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 bearer. A promissory note is an unconditional promise by the maker to pay the payee. The exam tests due date, discounting, dishonour and the accounts of both parties.
Key rules
- Parties to a bill: drawer, drawee (acceptor) and payee. A promissory note has a maker and a payee.
- Due date = date of drawing + tenor + three days of grace. A bill dated 1 January for three months is due on 4 April.
- Discounting: discount = bill amount × rate × unexpired period ÷ 12.
- Endorsement transfers the bill; dishonour requires noting, and noting charges are borne by the drawee.
- Renewal may involve interest or part payment; retirement before due date earns a rebate.
Worked example
A bill of ₹20,000 dated 1 January for three months is discounted on 1 February at 12% per annum. The unexpired period is two months. Discount = 20,000 × 12/100 × 2/12 = ₹400. The drawer receives ₹19,600. On dishonour, the drawer debits the drawee with the bill amount plus noting charges.
Traps
- Counting the due date from the date of acceptance instead of drawing.
- Calculating discount for the full tenor rather than the unexpired period.
- Omitting the three days of grace.
- Charging noting charges to the drawer when the drawee must bear them.
- Treating a promissory note as having three parties.