Important Terms in Bills of Exchange

Last Updated : 21 Apr, 2025

What is Bill of Exchange?

A bill of exchange is a very popular negotiable instrument. It is a written order drawn upon one party by the other, whereby the former is required to pay a stipulated sum of money to the latter, either on the latter's demand or at some point in the future. It is noteworthy that such an order should be unconditional. The party that draws the bill is called the drawer, and the party to whom such a bill is presented is called the drawee. A bill of exchange must be signed by both the drawer and the drawee. Bills of exchange are legal documents, implying that in case the drawee fails to repay the sum within the stipulated period, the drawer can recover that amount legally.

Definition:

As per the Negotiable Instruments Act, 1881, "A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument."

Important Terms in Bills of Exchange:

1. Term of Bill: This refers to the time period between the date upon which the bill has been drawn and the date upon which such bill becomes due for payment. It can be calculated in months or days.
For Examples,

Y draws upon X a bill of exchange worth ₹40,000 on 1 August 2022 to be settled on 1 October 2022. In this case, the term of the bill is 2 months.
Ramesh draws upon Suresh a bill of exchange worth ₹1,00,000 on 8 August 2022 to be settled on 31 August 2022. In this case, the term of the bill is 23 days.

2. Accommodation Bill: An accommodation bill is slightly different from a trade bill, even though they both serve the same purpose. When a bill of exchange is drawn and acknowledged by the drawer and the drawee, without any consideration involved, it is called an accommodation bill. Such a bill is not enforced by legal norms and principles, rather it thrives on the moral judgment and understanding of both parties. Such bills are prepared to offer monetary assistance to the parties involved.

3. Days of Grace: This refers to the extra days, usually 3, added to the due date of the bill of exchange. In simple ways, days of grace is an additional time period allowed to the drawee to fulfil his obligation, once the due date has passed. A payment made within such grace period is not subject to any penalty or legal action by the drawer. It is a standard practice in the business world to add days of grace to the due dates of negotiable instruments.

4. Date of Maturity: The date obtained after adding 3 days of grace to the due date of a negotiable instrument is called the date of maturity. This refers to the final date upon which a due payment can be settled without any legal action by the drawer. In case the drawee fails to honour the payment even after the maturity date, the drawer has the right to sue the defaulter.
For Example, If a bill drawn on 6 April is due to be settled 2 months later, then its due date is 6 June, but its maturity date is 6 June + 3 days of grace = 9 June.

5. Discounting of Bill: When the maker of a trade bill presents such bill to the bank for the purpose of its encashment even before its date of maturity, it is called the discounting of the bill. The maker's bank pays him the amount written on the bill after deducting some commission, known as a discount. On the due date, the bank presents such bill to the drawee and collects the amount. A bill is usually discounted when the drawer is in urgent need of cash.
For Example, C Ltd. sells goods worth ₹1,00,000 to R Ltd. on credit basis, and issues a trade bill for the same amount, to be settled in 90 days. In case, C Ltd. wants to get this money before 90 days, it can present the bill to the bank for encashment after some discount. Suppose the discount rate of the bank is 6%. Hence, the bank would deduct ₹6,000 from the total sum and pay ₹94,000 to C Ltd. On the date of maturity, the bank would collect the total amount from R Ltd.

6. Maturity of Bill: The date obtained after adding 3 days of grace to the due date of a negotiable instrument is called the date of maturity. This refers to the final date upon which a due payment can be settled without any legal action by the drawer. In case the drawee fails to honour the payment even after the maturity date, the drawer has the right to sue the defaulter.
For Example, If a bill drawn on 6 April is due to be settled 2 months later, then its due date is 6 June, but its maturity date is 6 June + 3 days of grace = 9 June.

