Accounting For Bill Of Exchange: Part 1

1. Definition of a Bill of exchange:

  • “is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future date, a sum certain in money to or to the order of a specified person or bearer”

2. Parties to a Bill of exchange:

  • There are three (3) parties to a bill viz:

(i) Drawer – the party who draws the bill and signs it ( usually creditor)

(ii) Drawee – the party to whom the bill is addressed (usually debtor)

(iii) Payee – the party to whom the bill is expressed to be payable 3. When a drawee accepts the bill and signs he/she is known as the acceptor. The acceptor is primarily liable on a bill to the drawer so long as the drawer retains the bill. When the bill is negotiated and transferred to a payee, the drawer than become liable on the bill as well as the acceptor.

4. The bill of exchange after it is accepted is known as bill receivable to the drawer and bill payable to the acceptor 5. When a bill receivable is discounted, the bill is actually being sold to the discount house for cash. The difference between the amount stated in the bill and the cash received is known as discount. This discount is the consideration payable for obtaining the money in advance of maturity date. The discount house will then hold the bill until maturity when it will present it to the debtor for payment.

Further Related terms used :

Dishonored bill When a bill is not met by the acceptor on maturity
Noted dishonored bill When the bill is being dishonored, it is often noted which means that the bill is handed to a solicitor acting as a notary public who will record the reasons for it dishonor to avoid any future dispute. The expenses incurred by reason of the dishonor of the bill must be charged to the person who dishonored it.
Returned Bill Where a bill is returned, the bill is actually being withdrawn by the acceptor to avoid dishonor. A new bill maturing at a later date is given in place of the old bill.
Rebated bill A bill that is met before the due date. Usually happens for the purpose of obtaining possession of goods or documents against which the bill was drawn and which cannot be released until the bill is discharged. A rebate representing the interest on the amount of the bill for the period unexpired is allowed.

Refer next article on Accounting & Example of Bill of Exchange

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