Bills of Exchange

Last Updated On -01 May 2025

In trade and commerce, particularly in credit-based transactions, there must be a written, legally enforceable promise of payment. This is where the bill of exchange comes in—a financial tool businesses have relied on for millennia to handle credit, guarantee transparency between buyers and sellers, and pay for expenses. From small local businesses to multinational exporters, the bill of change serves as a legally enforceable document safeguarding financial interests and preserving confidence in corporate partnerships.

Define Bill of Exchange

Either on demand or at a predetermined future date, a bill of exchange is a written, unconditional order directed by one party (the drawer) to another party (the drawee) paying a certain sum of money to a third party (the payee).

Mostly employed in commercial transactions, particularly in situations involving credit-based sales of products, it is Using a bill of exchange, the seller (drawer) guarantees that the buyer, drawee, pledges to pay the agreed amount by a designated date.

For example, Should A credit B with goods valued ₹50,000, A might create a bill of account on B and require B to pay the amount in 90 days. Should B accept the bill, it becomes a legally enforceable obligation.

Parties Engaged in a Bill of Exchange

Three main people are involved:

Drawer: The bill is created and drawn by someone. Usually the creditor or seller/buyer.
Drawee: The individual the bill is drawn upon. Usually the borrower or buyer.
Payee is the individual to whom the payment is due. It may be any third party or the drawer.
Sometimes the payee may change during the life of the bill if it is endorsed.

Key Features of a Bill of Exchange

A bill of exchange is more than just a financial document — it’s a powerful tool that facilitates trust, trade, and time-based payments in the commercial world. Whether you're a business student learning accounting concepts or a professional managing receivables, understanding how bills work will deepen your grasp of credit management and business law.

As commerce grows more complex, instruments like bills of exchange ensure that trust is documented, timelines are set, and payments are secure.

Written instrument: It has to be written and signed by the drawer.
The drawer has to give a clear, unwavering directive for payment.
Clearly defined amount: The payment amount has to be definite.
Payment has to be given on demand or on a clearly stated future date.
Acceptance: To be valid, the drawee has to write down his acceptance of the bill.
Bills can be endorsed and passed on to others under negotiable terms.
Trade Bill: Arises from a real trade transaction; types of bills of exchange.
Drawn without any sales of products, the accommodation bill is aimed merely to offer financial assistance.
Demand Bill: Paid right away after presentation.
Payable either on a set day or after a designated period is the time bill.
Inland Bill: The same nation houses the drawer as the drawee.
Foreign Bill: There is either a drawee or drawer outside of the nation.

Every type has a different legal and financial approach, particularly in corporate accounting where timing and payment cycles are crucial.

Bills of Exchange Treatment in Accounting

A bill drawn is seen as both a burden for the drawee and an asset for the drawer. The following is the fundamental approach for journal entry:

For the seller's drawer:

Once the bill is approved and drawn upon:

Bills Receivable A/c Dr.

To Debtor’s A/c

When the bill is honored at maturity:

Bank A/c Dr.

To Bills Receivable A/c

When the bill is dishonoured:

Debtor’s A/c Dr.

To Bills Receivable A/c

For the Drawee (Buyer):

If the bill is Accepted:

Creditor’s A/c Dr.

To Bills Payable A/c

If the bill is paid:

Bills Payable A/c Dr.

To Bank A/c

Legal Framework for the Bills of Exchange

The Negotiable Instruments Act, 1881 controls legal framework bills of exchange in India. Section 5 of the Act claims:

"A bill of exchange is an instrument in writing containing an unconditional order... signed by the maker, directing a certain person to pay a particular sum of money only to, or to the order of, a certain person or to the bearer of the instrument."

Bills are enforced in court thanks to this legal support, therefore guaranteeing confidence in trade credit systems.

Importance of the Bills of Exchange

Bills of exchange are important in business since they provide a legal guarantee of future payment, therefore lowering credit risk.
Bills can be discounted at banks to provide quick money.
Promotes trade by allowing consumers to buy items without making instant payments.
Transferable Instrument: Bills can be endorsed and used to settle debts with other parties.
Promotes Legal Protection: Should dishonor, the drawer can legally reclaim dues with interest and penalties.

Did you know?

The history of the bill of exchange begins in the twelfth century! It started in Italy during the Middle Ages when traders wanted a safe means of transporting money without carrying real gold. The system developed into the contemporary trade bills being utilized.

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Frequently Asked Questions (FAQs)

Should a bill of exchange be dishonored, what follows?

The bill is declared dishonored should the drawee refuse to pay at maturity. The drawer can take legal action to recover the amount, and noting charges may apply for official protest.

Is it possible to pass a bill of exchange to someone else?

Yes, bills of exchange are negotiable instruments. The drawer or holder can endorse it to another party, who then becomes the new payee.

Is a promissory note the same as a bill of exchange?

No. A promissory note is a promise to pay by the maker, while a bill of exchange is an order to pay by the drawer. Also, bills involve three parties; promissory notes only involve two.