A bill of exchange is a written order, including the date and amount, for payment of money. The bill is typically drawn on the drawer, who may be an individual or a business entity. A cheque is not a bill of exchange unless endorsed by the drawee bank with its acceptance.
The drawer must pay the bill before it expires by making arrangements with the drawee bank to pay the amount due upon presentation of the bill. In addition, the drawer may present the bill against someone else’s claim to receive payment in order to collect on that claim or to settle a debt owed by another person (the indorser).
Hence it promises to pay a certain amount of money to the payee on demand or at a definite time. It is payable on demand but not necessarily within one year from its date.
A bill of exchange differs from a promissory note in that it is payable on demand without reference to any future event. A promissory note may be made payable either upon presentation or upon sight, and if presented must be accepted by an endorsement; but a bill of exchange must be accepted by endorsement only and can be presented at any time, even after presentation with intent to dishonor it.
The acceptor may refuse payment or may require payment by another mode; but he must accept the bill if tendered in due form, and if so accepted his liability is limited to payment according to the tenor thereof.
What are the most important characteristics of a bill of exchange?
The features of bill of exchange are as follows:
- The bill of exchange should be in writing and signed by the drawer and drawee. It should be drawn on a bank or other recognized institution and presented for payment to the drawee.
- Amount should be definite, i.e., it should not be possible for the drawer or drawee to make any claim on his creditor except that of payment in full by presentation of the bill at maturity (unless otherwise provided).
- Fixed date: The date fixed for acceptance should be definite, so that there is no scope for any delay on the part of either party to make use of his right under this clause.
- This clause requires both parties to sign the document so that they may enjoy all advantages which are derived from signing a document
What are some of the common types of bill of exchange?
Before you go on to learn about the details like a bill receivable entry it is crucial that you learn about the most important types:
- Documentary Bill
Documentary bills are used to draw money from the drawer and pay it out to somebody else. A documentary bill is presented by one of the parties to a transaction, it states that he/she has received a certain sum of money from the drawer and that he/she intends to pay it out to the drawer. The drawer keeps the amount received on his account as an acknowledgment of having received payment for his goods or services.
- Demand Bill
A demand bill is a document issued by one party (the drawer) to another party (the drawee). The drawee is required to pay the amount stated in the bill within a specific time period or face legal consequences for not paying up. This type of instrument is usually issued by merchants who want their customers to pay them immediately instead of waiting for them to collect their goods before making payment.
- Usance Bill
Usance bills are used when selling goods at retail marketplaces like malls and supermarkets where consumers have no direct relationship with sellers but instead deal directly with mall management staffs who act as intermediaries between sellers and consumers.
