ICAI Notes- Bills of Exchange and Promissory Notes | Principles and Practice of Accounting - CA Foundation PDF Download

 Page 1


 
LEARNING OUTCOMES 
BILLS OF EXCHANGE AND 
 PROMISSORY NOTES  
After studying this chapter, you would be able to:
? Understand the meaning of Bills of Exchange and Promissory Notes 
and also try to grasp their underlying features. 
? Understand the accounting treatments relating to issue, acceptance, 
discounting, maturity and endorsement of bills in the books of 
drawer and drawee. 
? Learn the technique of accounting relating to accommodation bills. 
? Learn the special treatment needed in case of insolvency as well as 
early retirement of bill. 
 
 
 
6
CHAPTER 
 
© The Institute of Chartered Accountants of India
Page 2


 
LEARNING OUTCOMES 
BILLS OF EXCHANGE AND 
 PROMISSORY NOTES  
After studying this chapter, you would be able to:
? Understand the meaning of Bills of Exchange and Promissory Notes 
and also try to grasp their underlying features. 
? Understand the accounting treatments relating to issue, acceptance, 
discounting, maturity and endorsement of bills in the books of 
drawer and drawee. 
? Learn the technique of accounting relating to accommodation bills. 
? Learn the special treatment needed in case of insolvency as well as 
early retirement of bill. 
 
 
 
6
CHAPTER 
 
© The Institute of Chartered Accountants of India
  ACCOUNTING 
1.2 
6.2 
 
 1. BILLS OF EXCHANGE 
It is general practice that when goods are sold or services are provided, the seller extends a 
credit period to buyer.  Sometimes, the seller may not be in a position to offer credit period 
and the purchase is not in a position to pay immediately. In such circumstances the seller 
would like that the purchaser should give a definite promise in writing to pay the amount of 
the goods on a certain date which he can use to generate immediate funds. Commercial 
practice has developed to treat these written promises into valuable instruments of credit that 
when a written promise is made in proper form and is properly stamped, it is expected that 
the buyer discharges his debt and the seller receives payment. This is because written 
promises are often accepted by banks and money is advanced against them. Also, they can 
be endorsed, i.e., passed on from person to person. The written promise is either in the form 
of a Bill of Exchange or in the form of a promissory note. 
A Bill of Exchange has been defined as an “instrument in writing containing an unconditional 
BILLS OF EXCHANGE
Bill of Exchange
Normal Trading
Accommodation
Promissory Note
Date of Expiry
Due Date
Days of grace
Maturity Date
Nature of Bill
Bill at sight
Bill after date
Bill on Demand
Other Aspects
Dishonour of bill
Nothing charges
Renewal of bill
Insolvency
Reitrement of bill
Bills for collection
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
Page 3


 
LEARNING OUTCOMES 
BILLS OF EXCHANGE AND 
 PROMISSORY NOTES  
After studying this chapter, you would be able to:
? Understand the meaning of Bills of Exchange and Promissory Notes 
and also try to grasp their underlying features. 
? Understand the accounting treatments relating to issue, acceptance, 
discounting, maturity and endorsement of bills in the books of 
drawer and drawee. 
? Learn the technique of accounting relating to accommodation bills. 
? Learn the special treatment needed in case of insolvency as well as 
early retirement of bill. 
 
 
 
6
CHAPTER 
 
© The Institute of Chartered Accountants of India
  ACCOUNTING 
1.2 
6.2 
 
 1. BILLS OF EXCHANGE 
It is general practice that when goods are sold or services are provided, the seller extends a 
credit period to buyer.  Sometimes, the seller may not be in a position to offer credit period 
and the purchase is not in a position to pay immediately. In such circumstances the seller 
would like that the purchaser should give a definite promise in writing to pay the amount of 
the goods on a certain date which he can use to generate immediate funds. Commercial 
practice has developed to treat these written promises into valuable instruments of credit that 
when a written promise is made in proper form and is properly stamped, it is expected that 
the buyer discharges his debt and the seller receives payment. This is because written 
promises are often accepted by banks and money is advanced against them. Also, they can 
be endorsed, i.e., passed on from person to person. The written promise is either in the form 
of a Bill of Exchange or in the form of a promissory note. 
A Bill of Exchange has been defined as an “instrument in writing containing an unconditional 
BILLS OF EXCHANGE
Bill of Exchange
Normal Trading
Accommodation
Promissory Note
Date of Expiry
Due Date
Days of grace
Maturity Date
Nature of Bill
Bill at sight
Bill after date
Bill on Demand
Other Aspects
Dishonour of bill
Nothing charges
Renewal of bill
Insolvency
Reitrement of bill
Bills for collection
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
6.3 
BILLS OF EXCHANGE AND PROMISSORY NOTES 
 
