts the payment date (exam questions usually specify the rule to apply).
• Purpose distinctions: Trade bills arise from sale/purchase of goods; accommodation bills arise to help one party obtain cash/credit.

Why these types matter
Type determines accounting treatment, calculation of maturity, discounting with banks, documentary requirements in international trade, and legal responsibilities of parties.

What is a negotiable instrument? A negotiable instrument is a written, signed document guaranteeing the payment of a specific sum of money either on demand or at a fixed or determinable future time. It transfers the right to receive money by endorsement or delivery.

Main types

• Promissory Note – a written promise by one person (the maker) to pay a specified sum to another (the payee) or to the bearer.
• Bill of Exchange – an order in writing from one person (drawer) directing another (drawee) to pay a sum to a third person (payee) or to the bearer.
• Cheque – a bill of exchange drawn on a bank payable on demand.

Key legal provisions and concepts (summary)

• Essential elements: writing, unconditional order/promise, fixed sum, parties identified, signature of maker/drawer.
• Negotiability: Instruments can be transferred to others who get title free from many prior defects (subject to good faith rules for holder in due course).
• Parties: drawer, drawee/acceptor, payee, endorser, endorsee, holder, holder in due course, maker (for promissory notes).
• Endorsement: Transfer by signature on the instrument (types: blank, special, restrictive, conditional). Endorsement transfers rights to the endorsee.
• Presentment for acceptance & payment: For bills payable after sight/date, the holder must present for acceptance/present for payment to make drawer liable. Cheques are payable on demand—presentment is required for bank payment.
• Maturity: Date when payment is due. For bills "after date" or "after sight", the tenor plus traditional days of grace (textbook treatment: 3 days) are considered when calculating maturity.
• Dishonour: Non-payment or non-acceptance when presented. Legal steps after dishonour: notice of dishonour to prior parties and, if necessary, protest (formal certificate) for foreign bills; for cheques there are penal provisions for dishonour (legal/criminal consequences in many jurisdictions).
• Holder in due course (HIDC): A person who obtains the instrument for value, in good faith and without notice of defects. HIDC has stronger rights than a mere holder and takes the instrument free of many defenses available against prior parties.
• Discharge: Occurs by payment in due course, cancellation, release/renunciation, material alteration (unless accepted), or neglect of holder to take required steps on dishonour.
• Material alteration: Any change in an essential term (amount, date, payee) without consent which generally discharges parties except the party who made the alteration.

Practical points (class‑11 emphasis)

• Always check signature, amount (in figures and words), date, and endorsement chain.
• For accounting problems: calculate maturity by adding the tenor and (textbook) 3 days of grace for bills after date/sight, prepare journal entries for bill receipt/discount/ dishonour.
• Cheques returned unpaid carry additional statutory consequences (e.g., civil claim and often criminal liability for bounced cheques in many jurisdictions) — bank returns and notices are important evidence.

Overview

Both bill of exchange and promissory note are negotiable instruments used in trade and credit. They are written documents containing an unconditional order or promise to pay a certain sum of money either on demand or at a specified future date.

Definitions

• Bill of Exchange: A written, unconditional order signed by one person (the drawer) directing another person (the drawee) to pay a certain sum to a third person (the payee) or to the bearer either on demand or at a fixed future date.
• Promissory Note: A written, unconditional promise signed by one person (the maker) to pay a certain sum to another person (the payee) or to the bearer either on demand or at a fixed future date.

Key characteristics and differences

• Number of parties: Bill of Exchange — typically three parties (drawer, drawee, payee). Promissory Note — two parties (maker and payee). A bill may have fewer if drawer and payee are same person or drawee pays himself, but conceptually three.
• Nature: Bill — an order to pay. Promissory note — a promise to pay.
• Signature: Bill — signed by the drawer. Promissory note — signed by the maker.
• Acceptance: Bill — if payable after sight, it needs acceptance by the drawee (acceptance converts drawee into a primary debtor). Promissory note — no acceptance required.
• Liability: Promissory note — primary liability rests on the maker. Bill — after acceptance, primary liability is on the acceptor (drawee); the drawer/endorser have secondary liability.
• Negotiability and transfer: Both are negotiable and transferable (endorsement and delivery), unless expressly non-negotiable.
• Use: Bills are common in trade transactions (seller draws on buyer). Promissory notes are common for loans or personal promises to pay.
• Dishonour & formalities: Both can be dishonoured; foreign bills often require protest on dishonour. Stamping and formal particulars (amount, date, payee, words of order/promise) must comply with law.

