AHSEC - Class 11: Accounting for Bills of Exchange Transactions for Upcoming Exam | Class 11 Accountancy Notes

[Class 11 Accountancy Notes, AHSEC, CBSE, Chapter Wise Notes, Accounting for Bills of Exchange Transactions]

Class 11 Accountancy Notes
AHSEC Class 11 Notes
Unit - 6: Accounting For Bills of Exchange Transactions

Q.1. What is bills of exchange? Mention its features. Name the three parties of bills of exchange. 2015, 2016, 2018, 2019

Ans: Bills of Exchange: 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." A bill of exchange is also called a draft.

Features of bills of exchange:

a)      A bill of exchange must be in writing.

b)      It is an order to make payment.

c)       The order to make payment is unconditional.

d)      The maker of the bill of exchange must sign it.

e)      The payment to be made must be certain.

f)       The date on which payment is made must also be certain.

g)      The bill of exchange must be payable to a certain person.

h)      It must be stamped as per the requirement of law.

There are three parties to a bill of exchange namely:

a)      Drawer

b)      Drawee and

c)       Payee.

Drawer is the maker of the bill of exchange. A seller/creditor that is entitled to receive money from the debtor can draw a bill of exchange upon the buyer/debtor.

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.

A 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.

Q.2. What is dishonour of bill? State three reasons of dishonour of a bill.                      2017, 2019

Ans: When drawee fail to pay the payee on due date, this situation is called dishonour of a bills of exchange.

Reasons of dishonour of a bill:

a)      When the drawee has died.

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

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

d)      Where the drawee countermands payment.

Q.3. Mention four advantages of bills of exchange.

Ans: Advantages of bill of exchange

a)      Framework for relationship: 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.

b)      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.

c)       Convenient means of credit: A bill of exchange enables the buyer to buy the goods on credit and pay after the period of credit.

d)      Conclusive proof: The bill of exchange is a legal evidence of a credit transaction implying thereby that during the course of trade buyer has obtained credit from the seller of the goods; therefore, he is liable to pay to the seller.

e)      Easy transferability: A debt can be settled by transferring a bill of exchange through endorsement and delivery.

Q.4. Draft a specimen copy of bills of exchange.

Specimen of bill of exchange

Q.5. Write a brief note on calculation of legal due date in case of bills of exchange. (for knowledge only)

Ans: Legal Due Date of a bill of exchange: The Legal Due Date of Bill of Exchange is that when the amount of the bill is payable by the drawee. The calculation of due date of a bill of exchange is dependent on the nature of the bill.

A bill of exchange is of two types:

(a) A bill payable on demand or at sight (Presentation) e.g., Cheque,

(b) Term bill.     

A term bill may be payable after:

(a) A certain period after date, or

(b) A certain period after sight.

A cheque which is drawn on a banker is payable of demand. The banker is liable to pay as and when a cheque is presented to him for payment provided there is sufficient balance in drawer’s account and cheque is properly drawn.

In case of a Bill Payable after date, the legal due date is calculated from the date of drawing of the bill.

For Example, on 1.1.2009 Mr. A draws a bill on Mr.B for Rs. 20,000 for 3 months payable after date. In this case the due date will be:

                Date of Drawing of Bill                                                                                   1.1.2009              

                Period (Months)                                                                                                   3        .             

                Maturity Date                                                                                                    1.4.2009

                Days of Grace (3 days Added in case of every B/E)                                         3           .

                Due Date                                                                                                             4.4.2009

 

In case of a Bill Payable after sight, the legal due date is calculated from the date of acceptance of the bill. For Example, on 1.1.2009 Mr. A draws a bill on Mr.B for Rs. 20,000 for 3 months payable after sight. The bill was accepted on 7.1.2009. In this case the due date will be:

                Date of acceptance of Bill                                                                             7.1.2009              

                Period (Months)                                                                                                 3        .             

                Maturity Date                                                                                                    7.4.2009

                Days of Grace (3 days Added in case of every B/E)                                         3           .

                Due Date                                                                                                         10.4.2009

(If no information is given about the type of the bill, due date is calculated assuming bill is payable after date)

If the due date falls on a day which is a public holiday, the due date the due date shall be the preceding business day and if the preceding day is a public holiday, if will due on the day preceding the previous day.

For Example, if the due date of a bill is 26th January, it falls due on 25th January, if 25th January is also a public holiday (Sunday), it will fall due on 24th January.