order signed by the maker directing 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”. When such an order is 
accepted in writing on the face of the order itself, it becomes a valid bill of exchange. Suppose 
A orders B to pay `50,000 for three months after date and B accepts this order by signing his 
name, then it will be a bill of exchange. 
A Bill of Exchange has the following characteristics: 
1. It must be in writing. 
2. It must be dated. 
3. It must contain an order to pay a certain sum of money. 
4.      The promise to pay must be unconditional. 
5. The money must be payable to a definite person or to his order to the bearer. 
6. The draft must be accepted for payment by the party to whom the order is made. 
7. It should be properly stamped (except in case of bills payable ‘‘on demand”) 
8. Payment must be in legal currency of the country. 
The party which makes the order is known as the drawer. The party which accepts the order 
is known as the acceptor and the party to whom the amount has to be paid is known as the 
payee. The drawer and the payee can be the same. 
A Bill of Exchange can be passed on to another person by endorsement. Endorsement on a 
bill of exchange is made exactly as it is done in the case of a cheque. The primary liability on 
a bill of exchange is that of the acceptor. If he does not pay, a holder can recover the amount 
from any of the previous endorsers or the drawee. 
Sometimes, it may happen that a bill of exchange is drawn for foreign trade operations. Such 
a bill is known as “Foreign Bill of Exchange”. A foreign bill of exchange is one which is drawn 
in one country and is payable in another. It is generally drawn up in triplicate wherein each 
copy is sent by separate post so that at least one copy reaches the intended party. Payment 
will be made only on one of the copies and when such payment is made the other copies 
become useless. Section 12 of the Negotiable Instruments Act provides that all instruments, 
which are not inland instrument, are foreign.  
 
© The Institute of Chartered Accountants of India
Page 4


 
LEARNING OUTCOMES 
BILLS OF EXCHANGE AND 
 PROMISSORY NOTES  
After studying this chapter, you would be able to:
? Understand the meaning of Bills of Exchange and Promissory Notes 
and also try to grasp their underlying features. 
? Understand the accounting treatments relating to issue, acceptance, 
discounting, maturity and endorsement of bills in the books of 
drawer and drawee. 
? Learn the technique of accounting relating to accommodation bills. 
? Learn the special treatment needed in case of insolvency as well as 
early retirement of bill. 
 
 
 
6
CHAPTER 
 
© The Institute of Chartered Accountants of India
  ACCOUNTING 
1.2 
6.2 
 
 1. BILLS OF EXCHANGE 
It is general practice that when goods are sold or services are provided, the seller extends a 
credit period to buyer.  Sometimes, the seller may not be in a position to offer credit period 
and the purchase is not in a position to pay immediately. In such circumstances the seller 
would like that the purchaser should give a definite promise in writing to pay the amount of 
the goods on a certain date which he can use to generate immediate funds. Commercial 
practice has developed to treat these written promises into valuable instruments of credit that 
when a written promise is made in proper form and is properly stamped, it is expected that 
the buyer discharges his debt and the seller receives payment. This is because written 
promises are often accepted by banks and money is advanced against them. Also, they can 
be endorsed, i.e., passed on from person to person. The written promise is either in the form 
of a Bill of Exchange or in the form of a promissory note. 
A Bill of Exchange has been defined as an “instrument in writing containing an unconditional 
BILLS OF EXCHANGE
Bill of Exchange
Normal Trading
Accommodation
Promissory Note
Date of Expiry
Due Date
Days of grace
Maturity Date
Nature of Bill
Bill at sight
Bill after date
Bill on Demand
Other Aspects
Dishonour of bill
Nothing charges
Renewal of bill
Insolvency
Reitrement of bill
Bills for collection
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
6.3 
BILLS OF EXCHANGE AND PROMISSORY NOTES 
 