Common types

• Payable on demand (on demand bill / promissory note)
• Payable after a fixed period from date (e.g., 3 months after date)
• Payable after sight (requires acceptance for bills)

Typical formats (short)

• Promissory Note: "Promise to pay [Name] Rs. X on [date]. Signed: [Maker's signature]."
• Bill of Exchange: "Three months after date pay to the order of [Payee] Rs. X. To [Drawee]. Drawn by [Drawer]." (Drawer's signature)

Accounting and practical points

• When a bill is accepted, the drawee becomes primarily liable; the drawer remains liable if the bill is dishonoured and the drawee defaults.
• When a promissory note is issued, the maker is directly liable for payment.
• Businesses frequently discount bills at banks. The bank deducts interest (discount) and pays the present value to the holder.

When to use which: Use a bill of exchange in commercial sales where the seller wants a formal negotiable instrument drawn on the buyer. Use a promissory note when an individual or firm wants to give a direct written promise to repay a loan or debt.

Meaning of Endorsement

An endorsement is the signature (with or without words) placed on the back of a negotiable instrument (such as a bill of exchange or promissory note) by the holder (endorser) to transfer the instrument or some right in it to another person (endorsee). By endorsing a bill the holder transfers title and the right to receive payment to the endorsee.

Legal/economic effects

• The instrument (or the right in it) passes from the endorser to the endorsee.
• The endorsee acquires all the rights of the endorser and can sue for payment.
• Depending on the type of endorsement, the endorser may remain liable on the instrument if it is dishonoured (unless liability is expressly excluded).

Common forms of endorsement (how it appears on the bill)

• Special/Full endorsement: "Pay to A or order" followed by endorser's signature. (Transfers the bill to a specified person.)
• Blank endorsement: Only the endorser's signature (no payee named). (Converts the instrument into a bearer instrument negotiable by delivery.)
• Restrictive endorsement: Contains a restriction such as "Pay to bank for collection" or "Payee's account" followed by signature. (Limits further negotiation; instrument usually only for collection or the specified purpose.)
• Qualified endorsement: Adds limiting words like "without recourse" or "sans recours" with signature. (Transfers the instrument but excludes endorser's liability on dishonour.)
• Conditional endorsement: Makes transfer subject to a condition (e.g., "Pay to A if X happens"). (May affect negotiability; condition must be lawful.)
• Partial endorsement: Endorsement for part of the amount (e.g., "Pay Rs X to A"). (Generally not allowed — it destroys negotiability and is ordinarily invalid.)

Short notes on each type

• Special/Full: Names the new payee. Endorser remains liable unless words exclude liability. Example endorsement wording: "Pay to B or order — [Endorser's signature]".
• Blank: Only signature. Instrument becomes payable to bearer and can be transferred by delivery alone.
• Restrictive: Common restriction is "for collection" or "to the credit of A's account". It prevents further negotiation; the endorsee can only collect or deposit the proceeds as specified.
• Qualified: "Without recourse" disclaims liability; if the instrument is dishonoured endorser is not liable to subsequent holders for payment (but the endorsee can still try to recover from prior parties where applicable).
• Conditional: Makes payment or transfer subject to a condition. This can impair negotiability and should be used carefully.
• Partial: Because a negotiable instrument normally promises payment of a single specific sum, endorsement for part of the amount is generally invalid and destroys negotiability.

Practical points for students

• Endorsement must be on the instrument itself (usually the back) and signed by the endorser to be effective.
• Once you make a blank endorsement, anyone holding the bill can claim payment — handle signed instruments carefully.
• If you want to transfer rights but avoid future liability, use a qualified endorsement; if you want someone to simply collect proceeds, use a restrictive endorsement.

Accounting treatment — brief

• If a holder endorses a bill in full to settle a liability: Debit the creditor's account and credit Bills Receivable account (the book records the settlement by transferring the bill out of receivables).
• If a bill is endorsed for collection (restrictive) or simply transferred without settlement, usually no immediate accounting entry is made until collection or discounting occurs.
• On dishonour of a bill, the holder debits the drawer/endorser (as per liability chain) and credits Bills Receivable; if the endorser was qualified (without recourse) the endorser is not debited.

Negotiation (Bills of Exchange)
Negotiation is the transfer of a negotiable instrument (bill of exchange, promissory note or cheque) from one person to another in such a way that the transferee becomes entitled to receive payment and to sue in his own name. For instruments payable to order negotiation requires endorsement + delivery; for bearer instruments negotiation requires delivery alone.

How negotiation takes place

• Endorsement: The payee signs (endorses) the back of the instrument to transfer ownership. Types of endorsement: blank, special, restrictive, qualified.
• Delivery: Physical handing over of the instrument to the transferee.
• Effect: After proper negotiation the transferee becomes the holder and may further negotiate the instrument.

