Please refer to Bill of Exchange Class 11 Accountancy Exam Questions provided below. These questions and answers for Class 11 Accountancy have been designed based on the past trend of questions and important topics in your class 11 Accountancy books. You should go through all Class 11 Accountancy Important Questions provided by our teachers which will help you to get more marks in upcoming exams.
Class 11 Accountancy Exam Questions Bill of Exchange
Class 11 Accountancy er Science students should read and understand the important questions and answers provided below for Bill of Exchange which will help them to understand all important and difficult topics.
Meaning and Definition – A bill of exchange is a written acknowledgement of debt given by one person to another. It is drawn by the creditor on his debtor. It directs the debtor to pay a definite amount on demand or after the expiry of the period state therein. It is a legal document and considered as an evidence of debt.
Indian Negotiable Instruments Act, 1881, Section 5, defines the bills of exchange as, “an instrument in writing containing an unconditional order signed by the maker, directing a certain person to pay a certain sum of money only to, or the order of a certain person or the bearer of the instrument.”
A bill of exchange attains validity only when it is accepted by the debtor. Before its acceptance, the bill is called a draft.
The debtor accepts the bill by writing the word accepted across the face of the bill together with his signature.
Features of a Bill 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. The amount mentioned in the bill of exchange is payable either on demand or on the expiry of a fixed period of time.
i. It must be stamped as per the requirement of law.
Parties to a bill of exchange – There are three parties to a bill of exchange:
1. Drawer – The person who draws or writes the bill is called the drawer or maker. The drawer must be the seller or creditor to whom money owes.
2. Drawee – He is the person on whom the bill is drawn, he is the purchaser or debtor who is ordered by drawer to pay the amount. The drawee becomes the acceptor of the bill once it accepted by him.
3. Payee – He is the person to whom payment of bill is to be made on the maturity date.
The drawer and the payee can be the same person when the payment is made to the drawer. If the drawer direct the drawee to pay the amount to another party, then that party becomes the payee.
Promissory Note It is also one the negotiable instruments. It is a credit instrument which contains a promise made by the debtor to pay a certain sum of money for value received.
Negotiable Instruments Act 1881 defines a promissory note as, “an instrument in writing 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”.
Features of a promissory note
1. It must be in writing.
2. It must contain an unconditional promise to pay.
3. It must be signed by the maker. If it is made jointly by two or more persons, it must be signed by all the parties.
4. The maker must be a certain person.
5. The person to whom payment is to be made must also be certain.
6. The amount payable must be certain.
7. It should be properly stamped.
Parties to a Promissory Note
1. Maker or Drawer – The person who owes some amount to another person makes or draws the instrument. He is the debtor and is also called promissor.
2. Drawee or payee – The persons in whose favour the pro-note is drawn. He is the creditor and is also called the promisee. Generally, the drawee is also the payee, unless otherwise mentioned.
Advantages of Bills of Exchange
1. Framework for relationships – for enabling credit transactions.
2. Certainty of terms and conditions – It fixes a date for payment. So the creditor and debtor can plan their operations in advance.
3. Convenient means of credit – It can be discounted with a bank, so that the creditor gets the payment immediately without disturbing the debtor.
4. Conclusive proof – It is an authentic proof of ones indebtedness.
5. Easy transferability – It can be endorsed from one person to another, hence it is an easy way to send money from one place to another.
Drawing a Bill
When goods are sold on credit the seller of goods draws (writes) a bill on the buyer asking him to pay the amount on demand or on a stipulated date to himself or to another person named on the bill. This is called “drawing a bill” and the instrument is called “Draft”
Acceptance of a Bill
A bill of exchange will become a valid document only when it is accepted (signed) by the drawee (buyer) . This is done by writing the word accepted across the face of the bill together with his signature and date. This process is called acceptance of the bill and the drawee is known as acceptor. Now it becomes a valid document. As far as concerned to the drawer it is a bill receivable and to the acceptor it is a bill payable. A bill of exchange before its acceptance is called “Draft”.
Negotiability – Bills of exchange and Promissory Notes are negotiable instruments.
Negotiability means that the holder of the instrument can transfer the title to another person.
Negotiability is effected by mere delivery or by endorsement and delivery.
Maturity of Bill and Days of Grace
The date on which a bill of exchange becomes payable is the due date or date of maturity.
The date of maturity is calculated by adding three more days to the nominal due date. Three extra days over the nominal due date legally given to the acceptor for making payment is called “Days of Grace”.
If the due date falls on a public holiday, then the bill is payable on the preceding working day,i.e., if April 4th (date of maturity) is a public holiday then 3rd April will be the maturity date. If it is a declared holiday under Negotiable Instruments Act, 1881, by the Government of India, then the next working day immediately after the holiday will he the date of maturity. In this case it will be on 5th April.
