Types of Bills of Exchange

Oct 13, 2025 by thesweetdesigns.com 2 views

Introduction

A bill of exchange is a written order by one person (the drawer) to another (the drawee) to pay a certain sum of money on a specified date. It is a widely used method of payment in international trade and commerce. In this article, we will discuss the concept of a bill of exchange, its types, and how to pass journal entries in the books of the drawer and the drawee.

Types of Bills of Exchange

There are three main types of bills of exchange:

Bill of Exchange: A bill of exchange is a written order by one person (the drawer) to another (the drawee) to pay a certain sum of money on a specified date.
Draft: A draft is a bill of exchange that is drawn on a bank or a financial institution.
Promissory Note: A promissory note is a written promise by one person (the maker) to pay a certain sum of money to another person (the payee) on a specified date.

Bill of Exchange - A Real-Life Scenario

Let's consider a real-life scenario to understand how a bill of exchange works.

Scenario

On January 1, 2012, Ram sold goods to Gopal for Rs 10,000 and drew a bill on him payable after 3 months. The bill was accepted and returned to him. Gopal made payment of the bill on maturity.

Journal Entries in the Book of Ram

The following journal entries need to be passed in the book of Ram:

Date: January 1, 2012
Debit: Sales Account - Rs 10,000
Credit: Cash Account - Rs 10,000 (since the goods were sold for cash)
Date: January 1, 2012
Debit: Bills Receivable Account - Rs 10,000
Credit: Sales Account - Rs 10,000 (since the bill was drawn on Gopal)

Journal Entries in the Book of Gopal

The following journal entries need to be passed in the book of Gopal:

Date: January 1, 2012
Debit: Bills Payable Account - Rs 10,000
Credit: Cash Account - Rs 10,000 (since the bill was accepted and returned to Ram)
Date: April 1, 2012 (maturity date)
Debit: Cash Account - Rs 10,000
Credit: Bills Payable Account - Rs 10,000 (since the bill was paid on maturity)

Conclusion

In conclusion, a bill of exchange is a widely used method of payment in international trade and commerce. It is a written order by one person (the drawer) to another (the drawee) to pay a certain sum of money on a specified date. The journal entries in the books of the drawer and the drawee need to be passed carefully to ensure that the transaction is recorded correctly.

Key Takeaways

A bill of exchange is a written order by one person (the drawer) to another (the drawee) to pay a certain sum of money on a specified date.
There are three main types of bills of exchange: bill of exchange, draft, and promissory note.
Journal entries need to be passed in the books of the drawer and the drawee to record the transaction correctly.
The drawer needs to debit the bills receivable account and credit the sales account.
The drawee needs to debit the bills payable account and credit the cash account.

Frequently Asked Questions

Q: What is a bill of exchange?

A: A bill of exchange is a written order by one person (the drawer) to another (the drawee) to pay a certain sum of money on a specified date.

Q: What are the types of bills of exchange?

A: There are three main types of bills of exchange: bill of exchange, draft, and promissory note.

Q: How do I pass journal entries in the book of the drawer?

A: The drawer needs to debit the bills receivable account and credit the sales account.

Q: How do I pass journal entries in the book of the drawee?

A: The drawee needs to debit the bills payable account and credit the cash account.

Q: What is the maturity date of a bill of exchange?

Q: What is a bill of exchange?

A: A bill of exchange is a written order by one person (the drawer) to another (the drawee) to pay a certain sum of money on a specified date. It is a widely used method of payment in international trade and commerce.

Q: What are the types of bills of exchange?

A: There are three main types of bills of exchange:

Bill of Exchange: A bill of exchange is a written order by one person (the drawer) to another (the drawee) to pay a certain sum of money on a specified date.
Draft: A draft is a bill of exchange that is drawn on a bank or a financial institution.
Promissory Note: A promissory note is a written promise by one person (the maker) to pay a certain sum of money to another person (the payee) on a specified date.

Q: What is the difference between a bill of exchange and a promissory note?

A: A bill of exchange is a written order by one person (the drawer) to another (the drawee) to pay a certain sum of money on a specified date, whereas a promissory note is a written promise by one person (the maker) to pay a certain sum of money to another person (the payee) on a specified date.

Q: How do I pass journal entries in the book of the drawer?

A: The drawer needs to debit the bills receivable account and credit the sales account.

Q: How do I pass journal entries in the book of the drawee?

A: The drawee needs to debit the bills payable account and credit the cash account.

Q: What is the maturity date of a bill of exchange?

A: The maturity date of a bill of exchange is the date on which the bill is due for payment.

Q: What happens if the drawee fails to pay the bill on maturity?

A: If the drawee fails to pay the bill on maturity, the drawer can take legal action against the drawee to recover the amount due.

Q: Can a bill of exchange be transferred to another person?

A: Yes, a bill of exchange can be transferred to another person, known as the endorsee, by the original holder, known as the endorser.

Q: What is the difference between an endorsement and a negotiation?

A: An endorsement is the transfer of a bill of exchange from one person to another, whereas a negotiation is the transfer of a bill of exchange from one person to another in exchange for cash or other consideration.

Q: Can a bill of exchange be used for personal transactions?

A: Yes, a bill of exchange can be used for personal transactions, but it is more commonly used for business transactions.

Q: What are the advantages of using a bill of exchange?

A: The advantages of using a bill of exchange include:

It provides a secure method of payment.
It allows for a delay in payment.
It can be used for international transactions.
It can be used for personal and business transactions.

Q: What are the disadvantages of using a bill of exchange?

A: The disadvantages of using a bill of exchange include:

It requires a written agreement.
It requires a specified date for payment.
It can be subject to legal action if the drawee fails to pay.
It can be subject to exchange rate fluctuations if used for international transactions.

Conclusion

In conclusion, a bill of exchange is a widely used method of payment in international trade and commerce. It provides a secure method of payment and allows for a delay in payment. However, it requires a written agreement and a specified date for payment, and can be subject to legal action if the drawee fails to pay.