Banking, Business, Commerce


Bills of Exchange

In this blog, we will understand the below following core concepts of bills of exchange:

  • Definition & Parties of Bills of Exchange
  • Characteristics of Bills of Exchange
  • Types of Bills o f Exchange
  • Advantages of Bills of exchange


The document used by bankers, traders, industrialists and other people for the settlement of business transactions is called bills of exchange. It is an unconditional order in writing, which contains the acceptance of debtor for the payment of certain amount to the creditor at fixed future time. This bill is returned to creditor after the acceptance that asks for the payment at maturity by presenting it to the debtor.


1. “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, on demand or at a fixed future time.” (Section. 5 of Negotiable Instrument)

2. “Bills of exchange is a document, which contains the order of creditor or seller for debtor or buyer to pay a certain sum of money to or to a certain person “.


There are three main parties of bill.

(1) Drawer: The party who draws the bill is called “Drawer” or the “Maker”.

(2) Drawee: The party to whom the bill is addressed or on whom the bill is drawn.

(3) Payee: The party to whom the bill is made payable. It may be drawer or any other party.


There may be following other parties of a B/E:

(1) Acceptor: He is a person who accepts the bill. Often the drawee accepts the bill but if any other party accepts the bill on the behalf of drawee for the payment of bill on due date then this party is considered as “Acceptor”.

(2) Endorser: He is a person who transfers the rights to receive the amount of bill to any other party. It may be drawer or endorsee.

(3) Endorsee: He is a person to whom the rights to receive the amount of bill has been transferred.


The important features of bill are as follows:

(1) Order: The bills of exchange is an order for payment not a request to debtor.

(2) In Writing: The order of payment for debtor is always in writing.

(3) Unconditional: The bills of exchange is an unconditional order for payment. If any condition is attached, it makes the bill invalid.

(4) Certain Amount: This instrument is only for the payment of a Certain amount, which is written in words and figures on it.

(5) Specified Person (Drawee): The bill is always drawn in the name of that person who is responsible for the payment. He is a person who buys goods on credit or takes loan.

(6) Acceptance: The bills of exchange must be accepted by the drawee, because it has no legal value without the acceptance.

(7) Drawer: The drawer of the bill is always that person who sells the goods on credit or lends money.

(8) Signatures of Drawer: The drawer must sign the bill otherwise it will be invalid.

(9) Payee: He is the person who receives the amount of bill. He may be the drawer or the bearer of bill.

(10) Personality of Drawer & Drawee: Popular names of drawer and drawee or names known to the business community should be mentioned in the bill.

(11) Payment of Bill: The payment of bill is made on demand or at a fixed future time.

(12) Revenue Stamps: Revenue stamps are pasted on the bill according to its value. Local bill is stamped once where as foreign bill is stamped twice.

(13) Parties: There are three important parties of bills of exchange:

  • Drawer (Creditor)                                                                                          
  • Drawee (Debtor)
  • Payee (Who receives the amount of bill)

(14) Endorsement of Bill: The drawer or holder of bill can endorse his bill to another person for the settlement of debt or for payment.

(15) Facility of Credit: The drawer or holder of bill can avail credit in need by discounting the bill from bank. The tenure of loan or credit is according to date written on bill.

(16) Renewal of Bill: If the acceptor (drawee) in not able to meet the bill on due date then he can renew his bill with the consent of drawer. In this case the drawer can plus the amount of interest in new bill.

(17) Partial Payment: If the drawee cannot pay the total amount of bill on maturity then he may request for the new bill of balance amount after making partial payment to drawer. The interest on balance amount is also added in new bill.

(18) Retirement of Bill: If the drawer makes payment of bill before its maturity under rebate with the consent of drawer then it is called retirement of bill.

(19) Dishonouring and Protesting: If the drawee does not pay bill on due date (dishonouring of bill) then the drawer gets certification of dishonouring from notary public. In case of foreign bill’ protesting is also necessary along with noting. The main objective of protesting and noting is to get a reliable proof of dishonouring.

(20) Grace Days: The drawee is given or allowed three grace days in addition to fixed or decided period for the payment of bill.



If the division of bills of exchange is made on the basis of place then it called place wise types of bill. It has following two kinds.

(a) Inland Bills of Exchange: A bill, which is drawn, accepted and paid in the country then it is called inland bills of exchange. In other word, the drawer and drawee belong to the same country Inland bill has two kind.

  1. Inland Sight Bill:The amount of this bill is paid on the presentation of bill. Normally, this bill is used in local trade.
  2. Inland Time Bill: The amount of time bill is paid at the expiry of a fixed future time, which is written in bill.

(b) Foreign Bills of Exchange: It is a bill of exchange, which is drawn in one country and accepted in another country. In other words, the drawer and the drawee belong to two different countries. It has following two kinds.

