Bills of Exchange

Types of Bills of Exchange

According to Section 5 of the Negotiable Instruments Act 1881, the bill of exchange is  “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 this order is accepted in writing it becomes a valid bill of exchange. There are different types of bills of exchange which we will discuss here.

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Bills of Exchange

Meaning of Bills of Exchange

Bill of exchange means a bill drawn by a person who directs another person to pay the specified sum of money to another person.

A bill of exchange is of actual use if it is accepted by the person directed to pay the amount.

For example, Mr. X orders Mr. Y to pay ₹ 60,000 for 90 days after the date and Mr. Y accepts such order by signing his name, then it will be a bill of exchange.

Learn more about the Meaning and Features of Bills of Exchange here in detail.

Parties to Bills of Exchange

A bill of exchange has the following parties namely:

  • Drawer: Drawer is the person who makes or writes the bill of exchange. Normally, he is the seller.
  • Drawee: Drawee is the person on whom the bill of exchange is drawn for his acceptance. Normally, he is the buyer. He has to pay the amount of the bill of exchange to the drawer on the due date.
  • Payee: The payee is the person to whom the amount of bill of exchange is to be paid. The payee can be the drawer himself or the creditor of the drawer.
  • Endorser: Endorser is the person who transfers rights of payment.
  • Endorsee: Endorsee is the person in whose favor the bill of exchange is endorsed by the drawer.
  • Bearer: Bearer is the person in possession of the bearer bill of exchange.

Types of Bills of Exchange

Source: freepik.com

Types of Bills of Exchange

Bills of exchange facilitate trade transactions involving sale or purchase of goods. But this mechanism of the bill of exchange can also be of use in raising finance.

Type of bill of exchange depends on its object or purpose. From the accounting point of view, Bills of exchange are of two types:

  1. Trade bill: Where the bill of exchange is drawn and accepted to settle a trade transaction, it is called Trade bill. This bill of exchange is drawn by the seller of the goods and is accepted by the buyer.
  2. Accommodation bill: Where a bill of exchange is drawn and accepted for mutual help, it is called Accommodation bill. This bill is for mutual benefit without a trade transaction. It does not involve a sale or purchase of any goods or services. This bill carries an agreement between two parties for the purpose of giving financial support to others.

Solved Example For You

State the type of bill in the following cases?

  1. Suppose Mr. X sells goods worth ₹ 75,000 to Mr. Y. Mr. y is not in a position to pay the amount immediately. So, Mr. X the seller draws a bill on Mr. Y the buyer and Mr. Y accepts such a bill.
  2. If Mr. A is in need of money, he draws a bill on his friend Mr. B who accepts it. Mr. A then discounts this bill with bank i.e. bank will pay money before the due date. Mr. A and Mr. B share the money between them. On the due date, Mr. B pays to the bank and Mr. A pays to Mr. B his share.

Ans.

  1. Trade bill
  2. Accommodation Bill
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