Bills of Exchange

Meaning and Features of Bills of Exchange

The Negotiable Instruments Act 1881 governs the provisions for bills of exchange. According to Section 5 of this act, the bill of exchange is defined as “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 the order of the certain person or to the bearer of the instrument.” When such order is accepted in writing it becomes a valid bill of exchange. Learn the Features of Bills of Exchange here.

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Meaning of Bill of Exchange

Bill of exchange means a bill drawn by a person directing another person to pay the specified sum of money to another person. A bill of exchange is of real use if it is accepted by the person directed to pay the amount.

For example, X orders Y to pay ₹ 50,000 for 90 days after date and Y accepts this order by signing his name, then it will be a bill of exchange.

In general practice, the seller gives a credit period to the buyer on selling goods or on providing services.

But sometimes, the seller is not in a position to offer credit period to purchaser and purchaser also will not be in a position to pay immediately.

In such a case, the seller will like that the purchaser shall give a promise in writing to pay the amount on a certain date.

This written promise then turns into valuable instruments of credit when this written promise are made in proper form and is properly stamped.

These written instruments are often accepted by banks and we can advance money against them. Also, we can endorse this instrument i.e. can pass to another person.

Learn more about Retirement of Bills of Exchange here in detail.

Bills of Exchange Example

Mr. Anant Sharma draws a bill on Mr. Ram Kumar Goyal for 3 months for ₹ 50,000, payable to Mr. Rajiv Ranjan or his order on 15th April 2018.

Mr. Anant Sharma has ordered Mr. Ram Kumar Goyal to pay ₹ 50,000 to Mr. Rajiv Ranjan. If the order is acceptable to Mr. Ram Kumar Goyal, he will write across the bill as follows:

Accepted

Mr. Ram Kumar Goyal

Bhopal, M.P

17th April 2018

When the drawee writes such acceptance on the bill, it becomes a bill of exchange.in the above example Mr. Anant Sharma is the drawer of the bill, Mr. Ram Kumar Goyal is the acceptor and Mr. Rajiv Ranjan is the Payee. Mr. Ram Kumar Goyal will pay the amount to Mr. Rajiv Ranjan.

Features of Bills of Exchange

                                     Source: freepik.com

Features of Bills of Exchange

The following are the features of bills of exchange:

  • A bill of exchange an instrument in writing.
  • It is drawn and signed by the maker i.e. drawer of the bill.
  • It is drawn on a specific person i.e. drawee, to pay the specified amount.
  • Contains an unconditional order to a person i.e. drawee.
  • To make an instrument of value the drawee must accept it.
  • The specified amount is payable to the person whose name is mentioned in the bill or to his order or to the bearer.
  • It specifies the date by which amount should be paid.
  • Payment of the bill must be in the legal currency of the country.
  • It must be properly stamped.
  • It must bear a revenue stamp.

Solved Example on Bills of Exchange

What are the advantages of bills of exchange?

Ans.

Following are the advantages of the bill of exchange:

  1. Purchase and sale of goods on credit.
  2. Discounting facility.
  3. Easy to recover the amount.
  4. Proof of debt.
  5. Easily transferred.
  6. Safely transferred.
  7. Endorsable to other parties.
  8. Certainty as to payment.
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