Class 11 Accountancy Notes Chapter 8 (Bill of Exchange) – Financial Accounting-I Book
Alright students, let's focus on a crucial chapter for your exams: Chapter 8, Bills of Exchange from your NCERT Class 11 Financial Accounting-I book. This topic deals with important instruments used in credit transactions, and understanding the concepts and accounting treatment is vital.
Chapter 8: Bills of Exchange - Detailed Notes for Government Exam Preparation
1. Introduction
- Purpose: When goods are sold on credit, the seller (creditor) wants assurance of payment on a specific future date, while the buyer (debtor) gets time to pay. Bills of Exchange and Promissory Notes are formal documents acknowledging this debt and specifying payment terms.
- Governing Act: These instruments are governed by the Negotiable Instruments Act, 1881.
- Negotiable Instrument: Means a document transferable from one person to another (by delivery or endorsement & delivery) where the transferee (holder in due course) gets good title, free from defects of the transferor, provided they received it in good faith and for value.
2. Key Instruments
-
(a) Bill of Exchange (BoE):
- Definition (Sec 5, NI Act): "An instrument in writing 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."
- Parties:
- Drawer: The maker of the bill (usually the Seller/Creditor). They order the payment.
- Drawee: The person directed to pay (usually the Buyer/Debtor). Becomes the Acceptor after signing their assent on the bill.
- Payee: The person to whom the payment is to be made. (Can be the Drawer themselves or a third party).
- Essentials: Must be in writing, contain an unconditional order, signed by Drawer, specific Drawee, specific amount, payable on demand or fixed future date, payment must be in money only.
- Acceptance: The Drawee must accept the bill by signing it, usually with the word "Accepted". Without acceptance, it's just a draft and the Drawee isn't liable on it.
-
(b) Promissory Note (PN):
- Definition (Sec 4, NI Act): "An instrument in writing (not being a bank-note or a currency-note) containing an unconditional undertaking (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."
- Parties:
- Maker: The person who promises to pay (Debtor).
- Payee: The person to whom the payment is promised (Creditor).
- Essentials: Must be in writing, contain an unconditional promise, signed by Maker, specific Payee, specific amount, payable on demand or fixed future date, payment must be in money only.
- Acceptance: Does not require acceptance as the Maker is already liable.
3. Distinction between Bill of Exchange and Promissory Note
| Feature | Bill of Exchange | Promissory Note |
|---|---|---|
| Nature | An order to pay | A promise to pay |
| Maker | Drawer (Creditor) | Maker (Debtor) |
| Parties | Three (Drawer, Drawee, Payee) | Two (Maker, Payee) |
| Acceptance | Required by the Drawee | Not required |
| Liability | Drawer's liability is secondary | Maker's liability is primary |
| Payee | Drawer can be the Payee | Maker cannot be the Payee |
| Notice | Notice of dishonour to Drawer needed | Notice of dishonour to Maker not needed |
| Copies | Can be drawn in sets (foreign bills) | Cannot be drawn in sets |
4. Important Terms
- Term/Tenor: The period between the date the bill is drawn/accepted and the date it is due for payment.
- Due Date/Maturity Date: The date on which payment is due.
- Calculation: Date of Drawing/Acceptance + Term of Bill + 3 Days of Grace.
- Grace Days: The NI Act, 1881 allows 3 extra days after the nominal due date.
- Public Holiday: If the maturity date (after adding grace days) falls on a public holiday (incl. Sundays, 2nd/4th Saturdays), the due date is the preceding business day.
- Emergency Holiday: If the maturity date is declared an emergency holiday, the due date is the next business day.
- Bill at Sight/On Demand: Payable immediately on presentation. No grace days.
- Bill after Date: Term starts from the date of drawing.
- Bill after Sight: Term starts from the date of acceptance.
- Discounting of Bill: The holder (usually Drawer) gets the bill encashed from a bank before the due date. The bank deducts a charge (discount) for the remaining period and pays the net amount. Discount = Bill Amount x Rate x (Unexpired Period / 12 or 365).
- Endorsement: Transferring the bill to another person (usually a creditor of the Drawer) by signing on the back of the bill.
- Endorser: Person transferring the bill.
- Endorsee: Person to whom the bill is transferred.
- Bill Sent for Collection: Sending the bill to the bank with instructions to collect the amount from the Acceptor on the due date and credit the holder's account.
- Dishonour of Bill: Failure of the Acceptor to make payment on the due date (Dishonour by non-payment) or failure to accept the bill (Dishonour by non-acceptance).
