Bills of Exchange and Promissory Notes
A bill of exchange is a written order by the drawer directing the drawee to pay a sum to the drawer or a named payee. A promissory note is an unconditional promise by the maker to pay the payee. Bills extend credit and may be discounted, endorsed or sent for collection.
Key rules
- Parties: drawer, drawee (who becomes acceptor on signing), and payee.
- Tenor: a three-month bill dated 1 June falls due on 4 September, after three days of grace. If the due date is a holiday, it falls on the preceding working day; a bill dated the 31st is counted to the last day of the relevant month.
- Discounting: discount = bill amount × rate × unexpired months/12; proceeds = bill − discount.
- Endorsement transfers title; sending for collection keeps ownership with the drawer.
- Dishonour: noting charges are paid by the holder and recovered from the party liable; original entries are reversed.
- Retirement: the drawee pays before the due date and receives a rebate.
Worked example
A bill of ₹60,000 dated 1 June at three months is discounted on 1 July at 12% p.a. The unexpired period is two months, so discount = 60,000 × 12/100 × 2/12 = ₹1,200 and proceeds = ₹58,800. The drawer debits Bank ₹58,800 and Discount ₹1,200, and credits Bills Receivable ₹60,000.
Traps
- Omitting the three days of grace.
- Calculating discount for the full tenor instead of the unexpired period.
- Failing to charge noting charges to the defaulting party.
- Treating a bill sent for collection as discounted, which wrongly records a discount charge.