What Is Bill Of Exchange Meaning

What Is Bill Of Exchange Meaning


When we thought of one of the subjects of CMA Foundation Fundamentals of Accounting, then bill of exchange seems an important topic to understand. So here in this article we sprinkle on the:

  • Bill of exchange Meaning
  • Bill of exchange definition
  • Bill of exchange example
  • Features of bill of exchange
  • Parties of bill of exchange

All these subtopics will help you in understanding the concept of Bill of Change of Fundamentals of Accounting.


Bill of Exchange Meaning:

A bill of exchange means a binding agreement by one party to pay a fixed amount of money to another party as on a specified date or on demand. In other words, it is a written negotiable instrument containing an unconditional order to pay a specified sum of money to a certain person or to the bearer of the instrument, as directed in the instrument by the maker. The bill of exchange is either payable on demand or after a specified period.

The bill of exchange is issued by the seller/creditor to the buyer/debtor, when the buyer/debtor owes money for goods or services. The most important part of a bill of exchange is that it needs to be accepted by the buyer/debtor. Only after acceptance it becomes a valid bill of exchange. If the buyer/debtor doesn’t accept it, it doesn’t have any value. Once the buyer/debtor accepts the bill of exchange, it is levied on the buyer/debtor to pay off the amount due to the seller/creditor. If the buyer/debtor fails to pay the amount within a specific time period mentioned in the bill of exchange, the bill is dishonored.

So from here we have to understand the bill of exchange definition:
It can be understood as an instrument in writing that carriers an unconditional order signed by the maker directing certain person to pay certain sum of money only to or to the order of a certain person or to the holder of the instrument. When such an order is accepted in writing then it becomes a valid bill of exchange.

Bill of Exchange Example:
M orders N to pay Rs.30,000 for four months after date and N accepts this order by signing his name, then it will be a bill of exchange.


Features of bill of exchange:

  • It must be in writing. No verbal note would consider as valid.
  • It must contain an order to pay certain sum of money and not just request.
  • The order should not have any condition.
  • It must be dated and should be properly stamped, duly signed by the maker (creditor) and accepted by the drawee (debtor).
  • The money must be payable to a definite person or to his order to the bearer of the instrument.
  • It must contain the date by which the money should be paid. A fixed date for the amount to be paid must be mentioned.


Parties of bill of exchange:

A bill of exchange has three parties:

  • Drawer: He is the maker of a bill of exchange or gives the order to pay certain sum of money. The bill is signed by the drawer. We can say him as a creditor also.
  • Drawee: He is the person upon whom the bill of exchange is drawn and who has to pay the money to the drawer/payee i.e. the person who accepts the bill of exchange. He is the debtor or may be called as
  • Acceptor.Payee: He is the person to whom payment has to be made or person who receives the payment. He can be the drawer himself or a third party.

Some other parties to the bill of exchange are as follows:

  • Drawee, in case of need: If in any bill of exchange,in addition to the original drawee name, any other person name is mentioned, who can be called for payment, then that person will be called as drawee.
  • Holder: He is the person who possesses the bill and who has the right to recover the amount from the parties.
    Endorser: If the holder of the bill endorses it to another person, then the person will be the endorser.
  • Endorsee: The person, to whom the bill of exchange is endorsed, is called as an endorsee.


Bill of exchange Example 2:

Mr M has issued a bill of exchange for Mr. N who has purchased goods of Rs.80,000 from Mr. M. The bill is issued on 01.03.2020. It is the same date when goods are purchased on credit. But Mr. N didn’t accept the bill on same date. Rather, he accepted the bill on 06.03.2020.

Here, Mr. M is the creditor and Mr. N is the debtor. Bill was issued on 01.03.2020 but accepted on 06.03.2020. During these 5 days we cannot called the bill issued by Mr. M as a valid bill of exchange. When Mr. N accepted the bill i.e. on 06.03.2020 from that date onward it becomes a valid bill of exchange


Term of a bill or period of a bill:
It is the time period between the date on which a bill is drawn and the date on which it is payable.

Term of a bill or period of a bill:
It is the time period between the date on which a bill is drawn and the date on which it is payable.

Days of Grace:
These are the 3 extra days added to the period of bill.

Date of maturity of bill:
The date which comes after adding three days of grace to the due date of the bill is date of maturity of bill.


Calculating due date of bills:

  • When the period of bill is given in months:
    Due date is calculated according to calendar months and adding 3 days of grace period.
    Example: if a bill dated 04.05.2019 is payable 3 months after date, then due date will be 04.08.2019 + 3 days of grace = 07.08.2019.
    If the month in which the period ends has no corresponding day, the period shall be deemed to expire on the last day of such a month.
    Example: a bill signed on 31.03.2019 payable after 3 months will be due on 30.06.2019 + 3 days of grace = 03.07.2019.


  • When the period of bill is given in days:
    Due date will be date which comes after adding given number of days to the date of the bill along with 3 days of grace. This excludes the date of the bill and includes the date of payment.
    Example: if a bill dated 05.06.2019 is payable after 65 days, then due date will be = 25 Days of June + 31 Days of July + 9 Days of August + 3 Days of Grace = 12.08.2019.


  • When due date falls on a public holiday:
    Then the due day of the bill shall be the preceding business day.
    Example: -If due date of the bill falls on 26th January i.e. on Republic Day, then its due date will be 25th January.


  • When due date has been declared as an emergency holiday:
    In this case the next following day will be the due date.
    Example:  if the due date of a bill is 26th July and it is declared as an emergency holiday, then the due date will be 27th July.

Bill at Sight:
It means the instrument in which no time for payment is mentioned. The bill at sight becomes due for payment as soon as, it is presented for payment. 3 Days of Grace is not allowed in these bills. Bill at sight means instrument payable on demand. For example cheques are always payable on demand.


Bill after date:
Here time for payment is mentioned. 3 days of grace is allowed on such bills.


Discounting of a bill:
It means encashment of bill before its maturity in which the bank subtracts its charges from the bill.


Endorsement of a bill:
It means transfer of a bill to another person. It is transferred an account of the settlement of debts or dues.


Bill sent for collection:
When a bill is sent to the bank for collection with instruction that it will be holded till the maturity date then it is said to be the bill sent for collection.


Dishonor of Bill:
When the acceptor of the bill does not make the payment on due date then it is known as dishonor of a bill.


Noting of a bill and notary charges:
When the fact that the bill has been dishonored is bought to the notice of Notary Public and notary public takes a noting of this dishonor then it is called noting of a bill. Notary charges are the fees paid to Notary Public for noting of dishonor of the bill. The amount of notary charges is recoverable from the person which is responsible for dishonor.


Renewal of a bill:
When the drawee of a bill is not in a position to pay the amount of the bill on its due date and he himself approaches to the Drawer with a request of extension of time for payment and drawee agrees to bear the interest for such extended time period, then the old bill is canceled and a new bill with the new terms of payment is drawn and duly accepted and delivered. This is called Renewal of the Bill.

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May 8, 2021

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