- Noting Charges: Fees paid to a Notary Public for formally recording the fact of dishonour. This serves as legal evidence. These charges are initially paid by the holder but are ultimately recoverable from the party responsible for dishonour (the Acceptor/Maker).
- Renewal of Bill: When the Acceptor is unable to pay on the due date, they may request the Drawer to cancel the old bill and draw a new one for an extended period. The Drawer usually charges interest for this extension, which may be paid in cash or included in the new bill amount.
- Retiring of Bill: When the Acceptor makes payment before the due date. The holder (Drawer) may allow a discount/rebate for the unexpired period. Rebate = Bill Amount x Rate x (Unexpired Period / 12 or 365).
- Accommodation Bill: A bill drawn, accepted, or endorsed without any underlying sale/purchase transaction (i.e., without consideration). Its purpose is purely to provide financial help to one or both parties by discounting it with a bank. It's like mutual loan arrangement. Distinction from Trade Bill (drawn against genuine trade debt) is important.
- Insolvency of Acceptor: When the Acceptor is declared legally bankrupt and unable to pay their debts. Only a portion of the amount due might be recovered from their estate (as final dividend). The unrecoverable amount is a bad debt for the holder.
5. Accounting Treatment (Journal Entries)
(A) In the Books of Drawer (Seller/Creditor)
| Transaction | Journal Entry | Narration |
|---|---|---|
| 1. Goods Sold on Credit | Drawee's A/c Dr. To Sales A/c |
(Being goods sold on credit) |
| 2. Bill Drawn & Accepted | Bills Receivable A/c Dr. To Drawee's A/c |
(Being bill drawn and accepted by Drawee) |
| 3. Bill Honoured on Maturity | Cash/Bank A/c Dr. To Bills Receivable A/c |
(Being payment received on maturity) |
| 4. Bill Discounted | Bank A/c Dr. (Net Amount) Discounting Charges A/c Dr. (Discount) To Bills Receivable A/c (Full Amount) |
(Being bill discounted with bank) |
| 5. Bill Endorsed | Endorsee's (Creditor's) A/c Dr. To Bills Receivable A/c |
(Being bill endorsed to Endorsee) |
| 6. Bill Sent for Collection | Bills Sent for Collection A/c Dr. To Bills Receivable A/c |
(Being bill sent to bank for collection) |
| 7. Collection Received (for #6) | Bank A/c Dr. To Bills Sent for Collection A/c |
(Being amount collected by bank) |
| 8. Bill Dishonoured (if retained) | Drawee's A/c Dr. (Bill Amt + Noting Charges) To Bills Receivable A/c (Bill Amt) To Cash/Bank A/c (Noting Charges paid) |
(Being bill dishonoured and noting charges paid) |
| 9. Bill Dishonoured (if discounted) | Drawee's A/c Dr. (Bill Amt + Noting Charges) To Bank A/c (Bill Amt + Noting Charges paid by bank) |
(Being discounted bill dishonoured, bank debited our account) |
| 10. Bill Dishonoured (if endorsed) | Drawee's A/c Dr. (Bill Amt + Noting Charges) To Endorsee's A/c (Bill Amt + Noting Charges paid by endorsee) |
(Being endorsed bill dishonoured, Endorsee claims amount) |
| 11. Bill Dishonoured (if sent for collection) | Drawee's A/c Dr. (Bill Amt + Noting Charges) To Bills Sent for Collection A/c (Bill Amt) To Cash/Bank A/c (Noting Charges paid) |
(Being bill sent for collection dishonoured, noting charges paid) |
| 12. Renewal: Interest Charged | Drawee's A/c Dr. To Interest A/c |
(Being interest charged for renewal period) |
| 13. Renewal: New Bill Drawn | Bills Receivable A/c Dr. (New Amt) To Drawee's A/c |
(Being new bill drawn and accepted for renewed amount [incl. interest if not paid in cash]) |
| 14. Bill Retired under Rebate | Cash/Bank A/c Dr. (Net Amount) Rebate on Bill A/c Dr. (Rebate Allowed) To Bills Receivable A/c (Full Amount) |
(Being bill retired before due date and rebate allowed) |
| 15. Acceptor becomes Insolvent | Cash/Bank A/c Dr. (Amount Received) Bad Debts A/c Dr. (Amount Not Received) To Drawee's A/c (Total Amount Due) |
