What are Bills of Exchange? | CMA Foundation

 What are Bills of Exchange? | CMA Foundation

When we thought of one of the subjects of CMA Foundation Fundamentals of Accounting, then the bill of exchange seems an important topic to understand. So here in this article we sprinkle on the: All these subtopics will help you in understanding the concept of CMA Foundation Bill of Change of Fundamentals of Accounting.

• Bill of exchange Meaning
• Bill of exchange definition
• Bill of exchange example
• Features of the bill of exchange
• Parties of the bill of exchange

A bill of exchange is a legally enforceable agreement between two parties to pay a specific sum of money to the other party on a specific date or upon demand. In other terms, it is a written negotiable document that contains an unconditional order from the creator to pay a set sum of money to a specific person or to the bearer of the instrument, as directed in the instrument. The bill of exchange might be paid immediately or after a set length of time.

 

The bill of exchange is issued by the seller/creditor to the buyer/debtor when the buyer/debtor owes money for goods or services. The most important part of a bill of exchange is that it needs to be accepted by the buyer/debtor. Only after acceptance, it becomes a valid bill of exchange. If the buyer/debtor doesn’t accept it, it doesn’t have any value. Once the buyer/debtor accepts the bill of exchange, it is levied on the buyer/debtor to pay off the amount due to the seller/creditor. If the buyer/debtor fails to pay the amount within a specific time period mentioned in the bill of exchange, the bill is dishonored.

 

The Bill of Exchange Definition:

It can be understood as an instrument in writing that carries an unconditional order signed by the maker directing a certain person to pay a certain sum of money only to or to the order of a certain person or to the holder of the instrument. When such an order is accepted in writing then it becomes a valid bill of exchange.

 

 Bill of Exchange Features

It must be in writing. No verbal note would consider as valid.

It must contain an order to pay a certain sum of money and not just a request.

The order should not have any condition.

It must be dated and should be properly stamped, duly signed by the maker (the creditor), and accepted by the drawee (the debtor).

The money must be payable to a definite person or to his order to the bearer of the instrument.

It must contain the date by which the money should be paid. A fixed date for the amount to be paid must be mentioned.

 

Bill of exchange Example 1:

Mr. M has issued a bill of exchange for Mr. N who has purchased goods of Rs.80,000 from Mr. M. The bill is issued on 01.03.2020. It is the same date when goods are purchased on credit. But Mr. N didn’t accept the bill on the same date. Rather, he accepted the bill on 06.03.2020.

 

Here, Mr. M is the creditor and Mr. N is the debtor. Bill was issued on 01.03.2020 but accepted on 06.03.2020. During these 5 days, we cannot be called the bill issued by Mr. M a valid bill of exchange. When Mr. N accepted the bill i.e. on 06.03.2020 from that date onward it becomes a valid bill of exchange

Term of a bill or period of a bill:

It is the time period between the date on which a bill is drawn and the date on which it is payable.

Term of a bill or period of a bill:

It is the time period between the date on which a bill is drawn and the date on which it is payable.

Days of Grace:

These are the 3 extra days added to the period of the bill.

Date of maturity of the bill:

The date which comes after adding three days of grace to the due date of the bill is the date of maturity of the bill.

 We hope you found the information presented in this post to be helpful. Wishing you the best of success with your next examinations! Continue reading about this topic  Bills of Exchange -CMA Foundation.

Must Read: Bank Reconciliation Statement (BRS)

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