CBSE Class 11 Accountancy: Bills of Exchange NCERT Solutions

Solution: Two types of commonly used negotiable instruments are:

1. Cheques
2. Bills of Exchange

These instruments facilitate smooth financial transactions by providing a legally recognized way to transfer money or promise payment.

Solution: Here are two key points of distinction between a Bill of Exchange and a Promissory Note:

1. Parties Involved: A bill of exchange involves three parties: the drawer (who writes the bill), the drawee (who accepts and pays), and the payee (who receives the payment). A promissory note, however, involves only two parties: the maker (who promises to pay) and the payee (who receives the payment).
2. Nature of Instrument: A bill of exchange is an unconditional order written by the drawer, directing the drawee to pay a specific sum of money to the payee. In contrast, a promissory note is an unconditional promise made by the maker to pay a specific sum of money to the payee.

Solution: The essential features of a bill of exchange are:

1. Written Document: A bill of exchange must be in writing, either handwritten or typed.
2. Unconditional Order: It must contain an unconditional order to pay money. The order cannot be conditional upon any event or circumstance.
3. Certainty of Amount and Payment: The amount to be paid and the date of payment must be certain and clearly stated.
4. Signed by Drawer: The bill must be signed by the person who makes it (the drawer).
5. Acceptance by Drawee: The drawee must accept the bill by signing it, signifying their agreement to pay.
6. Payable on Demand or Fixed Period: The amount can be payable either immediately upon presentation (on demand) or after a specified period.
7. Payable to a Certain Person or Bearer: The bill must be payable to a specific person, their order, or the bearer of the instrument.
8. Legal Stamping: The bill must be stamped according to the legal requirements of the country where it is made.

Any four of these features are considered essential for a valid bill of exchange.

Solution: There are three distinct parties involved in a bill of exchange:

1. Drawer: This is the person who creates and signs the bill of exchange. Typically, the drawer is a creditor who has granted credit to the drawee and draws the bill to receive payment. The drawer is entitled to receive the money specified in the bill.
2. Drawee: This is the person on whom the bill of exchange is drawn. The drawee is usually a debtor who owes money to the drawer. The drawee must accept the bill (by signing it) to become liable for its payment. Once accepted, the drawee is often referred to as the acceptor.
3. Payee: This is the person to whom the payment is to be made according to the bill of exchange. Often, the drawer and the payee are the same person, but the bill can also be made payable to a third party.

Solution: The maturity of a bill of exchange refers to the date on which the bill becomes legally due for payment. This date is calculated by adding three days of grace to the specified due date of the bill. These three days are a customary allowance and are added regardless of whether they are business days or holidays.

It is important to note the following:

• Bills Payable on Demand/Sight: Days of grace are NOT applicable to bills that are payable on demand or at sight. Their maturity date is the date they are presented.
• Calculation Period: If the bill's period is stated in days, the maturity is calculated in calendar days. If stated in months, it is calculated in calendar months.
• Public Holidays: If the calculated maturity date falls on a public holiday (a day declared a holiday by the government), the bill becomes legally due on the preceding business day.

Therefore, the date of maturity is the final date by which the payment must be made to avoid dishonour.

Solution: The dishonour of a bill of exchange occurs when the drawee fails to make the payment on the bill's maturity date, or when the drawee refuses to accept the bill when it is presented for acceptance. This signifies that the bill has not been honoured as intended.

When a bill is dishonoured, the liability of the acceptor (drawee) is restored, and the drawer regains the right to sue for payment. The accounting entries to record the dishonour are as follows:

In the books of the Drawer:

The drawer debits the Drawee's account and credits the Bills Receivable account. This entry reverses the original entry when the bill was received and records the debt owed by the drawee.

$$Drawee\text{'}s\; A/c\; \dots \dots \dots \; Dr.$$

$$To\; Bills\; Receivable\; A/c$$

(Being bill dishonoured)

In the books of the Drawee:

The drawee debits the Bills Payable account and credits the Drawer's account. This entry reverses the acceptance entry and acknowledges the debt to the drawer.

$$Bills\; Payable\; A/c\; \dots \dots \dots \; Dr.$$

$$To\; Drawer\text{'}s\; A/c$$

(Being bill dishonoured)

Solution: There are two parties involved in a promissory note:

1. Maker: This is the person who creates the promissory note and makes a definite promise to pay a specified sum of money. The maker is essentially the debtor.
2. Payee: This is the person to whom the payment is promised and who will receive the money. The payee is the creditor.