Chapter 8-Bills of Exchange

(c) Trade and commerce

Explanation- Instruments of credit are often used to facilitate trade and commerce. In India, hundis have been in use from time immemorial.

(a) Credit

Explanation- The instruments of credit are Bills of Exchange and Promissory Notes. They facilitates the credit.

(b) Bills of exchange

Explanation- A Bills of Exchange is 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.

(d) 5

Explanation- Bill of Exchange is defined under the Section 5 of the Negotiable Instrument Act.

(a) 1881

Explanation- According to the said section a Bill of Exchange is an instrument that orders another person to pay the stated sum of money to somebody and is accepted by that person.

(d) Drawee

Explanation- It must contain an order to a person called ‘Drawee’ to pay a certain sum of money.

(b) Drawer

Explanation- Drawer makes aBill and it should be signed by him.

(a) Three

Explanation- A Bill of Exchange has three parties namely:

1. Drawer

2. Drawee

3. Payee

(c) Payee

Explanation- The party to whom the amount has to be paid is known as the payee and the person who makes the payment is payor.

(d) Feature of bill of exchange

Explanation- The order must be unconditional is one of the feature of bill of exchange.

(a) Payee

Explanation- The drawer or payee may be the same person if the drawer keeps the bill with him.

(c) Two types

Explanation- From the accounting point of view, Bills of Exchange are of two types- Trade Bill and Accommodation Bill.

(b) Accommodation bill

Explanation- Where a Bill of Exchange is drawn and accepted for mutual help, it is called an ‘Accommodation Bill.’ It can be drawn among the friends.

Q.14 If the debit side total is greater, it is called a

(a) Debit Balance

Explanation- If the debit side total is greater, it is called a Debit Balance.

(d) Trade Bill

Explanation- Where a Bill of Exchange is drawn and accepted for a genuine trade transaction, it is called a ‘Trade Bill.’ Otherwise it is an accommodation bill.

(b) Advantage of bill of exchange

Explanation- With the help of these, goods can be sold and purchased on credit without difficulty since Bills of Exchange contain an unconditional promise to pay.

(c) Bill of exchange

Explanation- Bill of Exchange can be discounted at a bank so that the firm allowing the credit can receive the amount immediately without the debtor having to pay before time.

(a) Bill of exchange

Explanation- The date of payment is certain firms which have to pay and receive the amount can thus plan their cash operations.

(c) Promissory note

Explanation- ‘‘ A promissory note is an instrument in writing (not being a bank note or 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.’’

(d) Bill of exchange

Explanation- A Bill of Exchange is a written acknowledgement of debt duly signed and stamped. It is a legal document under the Negotiable Instrument Act, 1881.

(b) Two

Explanation- In case of a Promissory Note, there are only two parties. They are:

1. Maker

2. Payee

(a) Bill of exchange

Explanation- In foreign trade, Bills of Exchange are of great assistance in enabling firms to make and receive payment. Thus, there is no risk of carrying the currency to different places.

(a) Maker

Explanation- Maker is a person who makes the note and promises to pay the amount.

(d) Payee

Explanation- Payee is a person who is to receive the amount.

(b) Promissory note

Explanation- The maker or promisor must sign the note is one of the feature of Promissory Note.

(a) Fourth

Explanation- Promissory Note is defined under the Section 4 of the Negotiable Instrument Act, 1881.

(c) Bills of exchange

Explanation- The creditor is the drawer in bill of exchange. He draws the bill and sent it to the drawee.

(b) Three

Explanation- In case of foreign bills, three copies are made but otherwise only one copy is prepared.

(a) Promissory note

Explanation- Promissory note contains a promise to pay. Bills of exchange contain order to pay.

(d) Promissory note

Explanation- In promissory note, the maker has the primary liability to pay but when we talk about bill of exchange then in this the liability of the drawer arises only if the acceptor does not pay.

(d) Holder in due course

Explanation- A person who acquires a bill of exchange (including a cheque or a Promissory Note) in good faith, for value and before the date of maturity is called a holder in due course.

(c) One

Explanation- Only one copy is prepared whether it is a foreign or a local Promissory Note.

