NCERT Solutions for Commerce Accountancy Class 11 (Part - 1) - Bills of Exchange

Quick Recap

A Bill of Exchange and Promissory Note both are legal instruments which facilitate the credit sale of goods by assuring the seller that the amount will be recovered after a certain period. Both of these legal instruments are covered by the Negotiable Instruments Act, 1881. There are 3 parties to a bill of exchange: Drawer, Drawee, Payee. 

Let’s look at the NCERT solutions for Bills of Exchange.

Q1: Name any two types of commonly used negotiable instruments.
Ans: The two commonly used negotiable instruments are:
1. Cheque: an order directing a bank to pay a certain sum from the drawer’s account.
2. Bill of exchange: an unconditional written order directing a person to pay a specified sum on a specified date.

Q2: Write two points of distinction between bills of exchange and promissory note.
Ans:

• Bills of exchange: contain an order to pay; involve three parties (drawer, drawee, payee).
• Promissory note: contains a promise to pay; involves two parties (maker/promisor and payee).

Q3: State any four essential features of bill of exchange.
Ans: The four essential features of a bill of exchange are:

• Written document: the bill must be in writing.
• Unconditional order: it must contain an unconditional order by the drawer to the drawee to pay a specified sum.
• Signature: the bill must be signed by the drawer (maker) to validate it.
• Specified amount and date: the sum to be paid and the payment date (or period) must be clearly stated, preferably in both figures and words.

Q4: State the three parties involved in a bill of exchange.
Ans: The three parties involved in a bill of exchange are:

• Drawer: the person who draws (creates) the bill and gives the order to pay.
• Drawee (acceptor): the person on whom the bill is drawn and who is expected to pay when the bill matures.
• Payee: the person who is to receive the payment; this may be the drawer or a third person.

Q5: What is meant by the maturity of a bill of exchange?
Ans: The maturity of a bill of exchange is the date on which the bill becomes due for payment. The maturity date depends on the terms of the bill. Common types are:

• After-date bill: maturity is calculated from the date of drawing. Add the specified period to the date of drawing and then add three days' grace. Example: bill drawn on 1 March 2011 payable after one month matures on 4 April 2011 (1 March + 1 month + 3 days' grace). If the maturity falls on a declared (gazetted) holiday, payment is due one day earlier; if on an undeclared (casual) holiday, it is due one day later.
• After-sight bill: maturity is calculated from the date of acceptance by the drawee. For example, a one-month after-sight bill drawn on 1 March 2011 but accepted on 5 March 2011 will mature on 8 April 2011 (5 March + 1 month + 3 days' grace).
• At-sight bill: becomes due when presented for payment; there is no grace period—payment is expected on presentation.

Q6: What is meant by dishonour of a bill of exchange?
Ans: A bill is said to be dishonoured when the acceptor (drawee) fails to pay the amount on the maturity date. Effects and accounting treatment:

• The acceptor's liability, which had been discharged on acceptance, is reinstated.
• Entries made when the bill was drawn are reversed to record the reinstated debt, i.e., the original creditor re‑records the debtor's liability.
• If the holder incurs noting charges (fees paid to a notary public for formal proof of dishonour), these are payable by the drawee but usually paid initially by the holder and claimed later.

In the books of the drawer

Q7: Name the parties to a promissory note
Ans: The parties to a promissory note are:

• Promisor (maker): the person who promises to pay the stated sum.
• Payee: the person to whom the payment is to be made.

Q8: What is meant by the acceptance of a bill of exchange?
Ans: Acceptance of a bill of exchange is the act by which the drawee signifies assent to pay the bill when it matures. In practice:

• A seller (drawer) draws a bill on the buyer (drawee) to obtain a promise of payment for credit sales.
• The drawee accepts the bill to confirm their obligation to pay on the specified date.
• Acceptance is usually by signing the face of the bill with the word 'accepted' and the date. A bill without acceptance cannot be treated as an accepted liability of the drawee.

Q9: What is Noting of a bill of exchange.
Ans: Noting is the formal procedure carried out by a notary public to record particulars of a bill when it is dishonoured. It provides legal evidence of dishonour. The notary records:

• Date and amount of the bill
• Reasons for dishonour
• Amount of noting charges

Noting charges are payable by the holder initially, but they are recoverable from the drawee, as the drawee is responsible for the dishonour.

Q10: What is meant by renewal of a bill of exchange?
Ans: Renewal of a bill of exchange takes place when the drawee is unable to pay on the due date and requests an extension. If the drawer agrees, a new bill is drawn to replace the old one. Usually, the drawee pays interest for the extended period. The old bill is marked cancelled and the new bill is recorded in the books.

Q11: Give the performa of a Bills Receivable Book.
Ans: A typical Bills Receivable Book records all bills received and due for payment. Useful columns include:

• Date: date on which the bill is received.
• Bill number: unique identifier for each bill.
• Party name: name of the acceptor/ drawer.
• Amount: amount of the bill.
• Due date: maturity date (including days of grace).
• Status/Remarks: e.g., paid, dishonoured, noted.

Q12: Give the performa of a Bills Payable Book.
Ans:

Q13: What is the retirement of a bill of exchange?
Ans: Retirement of a bill of exchange occurs when the holder receives payment of the bill before its maturity at the request of the acceptor. The holder may allow a discount for early payment; this discount is called a rebate. The accounting entry for retirement is shown in the holder's books when payment is received early.

