NCERT Textbook - Bills of Exchange | Accountancy Class 11 - Commerce PDF Download

 Page 1


G
oods can be sold or bought for cash or on
credit. When goods are sold or bought for
cash, payment is received immediately. On the
other hand, when goods are sold/bought on credit
the payment is deferred to a future date. In such a
situation, normally the firm relies on the party to
make payment on the due date. But in some cases,
to avoid any possibility of delay or default, an
instrument of credit is used through which the
buyer assures the seller that the payment shall be
made according to the agreed conditions. In India,
instruments of credit have been in use since time
immemorial and are popularly known as Hundies.
The hundies are written in Indian languages and
have a large variety (refer box1).
Box  1
Hundies and its Types
There are a variety of hundies used in our country.
Let us discuss some of the most common ones.
Shahjog Hundi: This is drawn by one merchant on
another, asking the latter to pay the amount to a
Shah. Shah is a respectable and responsible person,
a man of worth and known in the bazaar. A shah-jog
hundi passes from one hand to another till it reaches
a shah, who, after reasonable enquiries, presents it
to the drawee for acceptance of the payment.
Darshani Hundi: This is hundi payable at sight. It
must be presented for payment within a reasonable
time after its receipt by the holder. It is similar to a
demand bill.
LEARNING OBJECTIVES
After studying this chapter,
you will be able to :
• state the meaning of
bill of exchange and a
promissory note;
• distinguish between a
bill of exchange and a
promissory note;
• state the advantages
of bill of exchange;
• explain the meaning of
different terms involved
in the bill transaction,
• record bill of exchange
transactions in
journal;
• record transactions
relating to dishonour,
retirement and renewal
of bill;
• describe the uses of
bill receivable and bill
payable book;
• state the meaning and
use of accommodation
bill.
Bill of Exchange 8
2022-23
Page 2


G
oods can be sold or bought for cash or on
credit. When goods are sold or bought for
cash, payment is received immediately. On the
other hand, when goods are sold/bought on credit
the payment is deferred to a future date. In such a
situation, normally the firm relies on the party to
make payment on the due date. But in some cases,
to avoid any possibility of delay or default, an
instrument of credit is used through which the
buyer assures the seller that the payment shall be
made according to the agreed conditions. In India,
instruments of credit have been in use since time
immemorial and are popularly known as Hundies.
The hundies are written in Indian languages and
have a large variety (refer box1).
Box  1
Hundies and its Types
There are a variety of hundies used in our country.
Let us discuss some of the most common ones.
Shahjog Hundi: This is drawn by one merchant on
another, asking the latter to pay the amount to a
Shah. Shah is a respectable and responsible person,
a man of worth and known in the bazaar. A shah-jog
hundi passes from one hand to another till it reaches
a shah, who, after reasonable enquiries, presents it
to the drawee for acceptance of the payment.
Darshani Hundi: This is hundi payable at sight. It
must be presented for payment within a reasonable
time after its receipt by the holder. It is similar to a
demand bill.
LEARNING OBJECTIVES
After studying this chapter,
you will be able to :
• state the meaning of
bill of exchange and a
promissory note;
• distinguish between a
bill of exchange and a
promissory note;
• state the advantages
of bill of exchange;
• explain the meaning of
different terms involved
in the bill transaction,
• record bill of exchange
transactions in
journal;
• record transactions
relating to dishonour,
retirement and renewal
of bill;
• describe the uses of
bill receivable and bill
payable book;
• state the meaning and
use of accommodation
bill.
Bill of Exchange 8
2022-23
278 Accountancy
Muddati Hundi: A muddati or miadi hundi is payable after a specified period of time.
This is similar to a time bill.
There are few other varieties of hundies like Nam-jog hundi, Dhani-jog hundi, Jawabee
hundi, Hokhami hundi, Firman-jog hundi, and so on.
Now a days these instruments of credit are called bills of exchange or
promissory notes. The bill of exchange contains an unconditional order to pay
a certain amount on an agreed date while the promissory note contains an
unconditional promise to pay a certain sum of money on a certain date.  In
India these instruments are governed by the Indian Negotiable Instruments
Act 1881.