(b) Term

Explanation- The period intervening between the date on which a bill is drawn and that on which it becomes due is calledthe term, tenor or tenure of the bill.

(a) On Demand

Explanation- Bills which are drawn ‘On Demand’ and ‘At Sight’ are payable on presentation to the drawee or acceptor.

(b) After Date

Explanation- In case of an after date bill the period is counted from the date of drawing of the bill.

(d) After Sight

Explanation- In case of an after sight bill the validity period is counted from the date of acceptance of the bill.

(c) Due Date

Explanation- The date on which the payment of the bill is due is called the date of maturity or the due date.

(d) Three

Explanation- Date of maturity is calculated by adding three days of grace to the actual due date.

(b) Days of grace

Explanation- It is a practice to add three extra days to the period of the bill. These extra days are called days of grace.

(c) On Demand

Explanation- Grace is not allowed when the bill is payable ‘on demand’, or ‘at sight.’

(d) Days

Explanation- When the period of the bill is stated in days, the calculation of the maturity date will be in days (which includes the date of payment but excludes the date of transaction).

(b) Negotiation

Explanation- The holder in due course gets a good title and this is of good value in the transfer of Bills of Exchange from one person to another. Such a transfer is called negotiation.

(b) Endorsement

Explanation- The holder in due course gets a good title and this is of good value in the transfer of Bills of Exchange from one person to another. Such a transfer is called negotiation or endorsement.

(d) Sales A/c

Explanation- For sale of goods on credit:

Customer’s (Debtor’s) Personal A/c ...Dr.

To Sales A/c

(c) Bills Receivable A/c

Explanation- On Drawing, accepting and receipt of the bill-

Bills Receivable A/c .......Dr.

To Customer’s Personal A/c

(c) Purchases A/c

Explanation- For purchase of goods on credit:

Purchases A/c .....Dr.

To Supplier’s (Creditor’s) Personal A/c

(d) Assets - Capital

Explanation- Liabilities are debts, they are amounts owed to creditors. Thus, the claims who are not owners are called ‘‘Liabilities.’’

(d) Bills Payable A/c

Explanation- When acceptance on bill is given:

Supplier’s (Creditor’s) A/c ....Dr.

To Bills Payable A/c

(b) Assets - Liabilities

Explanation- Capital is also known as Owner’s Equity, proprietorship and net worth. Owner’s Equity means owner’s claim against the assets of the business. It will always be equal to assets less liabilities.

(c) Assets

Explanation- The equation says that the assets of a business are always equal to the claims of owners and the outsiders.

(d) Cash A/c

Explanation- On payment of the bill at maturity. The following journal entry will be passed-

Bills Payable A/c ......Dr.

To Cash (or Bank) A/c

(d) Bills Payable

Explanation- A bill given to a creditor is called Bills Payable because the debtor commits to pay by giving a bill to the creditor.

(c) Bills receivable a/c

Explanation- When the bill is retained till the date of maturity, the drawer receives the money from the drawer. The entry is-

Cash or bank A/c .......Dr.

To Bills Receivable A/c

(With the amount of bill)

(b) Balancing of account

Explanation- For example, if total of credit side is more than the debit side of any account the difference of amount will be recorded as Balance c/d on debit side and vice versa on the credit side.

(d) Balance brought down

Explanation- Assets will show a debit balance. Such accounts will be opened and the relevant amounts written on the debit side as ‘‘To Balance brought down.’’

(a) Balance carried down

Explanation- It is normally treated as a closing entry.

(b) Endorsed

Explanation- The term endorsement means the transfer of a bill of exchange or Promissory Note to other person.

(b) Creditor A/c

Explanation- The journal entry will be-

Creditor or Endorsee A/c ......Dr.

To Bills Receivable A/c

(Being the Bills Receivable endorsed)

(d) Stock and prepaid expenses

Explanation- Current assets are those assets which can be converted into cash within a period of one year.

(d) Bills Receivable A/c

Explanation- From the endorsee’s viewpoint, the transaction is: Received a bill receivable from the endorser. The journal entry is:

Bills Receivable A/c ....Dr.

