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Bills of Exchange And Promissory Notes

Promissory Notes

A negotiable instrument is a document in writing. It is signed by a certain person who promises to pay another person a fixed sum of money on a fixed date. It is transferrable. There are three types of negotiable instruments, viz, Bills of Exchange, Promissory Notes, and Cheques. Negotiable Instruments Act, 1881 has defined the Promissory Note.

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Promissory Notes

A Promissory Note is an instrument in writing. It contains an unconditional undertaking or promise, signed by the maker to pay a certain sum of money to a certain person. Unlike, Bills of exchange, there is no need of acceptance of Promissory Notes as here the payer is himself the maker of the note. He, himself promises to make the payment. Hence, only two parties are involved here, one is the maker and another one is the payee.


For instance, A has to pay ₹ 10000 to B. A makes a promissory note in which he promises to pay ₹ 10000 to B on 25th September 2018. Therefore, A is the maker, payer or the drawer of the promissory note whereas B is the receiver or the payee of the promissory note.

Features of a Promissory Note

  • It must be in writing.
  • It contains an unconditional promise to pay.
  • The sum payable is a certain amount.
  • The maker should sign it.
  • The sum should be payable to a certain person.
  • There are only two parties to a Promissory Note, one is the maker or the payer and another one is the payee.
  • It is not transferable and thus, the amount is not payable to the bearer.
  • The liability of the maker is primary and absolute.
  • Notice is not required if it is dishonored.
  • It needs to be properly stamped.

Promissory Notes

(Source: depositphotos.com)

Difference between Promissory Notes and Bills of Exchange

S. No. The basis of Difference                          Promissory Notes        Bills of Exchange
1. Meaning A Promissory Note is an instrument in writing. It only contains promise signed by the maker to pay a certain sum of money to a certain person. A bill of exchange is an instrument in writing. It contains an unconditional order requiring a certain person to pay a certain sum of money on a stipulated date.
2. Parties There are only two parties i.e. Maker or Payer and the Payee. There are three parties i.e. Drawer, Drawee, and Payee.
3. Drawer Debtor is the maker or the drawer. The creditor is the drawer
4. Payee Drawer cannot be the payee Drawer and payee can be the same person.
5. Acceptance It does not require any acceptance because payer is only the maker of the promissory note. It requires acceptance by the drawee or someone else on his behalf as the drawer is not the payer.
6. Notice In case of dishonor of promissory note, no notice needs to be given. In case of dishonor of Bills of Exchange, notice needs to be given to all the parties by the holder of the instrument.
7. Copies It cannot be drawn in copies. It can be drawn in copies.

Journal Entries for Promissory Notes

In the books of Payer or Maker:

Date Particulars Amount (Dr.) Amount (Cr.)
1.Issue Payee A/c Dr.
To Bills Payable A/c
(Being issue of the promissory note)
2.Payment Bills Payable A/c  Dr.
To Cash A/c
(Being payment of Promissory Note
3.Dishonour Bills Payable A/c Dr.
To  Payee A/c
( Being dishonor of the promissory note)

In the books of Payee:

Date Particulars Amount (Dr.) Amount (Cr.)
1.Receipt Bills Receivable A/c Dr.
To Maker A/c
(Being receipt of the promissory note)
2.Payment   Cash A/c  Dr.
To Bills Receivable A/c
(Being receipt of cash against the promissory note)
3.Dishonour Maker A/c Dr.
To Bills Receivable A/c
( Being dishonor of the promissory note)

Solved Example for You

Q. On 15th August 2018, Atul purchased goods worth ₹ 50000 from Bharat on credit. He made a promissory note in favor of Bharat payable on 15th October 2018. On the due date, Atul paid the amount.   Pass the necessary Journal entries in the books of Atul and Bharat.

Ans: In the books of Atul the entries will be as follows

Date Particulars Amount (Dr) Amount (Cr)
15 Aug Purchases A/c Dr. 50000
To Bharat A/c 50000
(Being goods purchased)
15 Aug Bharat A/c Dr. 50000
To Bills Payable A/c 50000
(Being promissory note issued)
15 Oct Bills Payable A/c Dr. 50000
To Cash A/c 50000
(Being cash paid against the promissory note)

Journal Entries in the books of Bharat:

Date Particulars Amount (Dr) Amount (Cr)
15 Aug Atul A/c Dr. 50000
To Sales A/c 50000
(Being goods sold)
15 Aug Bills Receivable A/c Dr. 50000
To Atul A/c 50000
(Being promissory note received)
15 Oct Cash A/c Dr. 50000
To Bills Receivable A/c 50000
(Being cash received against the promissory note)

 

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