8.1 Meaning of Bill of Exchange
According to the Negotiable Instruments Act 1881, a 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, or to
the order of a certain person or to the bearer of the instrument. The following
features of a bill of exchange emerge out of this definition.
• A bill of exchange must be in writing.
• It is an order to make payment.
• The order to make payment is unconditional.
• The maker of the bill of exchange must sign it.
• The payment to be made must be certain.
• The date on which payment is made must also be certain.
• The bill of exchange must be payable to a certain person.
• The amount mentioned in the bill of exchange is payable either on
demand or on the expiry of a fixed period of time.
• It must be stamped as per the requirement of law.
A bill of exchange is generally drawn by the creditor upon his debtor. It has to
be accepted by the drawee (debtor) or someone on his behalf. It is just a draft
till its acceptance is made.
For example, Amit sold goods to Rohit on credit for ` 10,000 for three months. To
ensure payment on due date Amit draws a bill of exchange upon Rohit for
` 10,000 payable after three months. Before it is accepted by Rohit it will be called
a draft. It will become a bill of exchange only when Rohit writes the word “accepted”
on it and append his signature thereto communicate his acceptance.
2022-23
Page 3


G
oods can be sold or bought for cash or on
credit. When goods are sold or bought for
cash, payment is received immediately. On the
other hand, when goods are sold/bought on credit
the payment is deferred to a future date. In such a
situation, normally the firm relies on the party to
make payment on the due date. But in some cases,
to avoid any possibility of delay or default, an
instrument of credit is used through which the
buyer assures the seller that the payment shall be
made according to the agreed conditions. In India,
instruments of credit have been in use since time
immemorial and are popularly known as Hundies.
The hundies are written in Indian languages and
have a large variety (refer box1).
Box  1
Hundies and its Types
There are a variety of hundies used in our country.
Let us discuss some of the most common ones.
Shahjog Hundi: This is drawn by one merchant on
another, asking the latter to pay the amount to a
Shah. Shah is a respectable and responsible person,
a man of worth and known in the bazaar. A shah-jog
hundi passes from one hand to another till it reaches
a shah, who, after reasonable enquiries, presents it
to the drawee for acceptance of the payment.
Darshani Hundi: This is hundi payable at sight. It
must be presented for payment within a reasonable
time after its receipt by the holder. It is similar to a
demand bill.
LEARNING OBJECTIVES
After studying this chapter,
you will be able to :
• state the meaning of
bill of exchange and a
promissory note;
• distinguish between a
bill of exchange and a
promissory note;
• state the advantages
of bill of exchange;
• explain the meaning of
different terms involved
in the bill transaction,
• record bill of exchange
transactions in
journal;
• record transactions
relating to dishonour,
retirement and renewal
of bill;
• describe the uses of
bill receivable and bill
payable book;
• state the meaning and
use of accommodation
bill.
Bill of Exchange 8
2022-23
278 Accountancy
Muddati Hundi: A muddati or miadi hundi is payable after a specified period of time.
This is similar to a time bill.
There are few other varieties of hundies like Nam-jog hundi, Dhani-jog hundi, Jawabee
hundi, Hokhami hundi, Firman-jog hundi, and so on.
Now a days these instruments of credit are called bills of exchange or
promissory notes. The bill of exchange contains an unconditional order to pay
a certain amount on an agreed date while the promissory note contains an
unconditional promise to pay a certain sum of money on a certain date.  In
India these instruments are governed by the Indian Negotiable Instruments
Act 1881.
8.1 Meaning of Bill of Exchange
According to the Negotiable Instruments Act 1881, a 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, or to
the order of a certain person or to the bearer of the instrument. The following
features of a bill of exchange emerge out of this definition.
• A bill of exchange must be in writing.
• It is an order to make payment.
• The order to make payment is unconditional.
• The maker of the bill of exchange must sign it.
• The payment to be made must be certain.
• The date on which payment is made must also be certain.
• The bill of exchange must be payable to a certain person.
• The amount mentioned in the bill of exchange is payable either on
demand or on the expiry of a fixed period of time.
• It must be stamped as per the requirement of law.