Common types of endorsement

• Blank endorsement: Endorser signs name only -> instrument becomes bearer paper and is transferable by delivery.
• Special endorsement: Endorser specifies a particular transferee ("Pay A") -> instrument remains order paper and needs further endorsement to transfer.
• Restrictive endorsement: Limits the purpose of transfer (e.g., "for collection only").
• Qualified endorsement: Endorser adds words like "without recourse" to limit liability.

Holder and Holder in Due Course (HDC)
Holder: A person who is in possession of a negotiable instrument and is entitled in his own name to receive payment of money and to enforce it. Holder in due course (HDC): A holder who has acquired the instrument in good faith and for consideration (value), before the instrument is overdue, and without notice of any defect in the title of the person from whom he derived it.

Conditions to become a Holder in Due Course

• Instrument must be complete and regular on its face.
• Acquired in good faith (honesty in fact).
• Consideration (value) must be given for the instrument.
• Acquired before maturity (except for negotiable instruments where rules allow otherwise for cheques).
• No notice of any defect in title, dishonour, or any claim against the instrument at the time of taking.

Rights and privileges of an HDC

• May sue in his own name for payment (right to institute legal proceedings).
• Takes the instrument free from all defects of title and personal defenses available between prior parties (e.g., breach of contract, fraud in inducement).
• Can demand payment and can endorse or negotiate the bill further.

Limits to HDC protection (Real defenses)

• HDC is NOT protected against certain real defenses such as forgery, lack of capacity, payment already made, material alteration (unauthorised), or illegality.

Practical importance
HDC status gives confidence to banks and third parties when they accept or discount negotiable instruments because they acquire a good and enforceable title even if prior transfers had defects (subject to real defenses).

Overview: In bills of exchange, three related terms are important — due date, maturity and days of grace. These determine when a bill becomes payable.

Definitions:

• Due Date: The date on which the payment is contractually required — either the specified date on the bill or the date obtained by adding the bill's tenor (period) to the appropriate starting date (date of bill or date of acceptance/sight).
• Days of Grace: Traditionally, three additional calendar days allowed to present the bill for payment after the due date. (CBSE / standard accounting problems normally use 3 days of grace.)
• Maturity: The last date on which the holder can legally demand payment. In practice (for most class 11 problems) maturity = due date + days of grace (i.e., due date + 3 days).

How to find the due date and maturity — stepwise:

• Identify the type of bill (on a fixed date, after date, after sight, on demand/on sight).
• Determine the starting date:
  • For bills "after date" — start from the date of the bill.
  • For bills "after sight" (or "after acceptance/sight") — start from the date of acceptance (or date of presentment for acceptance if not accepted earlier).
  • For bills "on a fixed date" — the specified calendar date is the due date (before adding days of grace).
  • For bills "on demand" or "on sight" — due on presentment (or on demand); see note below.
• Add the tenor (period) to the starting date to get the due date.
• Add days of grace (normally 3 calendar days) to the due date to get the maturity.

Important special points:

• Days of grace are calendar days (not working days) in standard school problems.
• If the maturity date falls on a Sunday or a bank holiday, the holder may generally present the bill on the next working day; local law/practice may affect this.
• Cheques are payable on demand and generally are not given days of grace; for promissory notes and bills of exchange, three days of grace are usually allowed in exercises.

Example visual layout (summary): A timeline showing — Bill date / Acceptance date (if any) → + tenor → Due date → + 3 days → Maturity (last day for presentation)

Overview
A bill of exchange (or promissory note) is said to be dishonoured when it is not accepted (in case of a bill of exchange) or not paid on its due date. Dishonour is a formal event that makes the drawer/endorser/acceptor liable to pay. When dishonour occurs, the holder may have the bill noted or protested by a notary public to obtain a formal certificate of dishonour and to preserve legal rights.

Key terms

• Dishonour — Non-acceptance (when presentment for acceptance is refused) or non-payment (when presented on due date and payment is refused).
• Noting — A notary’s short memorandum (entry) of dishonour; used to establish facts (date, reason) and to calculate expenses. Noting is optional but is evidence for legal action.
• Protest — A formal, attested certificate by a notary stating the bill has been dishonoured and that necessary steps (like presentment) were taken. Protest is required when legal claim against drawer/endorser is to be enforced in some jurisdictions or by banks.

Why noting/protest?
Noting/protest serves as legal proof of dishonour and supports claims against prior parties (drawer, endorser). Noting creates costs (noting charges) which the holder can recover from the party liable.

Procedure on dishonour
Typical sequence when a bill is dishonoured for non-payment:

• Holder presents bill for payment on due date. If payment is refused, the bill is dishonoured.
• Holder may get the bill noted by a notary (pay noting charges). The notary issues a note of dishonour; a protest may be prepared if required.
• Holder records the dishonour in books and makes the drawee/endorser liable for bill amount plus noting charges (and any interest, if applicable).

