Bills of Exchange and Promissory Notes
Bills of Exchange and Promissory Notes tests negotiation and accounting for credit instruments.
Core rules
- A bill of exchange is a written order by the drawer directing the drawee to pay a sum to the payee. A promissory note is a written promise by the maker to pay the payee. A bill needs acceptance; a note does not.
- Tenure runs from the date of the bill; add three days of grace to find the due date. If the due date is a public holiday, it falls on the preceding business day.
- The holder may discount the bill with a bank, endorse it, or hold it till maturity. On dishonour, the holder may claim the amount plus noting charges from the drawee.
Worked example
A draws a 3-month bill on B for ₹20,000 on 1 January 2024. Due date = 1 April + 3 days = 4 April 2024. A discounts it at 12% p.a.: discount = 20,000 × 12/100 × 3/12 = ₹600; proceeds = ₹19,400. In A's books: Bank A/c Dr 19,400; Discount A/c Dr 600; Bills Receivable A/c Cr 20,000. If B dishonours, B's account is debited with ₹20,000 plus noting charges.
Traps
Forget days of grace; compute discount for the unexpired period, not the full term; treat noting charges as the drawer's expense when recoverable from the drawee; confuse endorsement (liability continues) with discounting (bank recourse may remain).