  1. Foreign Sight Bill: The amount of this bill is paid on the presentation of bill.
  2. Foreign Time Bill: The payment of this bill is made at the expiry of a fixed future time.


There are following two types of bill according to object.

(a) Trade Bills of Exchange: It is a bill, which is issued or drawn to settle any trade When any trader sells goods on credit, he draws a bill of exchange on the purchaser for the amount. This bill is considered as trade bill.

(b) Accommodation Bills of Exchange: This bills of exchange does not involve any trade transaction, it is issued and accepted only for accommodation purpose.


The parties of accommodation bill can be benefited in following ways:

  1. Accommodation of drawer only with one bill:
    • Discount the bill after getting acceptance.
    • Sends the amount of bill to drawee on due date who makes the payment to bank.
  2. Accommodation of drawer & drawee with one bill:
    • Discount the bill after getting acceptance.
    • Then both share the amount of bill and discount according to agreed ratio.
    • On due date, the drawer returns the balance amount to drawee and the drawee pays the bill to bank.
  3. Accommodation of drawer & drawee with two separate bills:
    • Both parties draw on each other and accept the bills of same amount.
    • Both parties discount their bills and get the amount.
    • On due date, both drawer and drawee pay the bill to banks.


(1) Accepted Bill: The bill signed by drawee for the purpose of acceptance is called accepted bill. A bill of exchange is invalid without acceptance.

(2) Un-accepted Bill: The bill, which is not signed or not accepted by drawee. This bill is considered dishonoured on the basis of non- acceptance.

 (3) Dishonoured Bill: The bill not paid on due date is called dishonoured bill. The noting and protesting of bill with notary public is necessary in such case.

(4) Honoured / Paid Bill: If the amount of bill is paid on due date then it is called honoured or paid bill.

(5) Retired Bill: The bill paid or honoured before its maturity under rebate is called retired bill.

(6) Discounted Bill: If the drawer of bill receives the amount of bill from bank before its maturity then it is called discounted bill. This type of bill is shown on the liability side of balance sheet.

(7) Endorsed Bill: The bill transferred to another person by its drawer or holder is called endorsed bill.

(8) Renewed Bill: If the drawee of bill cannot pay its amount on due date and gets more or additional time for the payment of bill then it is called renewed bill. The drawer can add or plus interest in the amount of bill according to extended period or time.


(1) Trade Development: Credit transactions can be made safely with the help of bills of exchange, which flourishes the foreign & home trade.

(2) Settlement: As transfer of money is not needed in the case of B/E, so local or foreign receipts and payments can be made easily.

(3) Proof of Credit: The bill is a written proof of payment by the debtor to the creditor. The creditor can legally protest if the bill is dishonoured.

(4) Date or Payment: The payment of time bill is made at a fixed date, so the Creditor can plan his business dealings accordingly.

(5) Transfer of Money: The bills of exchange is considered as an easy and cheap source of transferring money from one place to another.

(6) Facility of Discounting: The beater of the bill can discount the bill at the time of need.

(7) Endorsement: The bills of exchange can be easily transferred to another patty for the settlement of debt.

(8) Income of Bank: Bank charges commission for discounting the bill. Thus, the income of bank increases.

(9) Progress of Banking: Sometimes, the bank does not pay cash after discounting the bill and opens the account of his customers. As a result, the number of accountholders increases.

(10) Income to Government: Revenue stamps are pasted on the bill according to its value, which increases the income of government.

(11) Rediscounting: The commercial banks can rediscount the bills at central bank to avoid their financial crisis.

(12) Buyer’s Facility: The buyer gets a handsome time for the payment of the goods purchased on credit by accepting the bill.

(13) Seller’s Facility: The seller of the goods can get the amount of bill by discounting it the expiry of fixed period.

(14) Les Need of Capital: The presence of bill makes the credit transactions possible. Due to this, any trader can run his business with less capital.

(I5) Certainty of Payment: The acceptor of bill tries to pay his debts at the fixed time to maintain his goodwill in business community, which ensures the of bill.

(16) Renewal of Bill: If the acceptor finds him unable for the payment at fixed future time then he can renew the bill with the consent of drawer (creditor). “The debtor can request for the renewal of bill following two ways:

  1. For the full amount of bill.
  2. For the balance after making partial payment.

(17) Financial Assistance: Drawing accommodation bills of exchange can fulfill financial need of any person.

(I8) Debtor’s Facility: In case of time bill, the debtor enjoys the full credit because no one can force him for the payment before time.

(19) Retirement of Bill: If the acceptor or drawee of bill wants to pay the amount of bill before the expiry of fixed period then he can do so with the consent of creditor (drawer).

(20) Economic Development: The use of bill in various transactions develops country’s trade and industrial sector, which leads to economic prosperity.

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