Accounting treatment — common journal entries (books of holder/payee)

• When the bill was originally transferred to Bills Receivable (at acceptance):
  

  Bills Receivable A/c  Dr.  xxx
        To Debtor/Acceptor A/c    xxx

• On dishonour (to transfer liability back to acceptor/drawee):
  

  Drawee/Acceptor A/c  Dr.  xxx
        To Bills Receivable A/c      xxx

• If noting charges are paid to the notary:
  

  Noting Charges A/c   Dr.  yyy
        To Cash/Bank A/c         yyy

• To charge the noting charges to the drawee (so total recoverable = bill + noting):
  

  Drawee/Acceptor A/c  Dr.  yyy
        To Noting Charges A/c      yyy

• Net effect: Drawee is debited with (bill amount + noting charges); Bills Receivable is cancelled; cash is reduced by noting charges.

If the bill was endorsed
If the holder received the bill by endorsement and it is dishonoured, the holder will make the endorser (or prior endorsers) liable. Entries (books of holder) are similar but use Endorser A/c in place of Drawee/Acceptor A/c:

• On dishonour: Endorser A/c Dr. To Bills Receivable A/c
• If noting charges paid: Noting Charges A/c Dr. To Cash/Bank A/c
• To transfer noting charges to endorser: Endorser A/c Dr. To Noting Charges A/c

Special cases

• Bill discounted with bank — If a bill taken to bank for discount is dishonoured, the bank will debit the drawer (or the customer who discounted it) with the bill amount plus bank charges and noting charges. The drawer records a liability to the bank when informed.
• Interest — If the holder decides to claim interest from the date of dishonour, interest must be calculated and debited to the party liable.

Legal effect
Dishonour makes the acceptor liable to the holder for the bill amount. If the holder wishes to recover from prior parties (drawer/endorsers), they must usually give notice of dishonour and may need a protest depending on rules; noting/protest helps satisfy notice requirements.

Summary
Dishonour is failure to accept/pay. Noting is a notary’s record and creates recoverable expenses. Protest is a formal notarized certificate. Accounting entries transfer liability back to the responsible party and record noting charges.

Definition: Discounting of bills means getting cash from a bank (or financial institution) by transferring a bill of exchange (a bill receivable) to the bank before its maturity. The bank pays the holder the face value of the bill minus the discount (interest) and usually some charges. The bank then collects the full amount from the drawee at maturity.

How it works (step-by-step):

• Seller supplies goods on credit and draws a bill on the buyer (the drawee) for the agreed amount and tenor.
• The buyer accepts the bill, becoming liable to pay at maturity.
• The holder of the bill (seller) goes to a bank and discounts the bill before maturity.
• The bank pays the holder: Proceeds = Face value of bill − Banker's discount (for the remaining period) − any charges.
• At maturity the bank collects the full face value from the drawee. If the drawee dishonours the bill, the bank will claim the amount from the holder/indorser (discounting is usually with recourse).

Key points:

• Banker's discount = simple interest on the face value for the unexpired period (using the agreed annual rate).
• Proceeds (cash received) = Face value − Banker's discount.
• True discount differs from banker’s discount: true discount is the difference between the face value and its present value (present worth).
• Time is expressed in years (t = days/365 or days/360 depending on practice—CBSE problems usually use 365 unless stated otherwise).

Typical journal entry in the books of the holder when a bill is discounted:

Bank A/c (Dr) — for proceeds received
Discount on Bills A/c (Dr) — for bankers' discount/charges
To Bills Receivable A/c — for face value of bill

What if the bill is dishonoured? (brief)

Because the holder discounted the bill with the bank (usually with recourse), if the drawee dishonours the bill the bank will recover the amount from the holder/indorser. The holder will then reinstate the debtor's account in his books and settle with the bank. The discount already charged by the bank is normally a cost to the holder.

Advantages of discounting:

• Immediate cash to meet working capital needs.
• Improves liquidity and helps business run without waiting for maturity.

Disadvantages:

• Costly: the discount (interest) reduces the amount actually received.
• If the bill is dishonoured, the holder bears the risk and may have to pay the bank.

Overview

In the Bills of Exchange context, two common events after a bill is drawn are renewal (retiering) and retirement. Both relate to settlement of a bill when the acceptor (debtor) cannot or chooses not to pay on the original terms.

