This document defines key terms related to bills of exchange and provides accounting entries for promissory notes and bills of exchange. It explains that a bill of exchange is a written order by a drawer directing a drawee to pay a specified amount to a payee. The key parties are the drawer, drawee, and payee. Accounting entries are provided for when the bill is held until maturity and show debits and credits between bills receivable/payable, the drawer, drawee, and cash accounts.

1. BBA I
INTRODUCTION TO ACCOUNTING
UNIT 5

2. BILL OF EXCHANGE
• “A bill of exchange is an instrument in writing
containing an unconditional order signed by the
maker ,directing a certain person to pay certain
sum of money only to, or to the order of, a certain
person or to the bearer of the instrument.”
• Negotiable instruments act 1881 sec.5. it means
that a bill of exchange is drawn by a person
directing another person to pay the specified sum
of money to yet another person. A bill of ex. is of
real use,if it is accepted by person directed to pay
the amount.

3. Features of bill of exchange
• 1-A bill of ex. is a written order.
• 2- It is drawn and signed by the maker i.e. drawer of
the bill .
• 3-it is an unconditional order to a person i.e.drawee to
pay specified amount the drawee, must accept it to
make it of value.
• 4- the specified amount is payable to the person
named in the bill or to his order or to bearer.
• 5-it is accepted by the drawee.
• 6-it is specifies the date by which the amount should
be paid.

4. Basic terms
• Drawer-Drawer is the person who makes or
writes the bill of exchange. He is a creditor of
the person on whom the bill of ex. Is shown.
• Drawee-Drawee is the person on whom the
bill of exchange is drawn for acceptance. He is
the person to whom credit has been granted
by the drawer.
• Payee- payee is the person named in the bill of
exchange to whom the amount is payable.

5. Basic Term
• Endorser-Endorser is the person who transfers
the bill of exchange or promissory note in favor of
other person of other person .
• Endorsee-Endorsee is the person to whom the bill
of exchange or promissory note is endorsed.
• Negotiation or Endorsment:Endorsment means
transfer of bill of ex. or promissory note to
another person. The person receiving the bill of
exchange or promissory note becomes
authorised to receive the payment.

6. Basic term
• Bill at sight or demand-the bills which are drawn
‘On demand’ and ‘At sight’ are payable on
presentation to the drawee or acceptor .
• Bill after date /After sight-bill after date is the bill
in which the period is counted from the date of
drawing of the bill after sight, the period is
counted from the date of acceptance of the bill.
• Tenor OR tenure of bill- Bill may be drawn
payable at Sight ,on demand ,on presentation
,after date ,and so on.The period intervening
between the date which a bill is drawn and that
on which it becomes due is called tenure of bill.

7. Basic Term
• Days of grace- days of grace three extra days
added to the period of bill .it is a custom to add
the days of grace.
• Date of maturity- due date is the date on which
the payment of the bill is due. It is also known as
the date of maturity. It is calculated by adding
days of grace.
• Dishonour of a bill-that mean a bill is not paid by
the drawee on its due date. It arises when
acceptor refuses or is unable to pay the amount
of bill of ex., promissory note or cheque ,the
amount of bill.

8. Basic terms
• Notary Public & noting charge-notary public is
an officer appointed by the central or state
government to excise the power and functions
relating to noting and protesting of negotiable
instruments for dishonour. ‘Noting’
authenticates the fact of dishonour.
• Renewal of a bill-when the acceptor of a bill is
not position to meet the bill on due date, he
may, with the consent of the holder accepts a
fresh bill in place of old bill.(after cancelation
of the old).

9. Basic
• Retirement of bill-when the drawee pays the bill
before due date ,it is called retirement of bill. The
holder allow him a rebate of certain amount
calculated at a certain rate percent per annum,
from the date of retirement to the date of
maturity.
• Holder-the holder of a negotiable instrument i.e.
bill of exchange ,promissory note or cheque is a
person entitled in his own name to the
possession thereof and to receive or recover the
amount due thereon from the parties to it.

10. Basic
• Holder in due course-A person who acquires
the negotiable instrument ,i.e.bill of exchange
,promissory note or cheque in good faith , for
value and before the date of maturity is a
holder in due course .unless otherwise
provided ,a holder will be assumed to be a
holder in due course .

11. 11
Accounting Entries For Promissory/Bill of
Exchange
• The accounting entries for promissory note
and bill of exchange are same.
• The terms promissee and maker are used in
case of promissory note.
• The terms drawer and drawee are used in case
of bill of exchange.

12. 12
Accounting Entries For Promissory
Note/Bill of Exchange (cont…)
• Accounting entries when a bill of exchange is
kept till the maturity date:
– In the book of drawer:
• On selling goods on credit:
Drawee A/c Dr.
To Sales A/c
• On receipt of the bill duly accepted by drawee:
Bills Receivable A/c Dr.
To Drawee A/c
• On receiving payment on maturity of the bill:
Cash A/c Dr.
To Bills Receivable A/c

13. 13
Accounting Entries For Promissory
Note/Bill of Exchange (cont…)
– In the books of drawee:
• On purchasing goods on credit from drawer:
Purchase A/c Dr.
To Drawer A/c
• On acceptance of bill in favour of drawer:
Drawer A/c Dr.
To Bills Payable A/c
• On payment of the bill on maturity:
Bills Payable A/c Dr.
To Cash A/c

14. References/Sources
• Mercantile Law N.D.Kapoor, Sultan Chand and
Sons chapter( part) 3 Negotiable Instruments
Act – 1881 page no 1.