A bill of exchange is generally drawn by the creditor upon his debtor. It has to
be accepted by the drawee (debtor) or someone on his behalf. It is just a draft
till its acceptance is made.
For example, Amit sold goods to Rohit on credit for ` 10,000 for three months. To
ensure payment on due date Amit draws a bill of exchange upon Rohit for
` 10,000 payable after three months. Before it is accepted by Rohit it will be called
a draft. It will become a bill of exchange only when Rohit writes the word “accepted”
on it and append his signature thereto communicate his acceptance.
2022-23
279 Bill of Exchange
8.1.1 Parties to a Bill of Exchange 8.1.1 Parties to a Bill of Exchange 8.1.1 Parties to a Bill of Exchange 8.1.1 Parties to a Bill of Exchange 8.1.1 Parties to a Bill of Exchange
There are three parties to a bill of exchange:
(1) Drawer is the maker of the bill of exchange. A seller/creditor who is entitled
to receive money from the debtor can draw a bill of exchange upon the
buyer/debtor. The drawer after writing the bill of exchange has to sign it
as maker of the bill of exchange.
(2) Drawee is the person upon whom the bill of exchange is drawn. Drawee is
the  purchaser or debtor of the goods upon whom the bill of exchange is
drawn.
(3) Payee is the person to whom the payment is to be made. The drawer of
the bill himself will be the payee if he keeps the bill with him till the date
of its payment. The payee may change in the following situations:
(a) In case the drawer has got the bill discounted, the person who has
discounted the bill will become the payee;
(b) In case the bill is endorsed in favour of a creditor of the drawer, the
creditor will become the payee.
Normally, the drawer and the payee is the same person. Similarly, the drawee
and the acceptor is normally the person. For example, Mamta sold goods worth
`10,000 to Jyoti and drew a bill of exchange upon her for the same amount payable
after three months. Here, Mamta is the drawer of the bill and Jyoti is the drawee. If
the bill is retained by Mamta for three months and the amount of ` 10,000 is
received by her on the due date then Mamta will be the payee. If Mamtagives away
this bill to her creditor Ruchi, then Ruchi will be the payee. If Mamta gets this bill
discounted from the bank then the bankers will become the payee.
In the above mentioned bill of exchange, Mamta is the drawer and Jyoti is
the drawee. Since Jyoti has accepted the bill, she is the acceptor. Suppose in
place of Jyoti the bill is accepted by Ashok then Ashok will become the acceptor.
Test Your Understanding - I
Write ‘True’ or ‘False’ against each statement regarding a bill of exchange:
(i) A bill of exchange must be accepted by the payee.
(ii) A bill of exchange is drawn by the creditor.
(iii) A bill of exchange is drawn for all cash transaction.
(iv) A bill payable on demand is called Time bill;
(v) The person to whom payment is to be made in a bill or exchange is called
payee.
(vi) A negotiable instrument does not require the signature of its maker.
(vii) The hundi Payable at sight is called Darshani hundi.
(viii) A negotiable instrument is not freely transferable.
(ix) Stamping of promissory note is not mandatory.
(x) The time of payment of a negotiable instrument need not be certain.
2022-23
Page 4


G
oods can be sold or bought for cash or on
credit. When goods are sold or bought for
cash, payment is received immediately. On the
other hand, when goods are sold/bought on credit
the payment is deferred to a future date. In such a
situation, normally the firm relies on the party to
make payment on the due date. But in some cases,
to avoid any possibility of delay or default, an
instrument of credit is used through which the
buyer assures the seller that the payment shall be
made according to the agreed conditions. In India,
instruments of credit have been in use since time
immemorial and are popularly known as Hundies.
The hundies are written in Indian languages and
have a large variety (refer box1).
Box  1
Hundies and its Types
There are a variety of hundies used in our country.
Let us discuss some of the most common ones.
Shahjog Hundi: This is drawn by one merchant on
another, asking the latter to pay the amount to a
Shah. Shah is a respectable and responsible person,
a man of worth and known in the bazaar. A shah-jog
hundi passes from one hand to another till it reaches
a shah, who, after reasonable enquiries, presents it
to the drawee for acceptance of the payment.