order signed by the maker directing 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”. When such an order is 
accepted in writing on the face of the order itself, it becomes a valid bill of exchange. Suppose 
A orders B to pay `50,000 for three months after date and B accepts this order by signing his 
name, then it will be a bill of exchange. 
A Bill of Exchange has the following characteristics: 
1. It must be in writing. 
2. It must be dated. 
3. It must contain an order to pay a certain sum of money. 
4.      The promise to pay must be unconditional. 
5. The money must be payable to a definite person or to his order to the bearer. 
6. The draft must be accepted for payment by the party to whom the order is made. 
7. It should be properly stamped (except in case of bills payable ‘‘on demand”) 
8. Payment must be in legal currency of the country. 
The party which makes the order is known as the drawer. The party which accepts the order 
is known as the acceptor and the party to whom the amount has to be paid is known as the 
payee. The drawer and the payee can be the same. 
A Bill of Exchange can be passed on to another person by endorsement. Endorsement on a 
bill of exchange is made exactly as it is done in the case of a cheque. The primary liability on 
a bill of exchange is that of the acceptor. If he does not pay, a holder can recover the amount 
from any of the previous endorsers or the drawee. 
Sometimes, it may happen that a bill of exchange is drawn for foreign trade operations. Such 
a bill is known as “Foreign Bill of Exchange”. A foreign bill of exchange is one which is drawn 
in one country and is payable in another. It is generally drawn up in triplicate wherein each 
copy is sent by separate post so that at least one copy reaches the intended party. Payment 
will be made only on one of the copies and when such payment is made the other copies 
become useless. Section 12 of the Negotiable Instruments Act provides that all instruments, 
which are not inland instrument, are foreign.  
 
© The Institute of Chartered Accountants of India
  ACCOUNTING 
1.4 
6.4 
A specimen of foreign bill of exchange is given below: 
`
 11,50,000
  New Delhi 
July, 2022 
 
Ninety days after date of this First Bill of Exchange (Second and Third of the same tenure 
and date being unpaid) Pay to the order of M/s Vencent John & Associates, London the 
sum of Rupees Eleven lakh Fifty thousand only, value received. 
 
 
To,  
 Wallis Sons     Accepted  
 M/a IONX (Wallis Sons)   Stamp 
 Birmingham, UK 
 
                 Drawee   
The following are examples of foreign bills: 
1. A bill drawn in India on a person resident outside India and made payable outside 
India. 
2. A bill drawn outside India on a person resident outside India. 
3. A bill drawn outside India and made payable in India. 
4. A bill drawn outside India and made payable outside India. 
 2. PROMISSORY NOTES 
A promissory note is an instrument in writing, not being a bank note or currency note 
containing an unconditional undertaking signed by the maker to pay a certain sum of money 
only to or to the order of a certain person. Under Section 31(2) of the Reserve Bank of India 
Act a promissory note cannot be made payable to bearer.  
A promissory note has the following characteristics: 
1. It must be in writing. 
2. It must contain a clear promise to pay. Mere acknowledgement of a debt is not a 
promissory note. 
© The Institute of Chartered Accountants of India
Page 5


 
LEARNING OUTCOMES 
BILLS OF EXCHANGE AND 
 PROMISSORY NOTES  
After studying this chapter, you would be able to:
? Understand the meaning of Bills of Exchange and Promissory Notes 
and also try to grasp their underlying features. 
? Understand the accounting treatments relating to issue, acceptance, 
discounting, maturity and endorsement of bills in the books of 
drawer and drawee. 
? Learn the technique of accounting relating to accommodation bills. 
? Learn the special treatment needed in case of insolvency as well as 
early retirement of bill. 
 
 
 
6
CHAPTER 
 
© The Institute of Chartered Accountants of India
  ACCOUNTING 
1.2 
6.2 
 
 1. BILLS OF EXCHANGE 
It is general practice that when goods are sold or services are provided, the seller extends a 
credit period to buyer.  Sometimes, the seller may not be in a position to offer credit period 
and the purchase is not in a position to pay immediately. In such circumstances the seller 
would like that the purchaser should give a definite promise in writing to pay the amount of 
the goods on a certain date which he can use to generate immediate funds. Commercial 
practice has developed to treat these written promises into valuable instruments of credit that 
when a written promise is made in proper form and is properly stamped, it is expected that 
the buyer discharges his debt and the seller receives payment. This is because written 
promises are often accepted by banks and money is advanced against them. Also, they can 
be endorsed, i.e., passed on from person to person. The written promise is either in the form 
of a Bill of Exchange or in the form of a promissory note. 
A Bill of Exchange has been defined as an “instrument in writing containing an unconditional 
BILLS OF EXCHANGE
Bill of Exchange
Normal Trading
Accommodation
Promissory Note
Date of Expiry
Due Date
Days of grace
Maturity Date
Nature of Bill
Bill at sight
Bill after date
Bill on Demand
Other Aspects
Dishonour of bill
Nothing charges
Renewal of bill
Insolvency
Reitrement of bill
Bills for collection
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
6.3 
BILLS OF EXCHANGE AND PROMISSORY NOTES 
 
