CBSE Class 11 Accountancy Chapter 8: Bill of Exchange

Chapter Overview

A bill of exchange is one of the most important negotiable instruments in commercial transactions. It facilitates credit sales by providing a written, legally enforceable promise of payment at a future date. This chapter covers the definition, features, types, and accounting treatment of bills of exchange — including acceptance, discounting, endorsement, dishonour, renewal, and retirement.

Understanding bills of exchange is essential for commerce students because they are widely used in business for settling debts, obtaining credit from banks, and financing trade operations.

Definition of Bill of Exchange

As per the Negotiable Instruments Act, 1881 (Section 5):

A bill of exchange is a written instrument 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.

In simpler terms, it is a written document in which one person (the creditor) orders another person (the debtor) to pay a specific amount to a specified person on a specified date.

Features and Essential Elements of a Bill of Exchange

For a bill of exchange to be valid, it must contain the following elements:

1. Must be in writing: An oral order is not a bill of exchange. 2. Unconditional order: The order to pay must not be subject to any condition. "Pay Rs 10,000 when satisfied" is NOT valid. 3. Signed by the maker (drawer): The person giving the order must sign the bill. 4. Three parties: Drawer, Drawee, and Payee. 5. Certain sum of money: The amount must be specific and certain. 6. Certain persons: The drawer, drawee, and payee must be identifiable. 7. Payable on demand or after a period: The bill may be payable immediately (on demand) or after a specified time (after date or after sight). 8. Stamp: A bill of exchange must be properly stamped as per the Indian Stamp Act. 9. May be payable to bearer or order: It must specify who will receive payment.

Parties to a Bill of Exchange

There are three parties to a bill of exchange:

1. Drawer

• The person who makes or draws the bill
• Usually the creditor (seller) who is owed money
• The drawer orders the drawee to pay

2. Drawee

• The person on whom the bill is drawn
• The person who is directed to pay
• Usually the debtor (buyer) who owes money
• The drawee must accept the bill by signing it, after which they become the acceptor

3. Payee

• The person to whom the payment is to be made
• Can be the drawer himself, or a third party
• In many cases, the drawer is also the payee

Important: The drawer and payee can be the same person, but the drawee must be a different person. After acceptance, the drawee becomes primarily liable to pay.

Types of Bills of Exchange

1. Trade Bill

• A bill drawn and accepted to settle a trade transaction (purchase/sale of goods)
• It arises from genuine business dealings
• Most bills in practice are trade bills

2. Accommodation Bill

• A bill drawn and accepted without any consideration (no actual trade transaction)
• It is drawn to provide financial accommodation (help) to one or more parties
• The purpose is to raise funds by discounting the bill from a bank
• These bills are not backed by genuine trade
• Accommodation bills can be:
• For mutual accommodation: Both parties benefit
• For single accommodation: Only one party benefits

Example of Accommodation Bill: A draws a bill on B for Rs 50,000. B accepts it. A discounts the bill from a bank and gives half the proceeds to B. There is no actual sale of goods between A and B.

Promissory Note

Definition (Section 4, Negotiable Instruments Act)

A promissory note is an instrument in writing containing an unconditional promise, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.

Features of a Promissory Note

1. Must be in writing 2. Contains an unconditional promise to pay (not an order) 3. Signed by the maker (promisor) 4. Two parties: Maker (promisor) and Payee (promisee) 5. Certain sum of money 6. Payable on demand or after a specified time 7. Must be properly stamped

Distinction: Bill of Exchange vs Promissory Note

Important Terms

Due Date

The date on which the bill becomes payable. It is calculated from the date of the bill.

Days of Grace

Three days of grace are added to the due date to determine the maturity date. This is a legal requirement under the Negotiable Instruments Act.

Maturity Date Calculation

The maturity date is the actual date on which payment is due, after adding 3 days of grace.