7. Endorsement of Bill: This refers to the practice whereby the drawer of the trade bill transfers it in favour of his own creditors to settle his own dues. Endorsing the bill to another person implies that the payment would now be made to the person to whom such bill has been endorsed, and not to the maker of the bill. The person who endorses a trade bill is called the endorser and the person to whom the bill is endorsed is called the endorsed.
For Example, Harsh draws upon Yamini a bill worth ₹10,000 on 1 April 2022 to be settled after 3 months. After 1 month, Harsh purchases goods from Mrinal worth ₹20,000. He endorses the bill drawn upon Yamini to Mrinal, along with a cheque of ₹10,000 in full settlement of his dues to Mrinal. Here, Harsh is the endorser and Mrinal is the endorsee. At the end of three months, Yamini would pay ₹10,000 to Mrinal, thereby settling the dues of both- herself as well as Harsh.

8. Bill after Due Date: A bill after due date means one whose term begins exactly after the date on which it is created. It is different from a bill after sight, whose term begins only after the drawee has received it. In other words, a bill after date becomes due as and when it has been created, no matter if the drawee has received it or not.
For Example, A draws a bill worth ₹40,000 on B on 1 March 2022, with a maturity period of 30 days after date. In such a case, the due date of the bill would be 1 March + 30 days after 1 March = 31 March 2022.

9. Negotiation: The negotiation of a bill of exchange refers to the practice of transfer of a trade bill, whereby the transferee of the bill becomes its holder.

10. Bill Sent for Collection: When a bill of exchange is sent to the bank for collection, with clear instructions to retain it till the date of its maturity, it is called bill sent for collection. In other words, the bank will realise the bill of exchange on its due date and credit the drawer's account with the amount of the trade bill. Such bills, which are sent for collection at the bank are recorded on the assets side of the Balance Sheet as 'Bills Sent for Collection'.

11. Dishonor of Bill & Noting Charges: Normally, when a trade bill is settled by making payment to the drawer on the maturity date, it is called the settlement of the bill. A bill of exchange is said to be dishonoured when the drawee fails to make the payment on the date of its maturity. Such dishonour restores the liability/obligation on the part of the drawee. It can be due to either insufficient funds or insolvency. Since bills of exchange are legal instruments, the drawer can take legal action against the drawee for non-payment. This is done in the Notary public. Notary public charges a certain amount of fee to record the dishonour of a bill. Such a fee is called noting charges. Noting charges are paid by the drawer, but ultimately added to the amount of the bill to be recovered later from the drawee.
For Example, On 5 November 2021, Ram sold goods worth ₹30,000 to Fatima. He then drew a bill upon Fatima to be settled 2 months from the date. Fatima accepts the bill. Ram gets the bill discounted from the bank on the same date @4% p.a. On the due date, Fatima is not able to pay the amount to the bank. Hence, the bill got dishonoured. Ram had to pay noting charges of ₹200. Now, Fatima is liable to pay ₹30,200; since the noting charges are also borne by the drawee.

12. Renewal of Bill: In cases where the drawee of the bill is unable to honour the bill upon its maturity, he might approach the drawer, requesting the latter to extend the time period for such payment. The drawer might agree to such a request and might issue a new bill by cancelling the old bill along with new guidelines for such payment. This process is called the renewal of the bill.

13. Retiring of Bill: When the drawee of a bill has enough funds at hand, he might request the drawer to accept the due amount even before the date of maturity of the such bill after allowing some rebate for the period between such settlement and the actual date of maturity. In such cases, if the drawer agrees to accept the payment before maturity, the bill is then said to be 'retired'.

Accounting Treatment of Bills of Exchange

prabhjotkushparmar

Improve

Article Tags :

Important Terms in Bills of Exchange

What is Bill of Exchange?

Definition:

Important Terms in Bills of Exchange:

Similar Reads

Part A

Chapter 1: Introduction to Accounting

Chapter 2: Theory Base of Accounting

Chapter 3: Recording of Business Transactions

Chapter 4: Bank Reconciliation Statement

Chapter 5: Depreciation, Provisions, and Reserves

Chapter 6: Trial Balance and Rectification of Errors

Chapter 7: Bills of Exchange

Part B