Q14: Give the meaning of rebate.
Ans: Rebate is the discount given by the holder to the drawee for payment of a bill before the due date. Accounting effects:

• For the holder (drawer): rebate is an expense and is debited in the drawer’s books.
• For the drawee (acceptor): rebate is a gain and is credited in the drawee’s books.

Entry in the books of drawer of the bill:

Q15: Give the performa of a Bill of Exchange.
Ans: Performa of a bill of exchange typically shows:

• Date: when the bill is drawn.
• Payee name: who is to receive the payment.
• Amount: the sum payable.
• Period or due date: when payment is to be made.
• Drawer’s signature: to validate the bill.

Long answers: 

Q1: A bill of exchange must contain an unconditional promise to pay. Do you agree with a statement?
Ans: Yes. Under 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 specified person or to the bearer. One essential characteristic is that the order must be unconditional; no clause or contingency should be attached that makes payment dependent on an external event. For example, conditions such as "payment only if profit exceeds a certain amount" are not permissible. The language must be clear and unambiguous.

Q2: Briefly explain the effects of dishonour and noting of a bill of exchange.
Ans:
When a bill is presented for payment and the acceptor fails to pay, the bill is dishonoured. Consequences:

• The acceptor's liability, which had been discharged on acceptance, is revived; the drawer or holder again has a claim against the acceptor.
• Accounting entries made earlier for the bill are reversed and the amount is re‑posted as a receivable from the drawee.
• If the holder obtains a noting from a notary public, the notary records the dishonour and charges a fee (noting charges). These charges are borne by the holder initially but are recoverable from the drawee.

Entry in the books of drawer (if noting charges are not paid):

If noting charges are paid by the holder, they are debited in the holder's books and later recovered from the drawee when the drawee pays. The notary notes the date and amount of the bill, reasons for dishonour and the amount of noting charges.

Effect of Noting charges in the books of holder of bill (if Noting charges are paid):

Q3: Explain briefly the procedure of calculating the date of maturity of a bill of exchange. Give an example.
Ans: Procedure to calculate the maturity date:

1. Ascertain whether the bill is payable after date, after sight or at sight.
2. For after date bills: start from the date of drawal, add the period specified and then add three days' grace.
3. For after sight bills: start from the date of acceptance, add the specified period and then add three days' grace.
4. For at sight bills: the bill is due on presentation; there is no grace period.

Example: A bill for one month drawn on 1 July is due on 1 August. Add three days' grace: payment becomes due on 4 August. Adjustment for holidays:

• Declared (gazetted) holidays: if maturity falls on a declared holiday, payment is due one day earlier.
• Undeclared (casual) holidays: if maturity falls on an emergency or undeclared holiday, payment is due one day later.

Examples:

• Bill drawn on 12 July with due date 12 August, plus 3 days' grace → 15 August. If 15 August is a national holiday, the bill is payable on 14 August.
• Bill drawn on 1 May payable after one month → due 1 June + 3 days' grace → 4 June. If 4 June is a Sunday, payment is made on 3 June.

Q4: Distinguish between bill of exchange and promissory note.
Ans:

Q5: Briefly explain the purpose and benefits of retiring a bill of exchange to the debtor and the creditor.
Ans: Retirement of a bill occurs when the holder (creditor) receives payment before maturity at the drawee's (debtor's) request. The holder may allow a discount (rebate) for early payment.

• Benefits to the holder (creditor): immediate cash inflow and reduced credit risk.
• Benefits to the acceptor (debtor): saves on interest or uncertainty by settling early and may obtain a small rebate (discount).

The acceptor receives a rebate for early payment; the rebate is recorded as a gain in the drawee’s books and as an expense in the holder’s books.

(Bill paid before the due date and rebate given for early payment)

Q6: Explain briefly the purpose and advantages of maintaining of a Bills Receivable Book.
Ans: The Bills Receivable Book is a special purpose book used to record bills accepted in favour of the business. It contains details such as acceptor's name, date of bill, due date, amount and remarks. Main benefits:

• Availability of information: all bills receivable details are in one place for quick reference.
• Reduced fraud risk: centralised recording lowers chances of misappropriation.
• Increased accountability: a single record keeper is responsible; errors can be detected and corrected easily.
• Time efficiency: recording in a subsidiary book is faster than making individual journal entries for routine bills.

Q7: Briefly explain the benefits of maintaining a Bills Payable Book and state how is its posting is done in the ledger?
Ans: A Bills Payable Book records all bills accepted by the business in favour of creditors. It contains the amount, date of bill, due date and the payee's name. Benefits:

• Availability of information: all bills payable details are recorded centrally.
• Minimisation of fraud: central record reduces misuse of obligations.
• Responsibility: keeping a separate book enhances accuracy and ease of verification.

Posting in the ledger: the totals of the Bills Payable Book are periodically posted to the credit side of the Bills Payable Account in the ledger. Individual bill details may also be posted to the respective creditor accounts as required.

Numerical questions:

Question 1: On Jan 01, 2016 Rao sold goods Rs 10,000 to Reddy. Half of the payment was made immediately and for the remaining half Rao drew a bill of exchange upon Reddy payable after 30 days. Reddy accepted the bill and returned it to Rao. On the due date Rao presented the bill to Reddy and received the payment Journalise the above transactions in the books Rao and prepare of Rao’s account in the books of Reddy.

Ans:

Books of Rao
Journal