Bills of Exchange & Promissory Notes - Key Difference Analysis

Bills of Exchange & Promissory Notes. Check Difference Between Bills of Exchange & Promissory Notes. Key Difference Between Promissory Notes & Bills of Exchange.

Meaning of Bills of exchange

A bill of exchange is:

an instrument in writing
containing an unconditional order
signed by the drawer
directing a certain person (drawee)
to pay a certain sum of money
to or to the order of a certain person or to the bearer of the instrument.

Meaning of Promissory Notes:

A Promissory note is:

an instrument is writing,
containing an unconditional promise
signed by the promisor
to pay a certain sum of money only to or to the order of a certain person (promise).

Parties to a bill of exchange:

There are three parties to a bill of exchange:

Drawer: Drawer is a person, who draws the bill. He is the creditor who has right to receive the money;
Drawee: Drawee (acceptor), is the person to whom the bill is addressed or on whom it is drawn and who accepts the bill. He is the debtor; who is liable to pay
Payee: Payee is the person who is to receive the payment under the bill. The drawer in many cases is also the payee.
Endorsee: He is the person in whose favour the bill is endorsed by the drawer. He is usually the creditor of the drawer.

Parties to a promissory note:

There are two parties to promissory note.

Maker/ promisor: He is the person, a debtor who makes the promissory note i.e. promises to pay.
Promisee: He is the person, a creditor in whose favour a promissory note is made. He is entitled to receive the money.

Effect of holidays while ascertaining due date:

In case of Bills of Exchange & Promissory Notes if the due date falls on a Public Holiday then the due date will be the preceding working day.
In case of Emergency Holidays, the subsequent working day will be taken as the due date.

Accounting for transactions of bills/ promissory notes:

For the purpose of accounting, it makes no difference whether it is a bill of exchange or promissory note.
It should be classified as Bills Receivable (BR) or Bills Payable (BP) for the party in whose books of account entry is being made.
For the purpose of accounting, bill is Bills Receivable for seller of goods and it is Bills payable for the purchaser of goods.

After receiving the bill, the seller (drawer) can deal with the bill in either of the following ways:

Retain it and present on the due date for payment or
Can discount the bill with bank & get the amount immediately, then the Bank will present the bill for payment on due date or
Can transfer/Endorse the bill in favour of some other party to whom he may be liable to pay, who will present the bill for payment on due date or
Can send it for collection through bank & will get the payment through Bank on due date.

The purchaser after accepting the bill is not concerned with the above treatments of bill i.e. it will not require any accounting entry in his books.

Must Read – Accounting for Rectification of Errors

Renewal of a bill:

On the due date, if acceptor is unable to pay the amount of bill, then he can approach the Drawer, for renewal of the bill.
Renewal means giving further time for the payment of bill.

Retirement of the bill:

Retirement of the bill means that payment is made before the due date.
Therefore, normally the receiver will allow some rebate/discount to the payer.
Entry for payment/ receipt will be recorded net of rebate.
Thus retirement is the opposite of renewal.

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Bills of Exchange & Promissory Notes – Key Difference Analysis