order signed by the maker directing 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”. When such an order is 
accepted in writing on the face of the order itself, it becomes a valid bill of exchange. Suppose 
A orders B to pay `50,000 for three months after date and B accepts this order by signing his 
name, then it will be a bill of exchange. 
A Bill of Exchange has the following characteristics: 
1. It must be in writing. 
2. It must be dated. 
3. It must contain an order to pay a certain sum of money. 
4.      The promise to pay must be unconditional. 
5. The money must be payable to a definite person or to his order to the bearer. 
6. The draft must be accepted for payment by the party to whom the order is made. 
7. It should be properly stamped (except in case of bills payable ‘‘on demand”) 
8. Payment must be in legal currency of the country. 
The party which makes the order is known as the drawer. The party which accepts the order 
is known as the acceptor and the party to whom the amount has to be paid is known as the 
payee. The drawer and the payee can be the same. 
A Bill of Exchange can be passed on to another person by endorsement. Endorsement on a 
bill of exchange is made exactly as it is done in the case of a cheque. The primary liability on 
a bill of exchange is that of the acceptor. If he does not pay, a holder can recover the amount 
from any of the previous endorsers or the drawee. 
Sometimes, it may happen that a bill of exchange is drawn for foreign trade operations. Such 
a bill is known as “Foreign Bill of Exchange”. A foreign bill of exchange is one which is drawn 
in one country and is payable in another. It is generally drawn up in triplicate wherein each 
copy is sent by separate post so that at least one copy reaches the intended party. Payment 
will be made only on one of the copies and when such payment is made the other copies 
become useless. Section 12 of the Negotiable Instruments Act provides that all instruments, 
which are not inland instrument, are foreign.  
 
© The Institute of Chartered Accountants of India
  ACCOUNTING 
1.4 
6.4 
A specimen of foreign bill of exchange is given below: 
`
 11,50,000
  New Delhi 
July, 2022 
 
Ninety days after date of this First Bill of Exchange (Second and Third of the same tenure 
and date being unpaid) Pay to the order of M/s Vencent John & Associates, London the 
sum of Rupees Eleven lakh Fifty thousand only, value received. 
 
 
To,  
 Wallis Sons     Accepted  
 M/a IONX (Wallis Sons)   Stamp 
 Birmingham, UK 
 
                 Drawee   
The following are examples of foreign bills: 
1. A bill drawn in India on a person resident outside India and made payable outside 
India. 
2. A bill drawn outside India on a person resident outside India. 
3. A bill drawn outside India and made payable in India. 
4. A bill drawn outside India and made payable outside India. 
 2. PROMISSORY NOTES 
A promissory note is an instrument in writing, not being a bank note or currency note 
containing an unconditional undertaking signed by the maker to pay a certain sum of money 
only to or to the order of a certain person. Under Section 31(2) of the Reserve Bank of India 
Act a promissory note cannot be made payable to bearer.  
A promissory note has the following characteristics: 
1. It must be in writing. 
2. It must contain a clear promise to pay. Mere acknowledgement of a debt is not a 
promissory note. 
© The Institute of Chartered Accountants of India
6.5 
BILLS OF EXCHANGE AND PROMISSORY NOTES 
 
3. The promise to pay must be unconditional.“I promise to pay `50,000 as soon as I can” 
is not an unconditional promise. 
4. The promiser or maker must sign the promissory note. 
5. The maker must be a certain person. 
6. The payee (the person to whom the payment is promised) must also be certain. 
7. The sum payable must be certain. “I promise to pay `50,000 plus all fine” is not certain. 
8. Payment must be in legal currency of the country. 
9. It should not be made payable to the bearer. 
10. It should be properly stamped.  
11.     It does not require any acceptance. 
Specimen of promissory note : 
Specimen of a Promissory Note 
`
 10,00,000/- only       Rohan 
           77, Sector-12, Ghaziabad 
           March 01, 2022 
 Three months after date I promise to pay Priya or his order the sum of  
`
 Ten lakh only, for 
value received. 
 To, 
 Priya         Stamp 
 S-11, Rohini, Delhi.         (Rohan) 
 
       Payee      Maker
 3  DIFFERENCES - BILL OF EXCHANGE AND 
PROMISSORY NOTE  
Bill of Exchange Promissory Note 
A bill contains an order to pay A promissory note contains only a 
promise to pay certain sum of money 
There are generally 3 parties (Drawer, Drawee 
and Payee) in bill of exchange 
There are 2 parties (Maker and Payee) in 
promissory note 
© The Institute of Chartered Accountants of India