Darshani Hundi: This is hundi payable at sight. It
must be presented for payment within a reasonable
time after its receipt by the holder. It is similar to a
demand bill.
LEARNING OBJECTIVES
After studying this chapter,
you will be able to :
• state the meaning of
bill of exchange and a
promissory note;
• distinguish between a
bill of exchange and a
promissory note;
• state the advantages
of bill of exchange;
• explain the meaning of
different terms involved
in the bill transaction,
• record bill of exchange
transactions in
journal;
• record transactions
relating to dishonour,
retirement and renewal
of bill;
• describe the uses of
bill receivable and bill
payable book;
• state the meaning and
use of accommodation
bill.
Bill of Exchange 8
2022-23
278 Accountancy
Muddati Hundi: A muddati or miadi hundi is payable after a specified period of time.
This is similar to a time bill.
There are few other varieties of hundies like Nam-jog hundi, Dhani-jog hundi, Jawabee
hundi, Hokhami hundi, Firman-jog hundi, and so on.
Now a days these instruments of credit are called bills of exchange or
promissory notes. The bill of exchange contains an unconditional order to pay
a certain amount on an agreed date while the promissory note contains an
unconditional promise to pay a certain sum of money on a certain date.  In
India these instruments are governed by the Indian Negotiable Instruments
Act 1881.
8.1 Meaning of Bill of Exchange
According to the Negotiable Instruments Act 1881, a 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, or to
the order of a certain person or to the bearer of the instrument. The following
features of a bill of exchange emerge out of this definition.
• A bill of exchange must be in writing.
• It is an order to make payment.
• The order to make payment is unconditional.
• The maker of the bill of exchange must sign it.
• The payment to be made must be certain.
• The date on which payment is made must also be certain.
• The bill of exchange must be payable to a certain person.
• The amount mentioned in the bill of exchange is payable either on
demand or on the expiry of a fixed period of time.
• It must be stamped as per the requirement of law.
A bill of exchange is generally drawn by the creditor upon his debtor. It has to
be accepted by the drawee (debtor) or someone on his behalf. It is just a draft
till its acceptance is made.
For example, Amit sold goods to Rohit on credit for ` 10,000 for three months. To
ensure payment on due date Amit draws a bill of exchange upon Rohit for
` 10,000 payable after three months. Before it is accepted by Rohit it will be called
a draft. It will become a bill of exchange only when Rohit writes the word “accepted”
on it and append his signature thereto communicate his acceptance.
2022-23
279 Bill of Exchange
8.1.1 Parties to a Bill of Exchange 8.1.1 Parties to a Bill of Exchange 8.1.1 Parties to a Bill of Exchange 8.1.1 Parties to a Bill of Exchange 8.1.1 Parties to a Bill of Exchange
There are three parties to a bill of exchange:
(1) Drawer is the maker of the bill of exchange. A seller/creditor who is entitled
to receive money from the debtor can draw a bill of exchange upon the
buyer/debtor. The drawer after writing the bill of exchange has to sign it
as maker of the bill of exchange.
(2) Drawee is the person upon whom the bill of exchange is drawn. Drawee is
the  purchaser or debtor of the goods upon whom the bill of exchange is
drawn.
(3) Payee is the person to whom the payment is to be made. The drawer of
the bill himself will be the payee if he keeps the bill with him till the date
of its payment. The payee may change in the following situations:
(a) In case the drawer has got the bill discounted, the person who has
discounted the bill will become the payee;
(b) In case the bill is endorsed in favour of a creditor of the drawer, the
creditor will become the payee.
Normally, the drawer and the payee is the same person. Similarly, the drawee
and the acceptor is normally the person. For example, Mamta sold goods worth
`10,000 to Jyoti and drew a bill of exchange upon her for the same amount payable
after three months. Here, Mamta is the drawer of the bill and Jyoti is the drawee. If
the bill is retained by Mamta for three months and the amount of ` 10,000 is
received by her on the due date then Mamta will be the payee. If Mamtagives away
this bill to her creditor Ruchi, then Ruchi will be the payee. If Mamta gets this bill
discounted from the bank then the bankers will become the payee.
