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Bills of Exchange and Promissory Notes Video Lecture | Crash Course for CA Foundation

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FAQs on Bills of Exchange and Promissory Notes Video Lecture - Crash Course for CA Foundation

1. What is a bill of exchange and why is it important in accounting?
Ans. A bill of exchange is a financial document that serves as an order written by one party (the drawer) directing another party (the drawee) to pay a specified sum of money to a third party (the payee) on a predetermined date. It is important in accounting as it helps in managing credit and facilitates transactions between parties by providing a formal agreement for payment, thus ensuring financial security and clarity in business dealings.
2. How does a bill of exchange differ from a promissory note?
Ans. A bill of exchange involves three parties: the drawer, the drawee, and the payee, whereas a promissory note involves only two parties: the maker (who promises to pay) and the payee (to whom the payment is made). Additionally, a bill of exchange is an order to pay, while a promissory note is a promise to pay.
3. What are the key features of a bill of exchange?
Ans. The key features of a bill of exchange include: (1) It must be in writing, (2) It must be signed by the drawer, (3) It must contain an unconditional order to pay a specific amount, (4) It must specify the payee, (5) It must indicate the due date for payment, and (6) It must be payable on demand or at a future date.
4. What are the accounting entries for recording a bill of exchange?
Ans. When a bill of exchange is drawn, the accounting entries typically involve: (1) Debiting the accounts receivable (or sales) account and crediting the bills receivable account, and (2) When the bill is paid, debiting the cash/bank account and crediting the bills receivable account. The entries may vary slightly based on whether the bill is accepted or dishonored.
5. What is the process for a bill of exchange to be accepted and honored?
Ans. The process of acceptance involves the drawee signing the bill of exchange, thus agreeing to pay the specified amount on the due date. Once accepted, the bill becomes a binding obligation. On the due date, the drawee must honor the bill by making the payment to the payee. If the drawee fails to pay, the bill is considered dishonored, and the payee may seek legal recourse to recover the amount.
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