Renewal (Retiering)

• Renewal (also called retiering or extension) happens when a bill is dishonoured (not paid) at maturity and the parties agree to cancel the old bill and draw a new bill for an extended period. This gives the debtor more time to pay.
• Typical steps: (a) On dishonour the holder reinstates the debtor's account, (b) a new bill is drawn and recorded, (c) any interest or noting charges are dealt with according to the agreement.
• Who records what: If you are the holder (creditor), you record Bills Receivable when a bill is originally accepted; on dishonour you debit the debtor and credit Bills Receivable; when a new bill is drawn you record a new Bills Receivable (and record any interest or cash received/paid as appropriate). If you are the drawer who had Bills Payable, analogous (mirror) entries are used in your books.
• Noting charges: If a holder gets the dishonour noted by a public notary, the noting charges paid are treated as a loss and are usually debited to the debtor's account (i.e., added to what the debtor owes) and credited to Cash/Bank when paid.

Common variations in renewal and how to account for them

• Renewal without extra interest: Old bill is dishonoured and a new bill for the same principal is drawn — entries simply reinstate the debtor and create a new Bills Receivable.
• Renewal where debtor pays interest in cash for extension: Interest paid in cash by the debtor is recorded as cash received and credited to Interest Income; debtor's liability (principal) remains outstanding and is recorded as the new bill.
• Renewal where interest is added to the face of the new bill: The new bill is for (principal + interest). On collection the interest component is shown as interest income and the principal as settlement of the receivable. (In practice interest may be shown separately as interest receivable or recognised at the time of collection.)

Retirement of Bills

• Retirement means settlement of a bill before its maturity (early payment) or on the due date. Retirement before maturity is often by payment of cash (by the acceptor/debtor) or sometimes by payment to the bank (discount/settlement).
• If the holder allows a discount for early payment, the holder records the discount allowed (a loss) and receives less cash than bill value. If no discount is allowed the debtor pays the full amount and the bill is discharged.
• On retirement on due date the acceptor (debtor) pays cash and the holder clears the bill from Bills Receivable to Cash/Bank.

Key accounting points (CBSE / Class 11 level)

• When a bill receivable is dishonoured: Debtor's A/c is debited and Bills Receivable A/c is credited.
• When a new bill is drawn in renewal: New Bills Receivable A/c is debited and Debtor's A/c credited (for the new bill amount).
• Noting charges paid by holder: Debtor's A/c debited; Cash/Bank credited.
• When a bill is retired on due date: Cash/Bank is debited; Bills Receivable credited.
• If retirement before due date involves discount allowed by holder: Cash/Bank debited (amount received), Discount Allowed debited (loss), To Bills Receivable (face value).

Practical tips

• Always follow the chronological steps in problems: original entry → dishonour (if any) → noting charges (if any) → renewal/new bill drawing → payment/collection.
• Compute interest on a time basis: use years or months consistently. For most Class 11 problems months are used (t in years = months/12).

Definition and nature
A Bill Receivable is a written promise (a bill of exchange) received by a creditor from a debtor to pay a stated sum on a specified future date. It converts a book-debt into a negotiable instrument and is treated as a current asset of the holder until maturity.

Books and accounts
When a business receives bills from debtors, it records them in the Bills Receivable Book and maintains a ledger account called Bills Receivable A/c. Typical entries transfer the amount from Debtor to Bills Receivable when the bill is received.

Basic accounting treatment — typical events and journal entries

• 1. When a bill is received in settlement of a debt

  Dr Bills Receivable A/c        xxx
      Cr Debtor A/c                  xxx

• 2. When the bill is retained to maturity and honoured (cash received)

  Dr Bank A/c                    xxx
      Cr Bills Receivable A/c         xxx

• 3. When the bill is dishonoured (not paid) — holder charges the debtor)

  Dr Debtor A/c                  xxx
      Cr Bills Receivable A/c         xxx

  Also record any bank collection charges or noting charges as an expense: Dr Bank Charges A/c, Cr Bank A/c.

• 4. When the bill is endorsed to a creditor (used to pay a creditor)

  Dr Creditor A/c                 xxx
      Cr Bills Receivable A/c         xxx

• 5. When the bill is discounted with a bank (sold for cash)

  Dr Bank A/c                    (proceeds)
  Dr Discount on Bills A/c        (discount expense)
      Cr Bills Receivable A/c         (face value)

  Example: Face value 10,000; discount 200 -> Dr Bank 9,800; Dr Discount on Bills 200; Cr Bills Receivable 10,000.

• 6. If a discounted bill is dishonoured

  Standard bookkeeping approach (two steps):

  (a) Reinstate bill against bank (bank debits the drawer for the bill):
  Dr Bills Receivable A/c         xxx
  Cr Bank A/c                      xxx
  
  (b) Then charge the debtor (to recover from debtor):
  Dr Debtor A/c                   xxx
  Cr Bills Receivable A/c          xxx
  
  Combined effect often shown as:
  Dr Debtor A/c                   xxx
  Cr Bank A/c                      xxx

  Also record bank charges (Dr Bank Charges A/c, Cr Bank A/c).