In the above mentioned bill of exchange, Mamta is the drawer and Jyoti is
the drawee. Since Jyoti has accepted the bill, she is the acceptor. Suppose in
place of Jyoti the bill is accepted by Ashok then Ashok will become the acceptor.
Test Your Understanding - I
Write ‘True’ or ‘False’ against each statement regarding a bill of exchange:
(i) A bill of exchange must be accepted by the payee.
(ii) A bill of exchange is drawn by the creditor.
(iii) A bill of exchange is drawn for all cash transaction.
(iv) A bill payable on demand is called Time bill;
(v) The person to whom payment is to be made in a bill or exchange is called
payee.
(vi) A negotiable instrument does not require the signature of its maker.
(vii) The hundi Payable at sight is called Darshani hundi.
(viii) A negotiable instrument is not freely transferable.
(ix) Stamping of promissory note is not mandatory.
(x) The time of payment of a negotiable instrument need not be certain.
2022-23
280 Accountancy
8.2 Promissory Note
According to the Negotiable Instruments Act 1881, a promissory note is defined
as an instrument in writing (not being a bank note or a 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, or to the bearer of the
instrument. However, according to the Reserve Bank of India Act, a promissory
note payable to bearer is illegal. Therefore, a promissory note cannot be made
payable to the bearer.
This definition suggests that when a person gives a promise in writing to
pay a certain sum of money unconditionally to a certain person or according to
his order the document is called is a promissory note.
Following features of a promissory note emerge out of the above definition:
• It must be in writing
• It must contain an unconditional promise to pay.
• The sum payable must be certain.
• It must be signed by the maker.
• The maker must sign it.
• It must be payable to a certain person.
• It should be properly stamped.
A promissory note does not require any acceptance because the maker of  the
promissory note himself promises to make the payment.
8.2.1 Parties to a Promissory Note 8.2.1 Parties to a Promissory Note 8.2.1 Parties to a Promissory Note 8.2.1 Parties to a Promissory Note 8.2.1 Parties to a Promissory Note
There are two parties to a promissory note.
• Maker or Drawer is the person who makes or draws the promissory note
to pay a certain amount as specified in the promissory note. He is also
called the promisor.
• Drawee or Payee is the person in whose favour the promissory note is
drawn. He is called the promisee.
Generally, the drawee is also the payee, unless, it is otherwise mentioned in the
promissory note. In the specimen of promissory note(refer figure 8.2), Ashok
Kumar is the drawer or maker who promises to pay `30,000 and Harish Chander
is the drawee or payee to whom payment is to made. If Harish Chander endorses
this promissory note in favour of Rohit then Rohit will become the payee. Similarly,
if Harish Chander gets this promissory note discounted from the bank then the
bank will become the payee.
2022-23
Page 5


G
oods can be sold or bought for cash or on
credit. When goods are sold or bought for
cash, payment is received immediately. On the
other hand, when goods are sold/bought on credit
the payment is deferred to a future date. In such a
situation, normally the firm relies on the party to
make payment on the due date. But in some cases,
to avoid any possibility of delay or default, an
instrument of credit is used through which the
buyer assures the seller that the payment shall be
made according to the agreed conditions. In India,
instruments of credit have been in use since time
immemorial and are popularly known as Hundies.
The hundies are written in Indian languages and
have a large variety (refer box1).
Box  1
Hundies and its Types
There are a variety of hundies used in our country.
Let us discuss some of the most common ones.
Shahjog Hundi: This is drawn by one merchant on
another, asking the latter to pay the amount to a
Shah. Shah is a respectable and responsible person,
a man of worth and known in the bazaar. A shah-jog
hundi passes from one hand to another till it reaches
a shah, who, after reasonable enquiries, presents it
to the drawee for acceptance of the payment.
Darshani Hundi: This is hundi payable at sight. It
must be presented for payment within a reasonable
time after its receipt by the holder. It is similar to a
demand bill.
