Bills of Exchange and Promissory Notes. Check the Difference Between Bills of Exchange and Promissory Notes. Key Difference Between Promissory Notes and Bills of Exchange.
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Meaning of Bills of exchange
A bill of exchange is:
- an instrument in writing
- containing an unconditional order
- signed by the drawer
- directing a certain person (drawee)
- to pay a certain sum of money
- to or to the order of a certain person or to the bearer of the instrument.
Meaning of Promissory Notes:
A Promissory note is:
- an instrument is writing,
- containing an unconditional promise
- signed by the promisor
- to pay a certain sum of money only to or to the order of a certain person (promise).
Parties to a bill of exchange:
There are three parties to a bill of exchange:
- Drawer: The drawer is a person, who draws the bill. He is the creditor who has the right to receive the money;
- Drawee: Drawee (acceptor), is the person to whom the bill is addressed or on whom it is drawn and who accepts the bill. He is the debtor; who is liable to pay
- Payee: The payee is the person who is to receive the payment under the bill. The drawer in many cases is also the payee.
- Endorsee: He is the person in whose favor the bill is endorsed by the drawer. He is usually the creditor of the drawer. Must Read Users of Accounting Information.
Parties to a promissory note:
There are two parties to a promissory note.
- Maker/ promisor: He is the person, a debtor who makes the promissory note i.e. promises to pay.
- Promise: He is the person, a creditor in whose favor a promissory note is made. He is entitled to receive the money.
Effect of holidays while ascertaining due date:
- In the case of Bills of Exchange and Promissory Notes if the due date falls on a Public Holiday then the due date will be the preceding working day.
- In case of Emergency Holidays, the subsequent working day will be taken as the due date.
Accounting for transactions of bills/ promissory notes:
- For accounting, it makes no difference whether it is a bill of exchange or a promissory note.
- It should be classified as Bills Receivable (BR) or Bills Payable (BP) for the party in whose books of account entry is being made.
- For accounting, the bill is Bills Receivable for the seller of goods and it is Bills payable for the purchaser of goods. You may also like Users of Accounting Information.
After receiving the bill, the seller (drawer) can deal with the bill in either of the following ways:
- Retain it and present it on the due date for payment or
- Can discount the bill with the bank and get the amount immediately, then the Bank will present the bill for payment on the due date or
- Can transfer/Endorse the bill in favor of some other party to whom he may be liable to pay, who will present the bill for payment on due date or
- Can send it for collection through the bank and will get the payment through the Bank on the due date.
The purchaser after accepting the bill is not concerned with the above treatments of the bill i.e. it will not require any accounting entry in his books.
Must Read –Accounting for Rectification of Errors
Renewal of a bill:
- On the due date, if the acceptor is unable to pay the amount of the bill, then he can approach the Drawer, for renewal of the bill.
- Renewal means giving further time for the payment of the bill.
Retirement of the bill:
- Retirement of the bill means that payment is made before the due date.
- Therefore, normally the receiver will allow some rebate/discount to the payer.
- Entry for payment/ receipt will be recorded net of rebate.
- Thus retirement is the opposite of renewal. Must Read Material Requisition.