Practical notes and rules

• Books kept: Bills Receivable Book, Cash/Bank Book and relevant ledger accounts.
• Maturity date calculation: exclude the date of bill, add the tenor (e.g., 3 months) and (where applicable in standard practice) add days of grace (commonly 3 days). If that day does not exist in the maturity month, maturity falls on the last day of that month.
• Always show the face value in Bills Receivable A/c; discount is recorded as a nominal loss (Discount on Bills A/c).

Where these entries appear in financial statements
Bills Receivable are current assets and appear under current assets in the balance sheet until they are honoured, discounted (then removed), endorsed (removed) or dishonoured (reinstated as Debtors).

Meaning: A Bill Payable arises when a business accepts a bill of exchange drawn on it by a creditor (supplier) or issues a bill promising to pay a creditor at a future date. It is a negotiable instrument and a current liability for the acceptor (drawer).

Basic concept and points:

• On acceptance, the creditor’s claim is replaced by a formal liability called Bills Payable.
• Bills Payable are recorded in the Bills Payable Book and shown under Current Liabilities in the Balance Sheet until they are discharged.
• They may be discharged by: payment at maturity, endorsement (transfer), discounting with bank, dishonour (non-payment) or renewal.

Journal entries — typical situations

• When purchase is made on credit and later bill is accepted:

  At time of purchase:
  Purchases A/c          Dr
     To Creditor A/c
  (Being goods purchased on credit)

  At time of acceptance:
  Creditor A/c           Dr
     To Bills Payable A/c
  (Being bill accepted in settlement of creditor)

• If bill accepted at time of purchase (single entry):

  Purchases A/c         Dr
     To Bills Payable A/c
  (Being goods purchased and bill accepted)

• When bill is paid on maturity:

  Bills Payable A/c      Dr
     To Bank/Cash A/c
  (Being bill paid on maturity)

• If bill is dishonoured at maturity:

  Bills Payable A/c      Dr
     To Creditor A/c
  (Being bill dishonoured and creditor reinstated)

  OR if noting charges are paid by the acceptor on dishonour:
  Bills Payable A/c      Dr
  Noting Charges A/c      Dr
     To Creditor A/c
  (Being bill dishonoured and noting charges borne)

• If bill is discounted with bank before maturity:

  Bank A/c               Dr
  Discount on Bills A/c    Dr
     To Bills Payable A/c
  (Being bill discounted with bank; discount is expense)

• If bill is endorsed to a third party (transferred):

  Bills Payable A/c      Dr
     To Creditor A/c
  (Being bill endorsed to creditor/third party)

• If the bill is renewed (fresh bill issued) on maturity due to inability to pay:

  Bills Payable A/c      Dr
  Interest/Extra Charge A/c Dr
     To New Bills Payable A/c
  (Being old bill renewed and interest/charge added)

Ledger and Balance Sheet presentation:

• Record Bills Payable in the Bills Payable Book and post to Bills Payable Ledger A/c.
• On the Balance Sheet (Liabilities side), show Bills Payable under Current Liabilities separately or combined under Sundry Creditors/Current Liabilities with a note.

Practical notes:

• When preparing cash flow statements, payment of bills payable appears under operating activities (if related to working capital) as outflow.
• Bank discount is an expense of the period and not part of Bills Payable — the full face value of the bill is removed from Books when discounted.

Overview
In the Bills of Exchange topic, "Books and Subsidiary Records" refers to the subsidiary books and registers used to record transactions relating to bills of exchange (bills receivable and bills payable). These subsidiary records provide a systematic, chronological and summarized record of all bill transactions before posting to ledger accounts.

Main subsidiary books and registers

• Bills Receivable Book (B/R Book) – used by a business (payee/drawer) to record bills accepted by its debtors when the business receives a bill in settlement of an existing receivable.
• Bills Payable Book (B/P Book) – used by a business (drawee) to record bills it has accepted in settlement of its liabilities.
• Bills Receivable Register / Bills Payable Register – a ledger/summary showing bill number, drawer/drawee, date of bill, tenor, due date (including days of grace if applicable), amount and status (paid, dishonoured, discounted, endorsed).
• Supporting subsidiary records – endorsement register, discount register (for bills discounted with bank), and a noting register (for charges when a bill is dishonoured).

