Accounting for Bills of Exchange H.S. 1ST YEAR ACCOUNTANCY NOTES AHSEC ASSAM Higher Secondary UNIT-6

 

Unit – 6

Accounting for Bills of Exchange


Q1. Define negotiable instrument.

Ans. According to section 13(1) of the Negotiable Instrument Act, “ A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.”


Q2. Define promissory note. What are its features?

Ans. According to section 4 of the Negotiable Instrument Act, “ An instrument in writing 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.”

Following are the features of promissory note:

a. It must be in writing.

b. It must be signed by the maker.

c. The promissory note must be properly stamped.

d. The promise to pay must be expressed. A mere acknowledgement of debt without express promise to pay is not a promissory note.

e. The promise to pay must be unconditional.

f. It should not be payable to the bearer.

Q3. Define bill of exchange. What are its features?

Ans. According to section 5 of the Negotiable Instrument Act defines a bill of exchange as, “ an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a sum of money only to or to the order of a certain person or to the bearer of the instrument.”

Following are the features of bill of exchange:

a. A bill of exchange is an instrument in writing.

b. It must be signed by the maker or drawer.

c. It contains an unconditional order..

d. The order must be to pay money or money only.

e. The money must be payable to a definite person or to his order or to the bearer.

f. The amount must be paid within a stipulated time or on demand.

 

Q4. What are the parties to a bill of exchange?

Ans. There are three parties to a bill of exchange:

a. Drawer: The person who draws or writes the bill is called the drawer or maker. The drawer must be the seller or creditor to whom money is owing.

b. Drawee: The drawee is the person on whom the bill is drawn. He is the purchaser or debtor who is ordered by the drawer to pay the amount.

c. Payee: The person who has the right to receive the amount of bill is called the payee. The payee may be a third person or drawer himself.


Q5. What are the advantages of a bill of exchange?

Ans. Following are the advantages of a bill of exchange:

a. Evidence of debt: A bill of exchange is a legal evidence of debt under the Negotiable Instrument Act, the creditor being able to sue on the bill itself. It can be submitted in a court of law in case of need.

b. Endorsement: It is negotiable instrument transferable from one person to another in full or part settlement of debts.

c. Discounting facility: In case of need the bill may be discounted before the due date with the banker or bill broker. This increases the cash resources of the trader.

d. Certainty as to payments: The date of payments of the bill by a debtor to the creditor is made certain in the bill of exchange. The creditor knows exactly when to expect payment and the debtor knows when to make the payment.

e. Financial planning: The accommodation bills help the businessman to arrange money, through discounting of bills, at a cheaper rate to meet their short term requirements.


Q6. What are the distinction between bill of exchange and promissory note?

Ans.  Following are the distinction between bill of exchange and promissory note:

Bill of exchange

Promissory note

A. It contains an unconditional order to make the payment.

a. It contains an unconditional promise to make the payment.

b. There are three parties in the bills,i.e., drawer, drawee and payee.

b. There are only two parties i.e., the maker and the payee.

c. It is drawn by the creditor.

c. It is drawn by the debtor.

d. It has to be accepted by the drawee.

d. It requires no such acceptance.

e. The drawer and the payee may be one and the same person.

e. Maker cannot be the payee for the simple reason that same person cannot be both the promisor and the promise.

 

Q7. Write Short notes on:

a. HOLDER OF BILL: Holder means any person entitled in his own name to the possession of the negotiable instruments and to recover or receive the amount due thereon from the parties thereto. A holder must therefore, have the possession of the instrument and also the right to recover the money in his own name.

b. HOLDER IN DUE COURSE: A holder in due course means a holder who takes the instrument in good faith and for value before it is overdue and without any notice of defect in the title of the person who transferred to him.

c. ENDORSEMENT OF BILL: The term endorsement means the transfer of a bill of exchange or a promissory note by a drawer to his creditor in full or part settlement of a debt, provided that his creditor agrees to such an arrangement. This is called Endorsement of a bill.

Q8. What are the distinctions between Trade bill an Accommodation bill?

Ans. Following are the distinctions between Trade bill an Accommodation bill:

Trade Bill

Accommodation bill

a. Trade bills are drawn for trade purposes.

a. Accommodation bills are drawn and accepted for financial purposes.

b. These are drawn against proper consideration.

b. These are drawn in the absence of any consideration.

c. A debtor-creditor relationship exists between the drawer and drawee at the time of drawing a bill.

c. No debtor-creditor relationship exists between the drawer and drawee at the time of drawing the bill.

d. When these bills are discounted, the proceeds remain with the holder of the bill.

d. When these bills are discounted, the proceeds may be shared by the two parties.

e. If these bills are dishonoured, the amount may be recovered easily through the court.

e. If these bills are dishonoured, the amount of the bill cannot be recovered through the court.

 

Q9. What is dishonor of bill? State three reasons of dishonor of a bill.

Ans. When drawee fail to pay the payment on due date, this situation is called dishonor of a bill of exchange.

Reasons of dishonor of a bill:

a. When the drawee has died.

b. Where the drawee has become insolvent or an order of adjudication has been pass against him.

c. When a drawee becomes a lunatic and the banker has got notice of his insanity.

d. Where the drawee countermands payment.

Q10. Explain five differences between Cheque and Bills of Exchange.

Ans.  Following are the differences between Cheque and Bills of Exchange:

Cheque

Bills of Exchange

a. A cheque is always drawn on a bank or banker.

a. A bills of exchange can be drawn on any person including a banker.

b. A cheque does not require any acceptance.

b. It requires acceptance by the drawee or someone else on his behalf.

c. A cheque is payable on demand without any days of grace.

c. A bills of exchange may or may not be payable on demand.

d. A cheque does not require any stamp.

d. A bills of exchange must be stamped.

e. A cheque may be crossed.

e. A bills of exchange cannot be crossed.

f. No days of grace are allowed for a payment of a cheque.

f. 3 days of grace are allowed for payment of a bill unless it is payable on demand.

 

Q11. What is accommodation bill? Mention three purpose of drawing an accommodation bill.

Ans. Accommodation bills are those which are drawn and accepted without any consideration. The bill, which is drawn without any trading activities, with sole intention of raising funds required by discounting the bill is known as accommodation bill.

Following are the purpose of drawing accommodation bill:

a. Temporary finance can be raised by the parties.

b. Rate of interest charged by the banks is low as compared to others.

c. Both drawer and drawee are benefited by the accommodation bill.

Q12. Write three characteristics of a cheque?

Ans:  Following are the characteristics of a cheque:

a. A cheque is always drawn on a bank or banker.

b. A cheque does not require any acceptance.

c. A cheque is payable immediately on demand without any days of grace.

 

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