In the due date falls on a day which is a Sudden holiday, the due date the due date shall be the following business day. For Example, on 1.1.2009 Mr. A draws a bill on Mr.B for Rs. 20,000 for 3 months payable after sight. The bill was accepted on 7.1.2009. 10th April was a sudden holiday. In this case the due date will be 11th April.

If the period of bill is stated in days, the calculation of the due date will be in days which include the date of payment but exclude the date of transaction. For example, on 1.8.2009 Mr. A draws a bill on Mr.B for Rs. 20,000 for 30 days payable after sight. The date of acceptance is 8.8.2009. In this case the due date will be:

                Date of acceptance of Bill                                                                             8.8.2009              

                Period (days)                                                                                                     30         .             

                Maturity Date    (from 9.8.2009)                                                                 7.9.2009

                Days of Grace (3 days Added in case of every B/E)                            3          .

                Due Date                                                                                                             10.9.2009

If the period of the bill is given in months, the calculation will be made in terms of month, ignoring the number the number of days in a month (as calculated above)

                If the bill is payable on demand, no days of grace is allowed.

Q.6. What is Promissory note? Mention its two parties? What are its essentials? Draft a specimen of a promissory note. 2+1+6+5

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Ans: According to the Section 4 of the Negotiable Instrument Act, 1881 “A Promissory Note is an instrument in writing not being a bank note or a current note containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or do the order of, a certain person, or to the bearer of the instrument.”

There are two parties to a Promissory Note:

a) Maker: It is the debtor, who promises to make the payment. It must be signed by its maker.

b) Payee: The person who receives the payment of the promissory note is the payee.

Features of Promissory note are:

a)      A promissory note is an instrument in writing.

b)      It contains an unconditional promise to pay money and money only.

c)       It must be signed by the maker. Unsigned note will be invalid.

d)      It must be stamped as per the requirement of law.

e)      The payment to be made must be certain.

f)       The date on which payment is made must also be certain.

Specimen of Promissory Note

Q.7. Mention five differences between bills of exchange and promissory note.    2015, 2016, 2018, 2019

Ans: Difference between bill of exchange and Promissory Note

Basis

Bill of Exchange

Promissory Note

Drawer

It is drawn by the creditor

It is drawn by the debtor.

Parties

There can be three parties to it, viz. the drawer, the Drawee and the payee.

There are only two parties to it, viz. the drawer and the payee.

Order or Promise

It contains an unconditional order to pay.

It contains an unconditional promise to pay.

Acceptance

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

It does not require any acceptance.

Payee

Drawer and payee can be the same party

Maker cannot be the payee of it.

Set

A bill of exchange can be drawn in sets.

Promissory note cannot be drawn in sets.

Notice

In case of its dishonour due notice of dishonour is to be given by the holder to the drawer.

No notice needs to be given in case of its dishonour.

Q.8. Distinguish between Trade Bill and Accommodation bill.

Ans: Difference between Trade Bill and Accommodation Bill

Basis

Trade Bill

Accommodation Bill

Purpose

There are drawn for trade purposes.

These are drawn and accepted for financial assistance.

Consideration

These are drawn against proper consideration.

These are drawn in the absence of any consideration.

Proof

These bills are proof of debt.

These bills are not a proof of debt.

Legal action

For obtaining the debt from Drawee, Drawee can resort to legal action.

Legal action cannot be resorted the recovery of amount against these bills by the immediate parties.

Q.9. Distinguish between cheque and bills of exchange.                              2019

Ans: Difference between cheque and bill of exchange 

Basis

Cheque

Bills of Exchange

Drawee

A cheque is always drawn on a bank or banker.

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

 

Acceptance

A cheque does not require any acceptance.

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

Payment

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

A bill of exchange may or may not be payable on demand.

Stamp

A cheque does not require any stamp.

A bill of exchange must be stamped.

Payee

A cheque may be issued payable to the bearer.

A bill can never be issued payable to bearer.

Days of grace

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

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

Crossing

A cheque may be crossed.

A bill of exchange cannot be crossed.

Q.10. Distinguish between discounting and retiring of bill of exchange

Ans: Difference between discounting and retiring of bills of exchange

Discounting

Retiring

a)      It is the process of selling the bill to the bank or anyone else before the due date.

b)      The reduction made by the bank is called discount.

c)       Discount is a loss to the person who discounts the bill and a gain to the bank.

a)   It is the process of paying the amount of the bill before due date.

b)   The concession allowed to the acceptor is called rebate.

c)    Rebate is a loss to the payee and a gain to the acceptor.