LEARNING OBJECTIVES
After studying this chapter,
you will be able to :
• state the meaning of
bill of exchange and a
promissory note;
• distinguish between a
bill of exchange and a
promissory note;
• state the advantages
of bill of exchange;
• explain the meaning of
different terms involved
in the bill transaction,
• record bill of exchange
transactions in
journal;
• record transactions
relating to dishonour,
retirement and renewal
of bill;
• describe the uses of
bill receivable and bill
payable book;
• state the meaning and
use of accommodation
bill.
Bill of Exchange 8
2022-23
278 Accountancy
Muddati Hundi: A muddati or miadi hundi is payable after a specified period of time.
This is similar to a time bill.
There are few other varieties of hundies like Nam-jog hundi, Dhani-jog hundi, Jawabee
hundi, Hokhami hundi, Firman-jog hundi, and so on.
Now a days these instruments of credit are called bills of exchange or
promissory notes. The bill of exchange contains an unconditional order to pay
a certain amount on an agreed date while the promissory note contains an
unconditional promise to pay a certain sum of money on a certain date.  In
India these instruments are governed by the Indian Negotiable Instruments
Act 1881.
8.1 Meaning of Bill of Exchange
According to the Negotiable Instruments Act 1881, a 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, or to
the order of a certain person or to the bearer of the instrument. The following
features of a bill of exchange emerge out of this definition.
• A bill of exchange must be in writing.
• It is an order to make payment.
• The order to make payment is unconditional.
• The maker of the bill of exchange must sign it.
• The payment to be made must be certain.
• The date on which payment is made must also be certain.
• The bill of exchange must be payable to a certain person.
• The amount mentioned in the bill of exchange is payable either on
demand or on the expiry of a fixed period of time.
• It must be stamped as per the requirement of law.
A bill of exchange is generally drawn by the creditor upon his debtor. It has to
be accepted by the drawee (debtor) or someone on his behalf. It is just a draft
till its acceptance is made.
For example, Amit sold goods to Rohit on credit for ` 10,000 for three months. To
ensure payment on due date Amit draws a bill of exchange upon Rohit for
` 10,000 payable after three months. Before it is accepted by Rohit it will be called
a draft. It will become a bill of exchange only when Rohit writes the word “accepted”
on it and append his signature thereto communicate his acceptance.
2022-23
279 Bill of Exchange
8.1.1 Parties to a Bill of Exchange 8.1.1 Parties to a Bill of Exchange 8.1.1 Parties to a Bill of Exchange 8.1.1 Parties to a Bill of Exchange 8.1.1 Parties to a Bill of Exchange
There are three parties to a bill of exchange:
(1) Drawer is the maker of the bill of exchange. A seller/creditor who is entitled
to receive money from the debtor can draw a bill of exchange upon the
buyer/debtor. The drawer after writing the bill of exchange has to sign it
as maker of the bill of exchange.
(2) Drawee is the person upon whom the bill of exchange is drawn. Drawee is
the  purchaser or debtor of the goods upon whom the bill of exchange is
drawn.
(3) Payee is the person to whom the payment is to be made. The drawer of
the bill himself will be the payee if he keeps the bill with him till the date
of its payment. The payee may change in the following situations:
(a) In case the drawer has got the bill discounted, the person who has
discounted the bill will become the payee;
(b) In case the bill is endorsed in favour of a creditor of the drawer, the
creditor will become the payee.
Normally, the drawer and the payee is the same person. Similarly, the drawee
and the acceptor is normally the person. For example, Mamta sold goods worth
`10,000 to Jyoti and drew a bill of exchange upon her for the same amount payable
after three months. Here, Mamta is the drawer of the bill and Jyoti is the drawee. If
the bill is retained by Mamta for three months and the amount of ` 10,000 is
received by her on the due date then Mamta will be the payee. If Mamtagives away
this bill to her creditor Ruchi, then Ruchi will be the payee. If Mamta gets this bill
discounted from the bank then the bankers will become the payee.
In the above mentioned bill of exchange, Mamta is the drawer and Jyoti is
the drawee. Since Jyoti has accepted the bill, she is the acceptor. Suppose in
place of Jyoti the bill is accepted by Ashok then Ashok will become the acceptor.
Test Your Understanding - I
Write ‘True’ or ‘False’ against each statement regarding a bill of exchange:
(i) A bill of exchange must be accepted by the payee.