Typical columns in Bills Receivable / Bills Payable Book

• Date (of transaction)
• Bill No. (or reference)
• Particulars: Name of drawer/drawee and brief details (e.g., for acceptance)
• Amount (face value)
• Tenor (e.g., 3 months / 60 days)
• Due Date (date of maturity; include days of grace if company policy/ law requires)
• Remarks (discounted, endorsed, dishonoured, paid, noting charges)

Accounting treatment — common journal entries

Below are the standard journal entries recorded in the books of the concerned parties for common bill-related events.

In the books of the payee (drawer) / seller — Bills Receivable (B/R)

• On receiving a bill in settlement of a trade receivable:
  Bills Receivable A/c Dr
  To Debtor's A/c
• On bill maturity when payment is received:
  Bank / Cash A/c Dr
  To Bills Receivable A/c
• On endorsing a bill to a creditor:
  Creditor's A/c Dr
  To Bills Receivable A/c
• On discounting a bill with bank:
  Bank A/c Dr (net proceeds)
  Discount on Bills A/c Dr (bank discount / expense)
  To Bills Receivable A/c (face value)
• On dishonour of a bill (not previously discounted):
  Debtor's A/c Dr
  To Bills Receivable A/c
• If noting charges are paid by the drawer:
  Noting Charges A/c Dr
  To Cash / Bank A/c
  And to recover from debtor: Debtor's A/c Dr
  To Noting Charges A/c

In the books of the drawee (acceptor) / buyer — Bills Payable (B/P)

• On accepting a bill in settlement of a trade payable:
  Creditor's A/c Dr
  To Bills Payable A/c
• On payment at maturity:
  Bills Payable A/c Dr
  To Bank / Cash A/c
• On endorsing a bill received to another party:
  Bills Payable A/c Dr
  To Creditor (endorsee) A/c
• On dishonour of a bill (acceptor fails to pay):
  Creditor A/c Dr
  To Bills Payable A/c

Important rules / points

• Due date calculation: Add the tenor (days / months) to the date of the bill and then add days of grace if applicable (commonly 3 days in many systems). Always follow the school/textbook convention (some problems require adding days of grace, some do not).
• When a bill is discounted with a bank, the bank becomes holder and the bank collects at maturity; the discount is an expense for the drawer and is recorded as Discount on Bills or Bank Charges.
• When a discounted bill is dishonoured, the drawer becomes liable to reimburse the bank. The usual entry: debit Debtor and credit Bank (for the amount the bank claims). If discount previously recorded as expense is to be recovered from debtor, adjust Discount on Bills account accordingly.
• Always maintain a Bills Receivable / Bills Payable Register to track status (issued, discounted, endorsed, matured, dishonoured) and due dates — this prevents missed payments and makes reconciliation easy.

Why subsidiary books?
They reduce the volume of entries in the journal and provide quick reference summaries of bill transactions. From these subsidiary books the totals are posted to ledger accounts and specific items are posted to individual ledgers.

Practical workflow (life-cycle of a bill) — receive/issue → record in B/R or B/P Book → (optionally) discount with bank or endorse → on maturity either receive/pay or dishonour → record noting charges if any → update registers and post to ledger.

Definition: An accommodation bill (or accommodation bill of exchange) is a bill drawn and/or accepted to provide financial assistance to a person (the accommodated party) without any underlying sale or purchase. A third party (the accommodation party) lends his credit by drawing or accepting the bill so the accommodated party can raise funds by discounting or endorsing the bill.

Key features:

• No underlying trade/consideration — the bill exists only to give credit.
• Two important roles: the accommodated party (beneficiary) and the accommodation party (who lends credit by signing).
• The accommodation party may act as drawer, acceptor or endorser.
• Liability: The accommodation party who signs the bill is legally liable to honor it (pay) if it is dishonored later; the accommodated party must ultimately reimburse the accommodation party.

Why used (purpose): To help a person with weak credit obtain funds (by discounting with a bank or selling the bill) using the stronger credit of a friend, partner or associate.

Types (by role of accommodation party):

• Accommodation by acceptor — a person accepts a bill drawn by the accommodated party even though no consideration is received.
• Accommodation by drawer — a person draws a bill in favour of the accommodated party (or on another) to help the accommodated party raise funds.
• Accommodation by endorser — a person endorses a bill to improve its marketability.

Accounting idea (summary): Accounting follows normal bills of exchange rules. The holder who discounts treats the transaction as a usual discount (Bank Dr; Discount Dr; To Bills Receivable). The accommodation party records the acceptance/drawing as a liability (Bills Payable) and a corresponding receivable/claim against the accommodated party (an account such as 'Accommodation to X' or 'X — Accommodation'). If the bill is dishonored, the accommodation party will claim reimbursement from the accommodated party.

Important practical points:

• Accommodation bills may attract legal risk — the accommodation party is liable to the holder and must obtain reimbursement from the accommodated party.
• Banks examine the nature of the relationship; repeated accommodation may be treated as related-party financing.