Q.11. Define Cheque. Name its parties. Mention its features and advantages.                  2016

Ans: According to Section 6 of the Negotiable Instrument Act, 1881, “A Cheque is a bill of exchange, drawn upon a specified banker and payable on demand.”  (2014)

Specimen of blank cheque

A cheque has three parties: The Drawer, The Drawee and The payee.

The features (Contents) of a cheque are:

a)      A cheque is payable on demand either to the bearer or to the order.

b)      A cheque has three parties, viz the drawer, the drawee and the payee.

c)       A cheque is always drawn on a specified banker who is to pay the sum involved on its presentation.

d)      The signature on the cheque must tally with the specimen signature kept in the bank.

e)      A cheque must be dated and is valid for period of three months from the date of the cheque.

Q.12. How many types of cheque are there in the modern business world? Explain each.   2017

Ans: Various types of cheques:

1) Open cheque which is divided into two parts: Bearer and order cheque.

2) Crossed cheque

An open cheque is one which is presented and paid by the banker over the banks counter in a direct way. An open cheque may be two types:  Bearer cheque and Order cheque.

Bearer cheque is one which is payable to any payee who present it for payment over the counter of the bank.

Order cheque is a cheque which is payable to a certain person named in the cheque by the drawer or to the order of the payee.

2) Crossed cheques: A cheque is said to be crossed when two parallel transverse line with or without any words are drawn on the left hand corner of the cheque. The negotiability of a cheque doesn’t affect for crossing. Crossing of a cheque refers to the instruction to the banker relating to the payment of the cheque. A crossing is the direction to the paying banker that the cheque should be paid only to a banker.

Q.13. What do you mean by dishonour of a cheque? Under what circumstances a bank may dishonour a cheque.

Ans: Dishonour of cheques: Cheque is ordinarily paid by the drawee bank if it is in perfect order. But sometimes a cheque is not paid. When a cheque is paid by the drawee bank, it is said to be honoured. When it is not paid it is said to be dishonoured.

In the Following cases the bank may dishonour a cheque:                           2016

e)      When the customer has died and the bank has notice of his death.

f)       Where the customer has become insolvent or an order of adjudication has been passed against him.

g)      When a customer becomes a lunatic and the banker has got notice of his insanity.

h)      Where the drawer countermands payment.

i)        When the customer has not got sufficient funds with the bank and there is no overdraft arrangement.

j)        Where there are material alterations or signatures of the drawer or endorses are irregular.

k)      When the drawer has closed his account prior to the presentation of cheque.

l)        When a cheque is mutilated.

 Q.14. Difference between Promissory Note and Cheque:                            2015, 2018

Basis

Promissory Note

Cheque

Nature

It is an unconditional promise by the maker to pay the money.

It is an unconditional order to the bank to pay certain sum of money.

Days of Grace

Three days of grace are allowed for payment.

No days of grace are allowed for payment.

Crossing

A promissory note cannot be crossed.

A cheque can be crossed.

Stamping

A promissory note must be stamped.

A cheque does not require a stamp.

Drawer

The maker of a promissory note is one who pays the money.

The drawer of a cheque is one who withdraws the money from the drawee.

Payee

The maker of promissory note cannot be payee.

The drawer of a cheque can be the payee.

Q.15. What do you mean by endorsement of bill? Mention its various types.

Ans: Endorsement of Bill: Endorsement is the act of signing a cheque for the purpose of transferring it to somebody else. Under Negotiable Instruments Act it means the writing of one’s name on the back of the instrument or any paper attached to it with the intention of transferring the rights therein.

Endorsements are of various kinds, the most important being as follow:

Blank or general endorsement: A blank or general endorsement is one in which the endorser simply puts down his signature. The name of the endorsee, it should be noticed is not put down. The effect of such an endorsement is to make the cheque a bearer cheque.

Special endorsement: Special or full endorsement is that which contains not only the name of the endorser but also the name of the endorsee. The effect of special endorsement is that the endorsee must endorse it again if he wants to transfer the property in the cheque to somebody else.

Restrictive endorsement: When an endorsement restricts the negotiability or transferability of proprietorship of a cheque, it is known as restrictive endorsement.

Partial endorsement: A partial endorsement is one which means to transfer the cheque only for a part of its value. For instance a cheque for Rs. 500 may be endorsed only for Rs.300. Legally such an endorsement is invalid.