Rules:

1. Add the term of the bill (30 days, 60 days, 90 days, etc.) to the date of drawing 2. Then add 3 days of grace 3. If the maturity date falls on a public holiday, it becomes due on the preceding business day 4. If the maturity date falls on a sudden holiday (declared after the bill was drawn), it becomes due on the next business day

Example: A bill drawn on 1st January 2025 payable after 3 months.

• Nominal due date = 1st April 2025
• Add 3 days of grace = 4th April 2025 (Maturity Date)

Example: A bill drawn on 15th March 2025 payable after 2 months.

• Nominal due date = 15th May 2025
• Add 3 days of grace = 18th May 2025 (Maturity Date)

Discounting of Bill

The holder of a bill may need money before the maturity date. The holder can take the bill to a bank, which pays the holder the present value (face value minus discount) of the bill. The bank collects the full amount from the drawee on maturity.

Endorsement of Bill

The holder of a bill may transfer the bill to another person by signing on the back of the bill. This is called endorsement. The person who endorses is the endorser, and the person to whom it is endorsed is the endorsee.

Noting

When a bill is dishonoured, the holder may get the dishonour officially recorded by a Notary Public. The Notary Public notes the fact of dishonour on the bill and charges a fee called noting charges. Noting provides legal evidence of dishonour.

Accounting Treatment: Bills Receivable

When a seller draws a bill on a buyer and the buyer accepts it, the seller records it as a Bills Receivable and the buyer records it as a Bills Payable.

Journal Entries in the Books of Drawer (Seller)

1. When goods are sold on credit

2. When bill is drawn and accepted

3a. When bill is retained till maturity and honoured

3b. When bill is discounted with bank

3c. When bill is endorsed to a creditor

3d. When bill is sent to bank for collection

(On collection:) Bank A/c Dr. / To Bills Sent for Collection A/c

Journal Entries in the Books of Drawee (Buyer)

1. When goods are purchased on credit

2. When bill is accepted

3. On payment at maturity

Dishonour of Bill

When the drawee fails to make payment on the due date, the bill is said to be dishonoured.

Journal Entries on Dishonour

In the Books of Drawer

If bill was retained:

(Noting charges, if any:)

If bill was discounted with bank:

(The bank debits the drawer's account with the bill amount + noting charges)

If bill was endorsed:

In the Books of Drawee

(Noting charges:)

Renewal of Bill

When the drawee is unable to pay on the due date, they may request the drawer to cancel the old bill and draw a new bill with a later maturity date. This is called renewal of bill.

Steps in Renewal

1. The old bill is cancelled (dishonoured entries passed) 2. Interest is calculated for the extended period 3. The interest may be paid in cash or added to the new bill amount 4. A new bill is drawn and accepted for the new amount and new date

Journal Entries for Renewal

In the books of Drawer:

1. Cancel old bill (dishonour entry):

• Drawee A/c Dr. / To Bills Receivable A/c

2. Interest for extended period:

• Drawee A/c Dr. / To Interest A/c

3. If interest received in cash:

• Cash/Bank A/c Dr. / To Drawee A/c (for interest portion)

4. New bill accepted:

• Bills Receivable A/c Dr. / To Drawee A/c

In the books of Drawee:

1. Cancel old bill:

• Bills Payable A/c Dr. / To Drawer A/c

2. Interest charged:

• Interest A/c Dr. / To Drawer A/c

3. If interest paid in cash:

• Drawer A/c Dr. / To Cash/Bank A/c (for interest portion)

4. New bill accepted:

• Drawer A/c Dr. / To Bills Payable A/c

Retirement of Bill

When the drawee pays the bill before its maturity date, it is called retirement of bill. The drawer allows a rebate (discount) to the drawee for early payment.

Journal Entries for Retirement

In the books of Drawer:

In the books of Drawee:

Rebate is treated as an expense for the drawer and an income for the drawee.