Discounting a bill – If the holder of a bill wants cash immediately he can approach the bank and enchash the bill before the due date. The bank will deduct from face value of the bill a certain amount called discount (interest) and pays the balance to the holder of the bill. The bank gets the payment from the drawee on the due date.
Endorsement of Bill – A bill may be an order bill or a bearer bill. An order bill is payable to a certain person or order. In case of a bearer bill it is payable to the bearer of the instrument.
The bearer bill can be transferred by mere delivery. If it is an order bill it is transferable by endorsement and delivery.
Thus, endorsement is a written order on the back of the instrument by the payee or the holder,for transferring his right to another person. This is done by putting his signature on the back of the instrument with or without the name of the person to whom it is endorsed. The person who makes the endorsement is called Endorser and in whose favour the endorsement is made is called the Endorsee.
Accounting treatment – The accounting treatment for bill of exchange and promissory note are similar. A bill of exchange is a bill receivable for the drawer as he has to receive the amount. At the same time it becomes the bill payable to the acceptor as he has to pay the money.
In case of promissory note it becomes a bill receivable for the promissee and bill payable for the promissor.
The holder of a bill may exercise any one of the following option in terms of the instrument:
1. He can retain the bill till the date of maturity and obtain the payment from the acceptor.
2. He can get the bill discounted through the banker.
3. He can endorse the bill in favour of his creditor.
4. He may send it to the bank for collection on the due date.
When the bill is retained by the holder till the date of maturity In the books of drawer: In the books of Drawee/Acceptor
When the bill is discounted through the banker – If the drawer of the bill needs cash immediately, he can discount the bill with the bank. Discounting of the bill means encashing the bill with the banker on the security of the bill before maturity date. The banker will deduct a certain sum from the bill amount as discount and this process is known as discounting of bills.
The bank will present the bill the drawee on the due date and get the payment on due date.
Drawee makes no entry relating to discounting of a bill because he is not affected by this transaction in any way. He will make the payment of the bill to the bank on maturity date,because bank is the holder of the bill.
When the bill is endorsed in favour of a creditor
Accounting treatment in the books of drawer:
Drawee does not make any entry in this juncture, because he is not affected by this transaction. He will make the payment on due date to the holder.
In the books of endorsee:
When the bill is sent to bank for collection – The trader can send the bill to the bank for collection. The bank keeps the bill till maturity, realizes its payment and credits the amount in drawers account.
Dishonour of a Bill – When the acceptor fails to meet the bill on the date of maturity, the bill is said to have been dishonoured. In this case, the liability of the acceptor comes into existence and the entries made on the receipt of the bill should be reversed.
When the bill is dishonoured, the holder must inform the drawer as well as all the prior holders about the dihonour through a notice. This notice is known as “Notice of Dishonour”. Such a notice is necessary for the proceedings against them for recovering the amount of the bill.
Accounting treatment in case of dishonor of bill by non-payment In the books of drawer
Noting charges – When a bill is dishonoured for non-payment, the holder usually get it noted to establish the legality of dishonor. Noting is done by a Notary Public who is an advocate appointed by the government. Noting is the act of recording the fact of dishonor of a bill by a Notary Public. For providing this service, a fee is charged which is called Noting Charges.
The amount of noting charges paid by the holder will be recovered from the acceptor, by the drawer.
Journal entries in the books of the drawer
In the books of drawee/acceptor
Renewal of the Bill – When the acceptor of the bill finds it difficult to meet the bill on maturity date, he may request the drawer to cancel the old bill and draw a new bill. If he agrees with the acceptor, the old bill is cancelled and a new bill is drawn. Since, cancellation of the bill is mutually agreed, noting of the bill is not required.
The acceptor may have to pay interest for the delayed payment of the bill. It is paid in cash or may be included in the new bill. Sometimes, the original bill may be cancelled partly for a new bill and partly for cash.
Accounting treatment in the books of the drawer:
Retiring of Bill – Payment of the bill can be made before maturity by mutual understanding between the drawer and the acceptor. If the holder of the bill agrees to this, the bill is said to be retired. Making payment of the bill by the acceptor to the holder before maturity is called retiring of a bill.
In order to encourage early payment of the bill, a deduction may be granted by the holder of the bill and it is called Rebate”.
Bills Receivable and Bills Payable Book
When the number of transactions relating to bills is large, it is advisable to record them in separate subsidiary books. These special journals are known as Bills Receivable Book and Bills Payable Book.
Bills receivable book is used to record full particulars of bills receivable drawn by us and accepted by drawee and those endorsed to us by our debtors. A bills receivable is one on which money is to be received. A bills payable book is used for recording all bills accepted by us. A bill payable is one on which money is payable by us.