(Being final dividend received from insolvent Drawee's estate) |
(B) In the Books of Drawee/Acceptor (Buyer/Debtor)
| Transaction | Journal Entry | Narration |
|---|---|---|
| 1. Goods Purchased on Credit | Purchases A/c Dr. To Drawer's A/c |
(Being goods purchased on credit) |
| 2. Bill Accepted | Drawer's A/c Dr. To Bills Payable A/c |
(Being acceptance given to Drawer) |
| 3. Bill Honoured on Maturity | Bills Payable A/c Dr. To Cash/Bank A/c |
(Being payment made on maturity) |
| 4. Bill Dishonoured | Bills Payable A/c Dr. (Bill Amt) Noting Charges A/c Dr. (Charges) To Drawer's A/c (Total Amt Due) |
(Being acceptance dishonoured and noting charges incurred) |
| 5. Renewal: Interest Due | Interest A/c Dr. To Drawer's A/c |
(Being interest due to Drawer for renewal) |
| 6. Renewal: New Bill Accepted | Drawer's A/c Dr. To Bills Payable A/c (New Amt) |
(Being new acceptance given [incl. interest if not paid in cash]) |
| 7. Bill Retired under Rebate | Bills Payable A/c Dr. (Full Amount) To Cash/Bank A/c (Net Amount Paid) To Rebate on Bill A/c / Discount Received A/c (Rebate) |
(Being acceptance paid before due date, rebate received) |
| 8. Insolvency Declared | Bills Payable A/c Dr. (If bill not yet due) OR Drawer's A/c Dr. (If bill dishonoured) To Cash/Bank A/c (Amount Paid) To Deficiency A/c (Amount Not Paid) |
(Being final payment made upon insolvency, balance transferred to Deficiency A/c) |
Note on Promissory Note Accounting:
- In the Maker's (Debtor's) books, the entries are similar to the Drawee/Acceptor's books (using Bills Payable A/c).
- In the Payee's (Creditor's) books, the entries are similar to the Drawer's books (using Bills Receivable A/c).
Multiple Choice Questions (MCQs)
-
A Bill of Exchange requires acceptance from the:
a) Drawer
b) Payee
c) Drawee
d) Endorser -
How many days of grace are legally allowed for payment of a time bill under the Negotiable Instruments Act, 1881?
a) 0 days
b) 1 day
c) 2 days
d) 3 days -
If the due date of a bill falls on a public holiday, the payment must be made on the:
a) Next business day
b) Preceding business day
c) Same day
d) Any day within a week -
Noting charges are paid in the event of:
a) Honour of a bill
b) Discounting of a bill
c) Endorsement of a bill
d) Dishonour of a bill -
When a drawer transfers a bill to their creditor, it is known as:
a) Discounting
b) Retiring
c) Endorsement
d) Renewal -
In the books of the Acceptor, the entry for honouring the acceptance on the due date is:
a) Debit Bills Receivable A/c, Credit Cash/Bank A/c
b) Debit Bills Payable A/c, Credit Cash/Bank A/c
c) Debit Drawer A/c, Credit Bills Payable A/c
d) Debit Cash/Bank A/c, Credit Bills Payable A/c -
A bill drawn on 1st January 2023 for 2 months. The maturity date will be:
a) 1st March 2023
b) 3rd March 2023
c) 4th March 2023
d) 28th February 2023 -
Which of the following is NOT a party to a Promissory Note?
a) Maker
b) Payee
c) Drawee
d) None of the above -
Rebate on a bill signifies:
a) Interest charged for extension of time
b) Charges paid for dishonour
c) Discount allowed for early payment
d) Commission paid for collection -
A bill drawn and accepted solely for mutual financial help without a genuine trade transaction is called:
a) Trade Bill
b) Foreign Bill
c) Accommodation Bill
d) Inland Bill
Answer Key for MCQs:
- c) Drawee
- d) 3 days
- b) Preceding business day
- d) Dishonour of a bill
- c) Endorsement
- b) Debit Bills Payable A/c, Credit Cash/Bank A/c
- c) 4th March 2023 (Jan 1 + 2 months = Mar 1; Mar 1 + 3 days grace = Mar 4)
- c) Drawee (Drawee is a party to a Bill of Exchange)
- c) Discount allowed for early payment
- c) Accommodation Bill
Study these notes carefully, paying close attention to the definitions, distinctions, calculation of due dates, and the journal entries for various scenarios. Practice solving numerical problems from your textbook to solidify your understanding. Good luck with your preparation!