(ii) A bill of exchange is drawn by the creditor.
(iii) A bill of exchange is drawn for all cash transaction.
(iv) A bill payable on demand is called Time bill;
(v) The person to whom payment is to be made in a bill or exchange is called
payee.
(vi) A negotiable instrument does not require the signature of its maker.
(vii) The hundi Payable at sight is called Darshani hundi.
(viii) A negotiable instrument is not freely transferable.
(ix) Stamping of promissory note is not mandatory.
(x) The time of payment of a negotiable instrument need not be certain.
2022-23
280 Accountancy
8.2 Promissory Note
According to the Negotiable Instruments Act 1881, a promissory note is defined
as an instrument in writing (not being a bank note or a 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, or to the bearer of the
instrument. However, according to the Reserve Bank of India Act, a promissory
note payable to bearer is illegal. Therefore, a promissory note cannot be made
payable to the bearer.
This definition suggests that when a person gives a promise in writing to
pay a certain sum of money unconditionally to a certain person or according to
his order the document is called is a promissory note.
Following features of a promissory note emerge out of the above definition:
• It must be in writing
• It must contain an unconditional promise to pay.
• The sum payable must be certain.
• It must be signed by the maker.
• The maker must sign it.
• It must be payable to a certain person.
• It should be properly stamped.
A promissory note does not require any acceptance because the maker of  the
promissory note himself promises to make the payment.
8.2.1 Parties to a Promissory Note 8.2.1 Parties to a Promissory Note 8.2.1 Parties to a Promissory Note 8.2.1 Parties to a Promissory Note 8.2.1 Parties to a Promissory Note
There are two parties to a promissory note.
• Maker or Drawer is the person who makes or draws the promissory note
to pay a certain amount as specified in the promissory note. He is also
called the promisor.
• Drawee or Payee is the person in whose favour the promissory note is
drawn. He is called the promisee.
Generally, the drawee is also the payee, unless, it is otherwise mentioned in the
promissory note. In the specimen of promissory note(refer figure 8.2), Ashok
Kumar is the drawer or maker who promises to pay `30,000 and Harish Chander
is the drawee or payee to whom payment is to made. If Harish Chander endorses
this promissory note in favour of Rohit then Rohit will become the payee. Similarly,
if Harish Chander gets this promissory note discounted from the bank then the
bank will become the payee.
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281 Bill of Exchange
Box 2
Distinction between a Bill of Exchange and Promissory Note
Both a bill of exchange and a promissory note are instruments of credit and are similar
in many ways. However, there are certain basic differences between the two.
S.No. Basis Bill of Exchange Promissory Note
1. Drawer It is drawn by the creditor It is drawn by the debtor
2. Order or Promise It contains an order to make It contains a promise to make
and Parties payment. There can be three payment. There are only two
parties to it, viz. the drawer, parties to it, viz. the drawer
the drawee and the payee. and the payee.
3. Acceptance It requires acceptance by the It does not require any
drawee or someone else on his acceptance.
behalf.
4. Payee Drawer and payee can be the Drawer cannot be the payee
same party. of it.
5. Notice In case of its dishonour due No notice needs to be givenin
notice of dishonour is to be case of its dishonour.
given by the holder to the drawer
Fig. 8.1 Distinction between bills of exchange and promissory note
8.3 Advantages of Bill of Exchange
The bills of exchange as instruments of credit are used frequently in business
because of the following advantages:
• Framework for relationships: A bill of exchange represents a device, which
provides a framework for enabling the credit transaction between the seller/
creditor and buyer/debtor on an agreed basis.
• Certainty of terms and conditions: The creditor knows the time when he
would receive the money so also debtor is fully aware of the date by which
he has to pay the money. This is due to the fact that terms and conditions
of the relationships between debtor and creditor such as amount required
to be paid; date of payment; interest to be paid, if any, place of payment are
clearly mentioned in the bill of exchange.
• Convenient means of credit: A bill of exchange enables the buyer to buy the
goods on credit and pay after the period of credit. However, the seller of
goods even after extension of credit can get payment immediately either by
discounting the bill with the bank or by endorsing it in favour of a
third party.
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