Overview
The chapter Bills of Exchange contains many numerical problems that test: calculation of due/maturity dates (including days of grace), interest on bills, bank discounting (simple discount), proceeds received on discounting, journal entries for drawing/discounting/dishonour/renewal, and treatment of noting charges. Practical problems usually follow a stepwise approach: determine the time period, compute interest or discount (simple interest), and then record accounting entries.

Stepwise approach to solve problems

1. Find the maturity date – Start from the date of bill (or acceptance) and count the specified period; then add days of grace (usually 3 days unless told otherwise). Take care about month lengths and leap years when needed.
2. Compute time in years – Convert months/days into fraction of year for interest or discount. Unless otherwise stated use days/365 or months/12 as given in the question.
3. Calculate interest or bank discount – Use simple interest formula (Interest = Principal × Rate × Time). For bank discount use the maturity (face) amount as the base.
4. Find proceeds or amount payable – Proceeds on discount = Maturity amount − Bank discount. Amount payable on dishonour = Face value + noting charges + any unpaid interest.
5. Pass journal entries – Use standard templates: sale/issue of bill, discount with bank, receipt on maturity, dishonour entries, noting charges and recovery, renewal entries.

Accounting treatment – quick templates

• On sale on credit: Debtor A/c Dr; Sales A/c Cr.
• On drawing a bill: Bills Receivable A/c Dr; Debtor A/c Cr.
• On discounting with bank: Bank A/c Dr (proceeds); Discount on Bills A/c Dr (bank's discount); Bills Receivable A/c Cr (face value).
• On receipt at maturity (if not discounted): Bank A/c Dr; Bills Receivable A/c Cr.
• On dishonour (not discounted): Debtor A/c Dr (face value); Bills Receivable A/c Cr. If noting charges are paid: Noting Charges A/c Dr; Bank A/c Cr (payment) and Debtor A/c Dr; Noting Charges A/c Cr (to recover noting charges from debtor).
• On renewal (new bill accepted to replace old): Cancel old bill and record new bill – adjust interest/cash if required. Typical entry when old bill is replaced by a new bill: Bills Receivable (new) A/c Dr; Debtor A/c Cr (for old bill amount + any interest accepted). Exact entries depend on whether extra cash or interest is involved.

Common pitfalls

• Wrong counting of days/months for maturity.
• Using face value instead of present value (or vice versa) when computing discount/interest.
• Confusing bank discount (simple discount on maturity amount) with interest on present value.
• Omitting noting charges when computing amount recoverable from debtor after dishonour.

Overview: A bill of exchange is a written, unconditional order by one person (drawer) directing another (drawee/acceptor) to pay a fixed sum of money to a named person (payee) or to bearer on demand or at a future specified date. It is a negotiable instrument widely used in trade and finance.

Advantages:

• Written proof of debt: A bill records the amount, parties and due date, providing clear documentary evidence of the debt.
• Negotiability: It can be transferred by endorsement and delivery, making it easy to transfer claims without cash.
• Credit facility: It converts a cash sale into a formal credit arrangement with a definite maturity date (e.g., 30/60/90 days).
• Liquidity (discounting): The holder can obtain immediate cash by discounting the bill with a bank, improving working capital.
• Legal enforceability: Acceptance creates a binding obligation on the acceptor; unpaid bills can be protested and legally sued.
• Reduction of cash handling: Reduces need to carry or transfer large amounts of cash, improving safety and convenience.
• Facilitates international trade: Commonly used in exports/imports; provides clear payment terms and can be endorsed to banks.
• Standardisation for accounting: Simplifies recording, tracking and reconciling receivables and payables.

Limitations:

• Risk of dishonour: Drawee may refuse to accept or pay the bill; dishonour causes delay, extra costs (noting, protesting) and uncertainty.
• Delay in realisation: Unless discounted, bills tie up funds until maturity; fixed due dates may not match cash needs.
• Cost of discounting and endorsements: Banks charge discount interest and fees; endorsers or guarantors may demand commissions.
• Dependence on creditworthiness: Value depends on acceptor’s reputation; weak credit reduces negotiability and increases discount cost.
• Not suitable for small/retail transactions: Formalities and costs make bills impractical for low-value or immediate sales.
• Formal requirements and risk of forgery: Improper filling can invalidate a bill; instruments can be forged or altered.
• Legal procedures on dishonour: Noting and protesting are formal and sometimes expensive steps before legal recovery.

Practical implications for students: Understand both the commercial benefits (credit, negotiability, liquidity) and practical limits (discount cost, dishonour risk). When recording transactions, know when a bill is drawn, accepted, dishonoured or discounted and the corresponding journal entries.