To Endorser

(b) Bills Receivable A/c

Explanation- The Journal Entry is:

Cash or Bank A/c .....Dr.

To Bills Receivable A/c

(a) Holder

Explanation- Holder is the person entitled to possess the instrument and to receive the due amount.

(d) Discounting

Explanation- Discounting means withdrawing the bill amount from the bank before the instrument becomes due for payment. The bank charges, Discounting Charges for paying before the due date.

(d) Dishonour

Explanation- Dishonour means a situation when the instrument is not paid.

(b) Retirement of Bill

Explanation- Retirement of Bill means that the drawee pays the bill before it becomes due for payment. Drawee gets some discount in such a case.

(c) Renewal of Bill

Explanation- Renewal of Bill means replacement of the instrument with a new instrument with the consent of the holder. It is done when the drawee expresses his inability to make the payment on due date.

(b) Negotiation

Explanation- Negotiation means transfer of the instrument in the name of another person by which the new person becomes entitled for payment.

(a) Drawee

Explanation- A Bill of Exchange is renewed generally at the request of the Drawee because he expresses his inability to make the payment on the due date.

(b) Purchaser

Explanation- A Promissory Note is made by the Purchaser. He promises to pay the seller.

(d) Liability

Explanation- For example, December’s wages totalling Rs. 20,000 are payable on 31^st December. The enterprise will debit Wages Account and credit Wages Outstanding Account as it is a defined liability.

(a) Bad debts

Explanation- When a debtor becomes bankrupt, i.e. unable to pay one’s debts, the entire amount due from him is not realised. The unrealised amount is a loss to business, the same is called Bad Debts.

(d) Debtors

Explanation- Sometime insolvent debtor whose account had been earlier written off as ‘Bad Debts’ pays some amount.The amount so received is a gain to the business and is known as Bad Debts Recovered.

(d) Creditor

Explanation- Bills are drawn by Creditor. He sells goods on credit and is a Creditor in the books of drawee.

(b) Debtor

Explanation- A Promissory Note is given by a debtor to a creditor.

(a) Invalid

Explanation- A bill becomes invalid when it is dishonoured.

(d) Good debts

Explanation- Good debtors are those who pay to the trader in the stipulated period or shall be recovered for sure.

(c) Drawer

Explanation- The person which makes the Bill of Exchange is known as Drawer.

(b) Drawee

Explanation- The person who accepts the Bill is known as Drawee.

(d) Debt

Explanation- A Bill of Exchange is an acknowledgement of debt. It confirms that the amount is due.

(a) Drawee

Explanation- Noting charges are ultimately borne by the drawee only as he is responsible for the dishonour of the bill.

(c) Drawee.

Explanation- A Bill of Exchange requires acceptance by the drawee. Drawer sent it to the drawee for acceptance.

(d) Next working day

Explanation- If the date of maturity of a bill is on holiday then the bill will mature on preceding working day.

(b) Notary Public

Explanation- If the bill is dishonoured, the fact that it is dishonoured and its causes must be established. To establish the fact of a proper presentation and dishonour the bill is generally noted. It is given to a person called the Notary Public.

(a) Government

Explanation- Noting Public is appointed by the Government.

(b) Noting

Explanation- The Notary Public presents the bill for payment if payment is received it is given to the holder otherwise the fact of dishonour is noted on the face of the bill. This act is called Noting.

(c) Drawee’s A/c

Explanation- When the bill is dishonoured drawer always debits the account of drawee.

(d) Bank A/c

Explanation- The Journal Entry will be:

Drawee’s A/c ....Dr.

To Bank A/c

(Being passed with the amount of the bill and noting charges)

(b) Endorsee’s A/c

Explanation- The Journal entry in this case will be

Drawee’s A/c ......Dr.

To Endorsee’s A/c

(c) Drawee’s A/c

Explanation- The Journal entry in this case is-

Drawee’s A/c ..........Dr.

To Bills Sent for Collection A/c

To Bank A/c

(With the amount of bill and noting charges)

(a) Insolvent

Explanation- Insolvency of a person means that he is unable to meet his liabilities. This means that the bill accepted by him will be dishonoured.