Insolvency of Drawee

When the drawee becomes insolvent (declared bankrupt), they cannot pay the bill. The drawer may receive only a partial amount (dividend) from the drawee's estate.

Journal Entries

In the books of Drawer:

1. Dishonour entry (as above) 2. Amount received from official receiver:

3. Balance written off as bad debt:

• Cash/Bank A/c Dr. / To Drawee A/c (for amount received)
• Bad Debts A/c Dr. / To Drawee A/c (for balance)

In the books of Drawee:

1. Cancel Bills Payable:

2. No entry for insolvency — just a memorandum entry

• Bills Payable A/c Dr. / To Drawer A/c

Common Mistakes Students Make

1. Forgetting 3 days of grace: Always add 3 days of grace to calculate the maturity date. This is a legal requirement.

2. Confusing discount with rebate: Discount is charged by the bank at the time of discounting a bill. Rebate is given by the drawer when the bill is retired (paid early).

3. Wrong journal entry for discounted bill dishonour: When a discounted bill is dishonoured, the drawer's account with the bank is debited (not Bills Receivable). Entry: Drawee Dr. / To Bank.

4. Not passing noting charges entries: Noting charges are always debited to the Drawee and credited to Cash/Bank in the drawer's books.

5. Confusing Bills Receivable and Bills Payable: The seller records Bills Receivable (asset). The buyer records Bills Payable (liability).

6. Wrong treatment of interest on renewal: Interest on renewal is income for the drawer and expense for the drawee. It may be paid in cash or added to the new bill amount.

7. Forgetting accommodation bill entries: In accommodation bills, there is no sale/purchase entry. Only the bill entries and bank entries are passed.

Exam Tips

1. Maturity date calculation is almost always asked. Practice with different scenarios — after date, after sight, public holidays.

3. When a bill is discounted and then dishonoured, remember: the bank debits the drawer. The drawer then debits the drawee.

4. In renewal problems, calculate interest carefully for the extended period. Interest = Principal x Rate x Time.

5. Rebate calculation is similar to discount: Rebate = Face Value x Rate x (Days saved / 365).

6. For accommodation bills, remember there is no trading entry. Only bill-related and bank-related entries are passed.

7. Read the question carefully to identify who is the drawer, drawee, and payee. Sometimes the payee is a third party.

8. In the Balance Sheet: Bills Receivable is shown as a current asset, Bills Payable as a current liability.

Quick Revision Notes

• Bill of Exchange = unconditional order to pay (3 parties)
• Promissory Note = unconditional promise to pay (2 parties)
• Drawer = creditor, Drawee = debtor, Payee = recipient of payment
• Always add 3 days of grace to find maturity date
• Trade bill = genuine trade transaction; Accommodation bill = no consideration
• Bills Receivable = asset for drawer; Bills Payable = liability for drawee
• Discounting = getting cash before maturity from bank (bank charges discount)
• Endorsement = transferring bill to settle own debt
• Dishonour = drawee fails to pay; noting charges may apply
• Renewal = old bill cancelled, new bill drawn with interest for extended period
• Retirement = early payment with rebate (discount for early payment)
• Insolvency = drawee bankrupt; partial recovery + bad debt for balance
• Rebate = expense for drawer, income for drawee
• Discount = expense for drawer (when bill discounted), income for bank

Related Chapters

• [Chapter 7 — Accounts from Incomplete Records](/school/cbse/class/11/accountancy/cbse-accounts-incomplete-records)
• [Chapter 9 — Financial Statements I](/school/cbse/class/11/accountancy/cbse-financial-statements-1)
• [Bill of Exchange — Exercise Solutions](/school/cbse/class/11/accountancy/solutions/cbse-bill-of-exchange-exercise-solutions)
• [All Class 11 Accountancy Solutions](/school/cbse/class/11/accountancy/solutions)
• [Class 11 Accountancy Subject Guide](/school/cbse/class/11/accountancy)