[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
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.
|
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.