In business, credit sales and credit purchases are very common. To make credit transactions legally safer and easier to settle, businesses use negotiable instruments like promissory note and bill of exchange.
This chapter is both theoretical and practical. In theory, you must know definitions and differences; in numericals, you must understand basic entries related to acceptance, endorsement, discounting and dishonour.
So, BR is money to be received in future; BP is money to be paid in future.
Promissory Note is a written instrument containing an unconditional promise by the maker to pay a certain sum of money to a certain person or order or bearer.
Features:
Bill of Exchange is a written instrument containing an unconditional order by the drawer to the drawee to pay a certain sum of money to a certain person or to his order or to bearer.
Features:
Three main parties:
After acceptance, drawee becomes acceptor.
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In business, credit sales and credit purchases are very common. To make credit transactions legally safer and easier to settle, businesses use negotiable instruments like promissory note and bill of exchange.
This chapter is both theoretical and practical. In theory, you must know definitions and differences; in numericals, you must understand basic entries related to acceptance, endorsement, discounting and dishonour.
So, BR is money to be received in future; BP is money to be paid in future.
Promissory Note is a written instrument containing an unconditional promise by the maker to pay a certain sum of money to a certain person or order or bearer.
Features:
Bill of Exchange is a written instrument containing an unconditional order by the drawer to the drawee to pay a certain sum of money to a certain person or to his order or to bearer.
Features:
Three main parties:
After acceptance, drawee becomes acceptor.
Endorsement means signing on the back of the bill to transfer it to another person.
Types (basic):
Endorsement helps settle debts by transferring bills to creditors.
If the holder of a bill needs cash before maturity, he can get it discounted from the bank.
So, discounting converts a future receipt into immediate cash (less discount).
Dishonour means non-payment of bill on due date (or non-acceptance when presented for acceptance).
Causes:
Dishonour restores the relationship of debtor and creditor.
When a bill is dishonoured, holder can get it noted and protested by a Notary Public.
Noting charges are generally recoverable from the drawee/acceptor.
Credit sale → Bill drawn → Acceptance → Holder keeps / endorses / discounts → Maturity → Payment or dishonour
From this topic
Table:
Thus, both are negotiable instruments but differ in nature and parties.
Main parties and roles:
Mini table:
Hence, bill of exchange formalizes credit sale legally.
A bill of exchange generally passes through the following stages:
Flowchart:
Credit sale → Bill drawn → Acceptance → (Hold / Endorse / Discount) → Maturity → Payment OR Dishonour → Noting/Protest
Conclusion: A bill converts credit sale into a legally enforceable instrument and provides flexibility through endorsement and discounting.