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written by | April 18, 2022

Understanding the Role and Significance of a Bill of Exchange

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A bill of exchange is a formal document that details the timeframe for a certain payment that has to be made. It is globally known as an international bill of exchange. It states the payment obligation of one commercial enterprise or individual which has been mutually agreed upon by itself and the supplier. This document states the exact date the payment terms need to be fulfilled. This formal document is duly signed by the concerned authority, i.e. the provider of the goods, demanding a commitment from the recipient or beneficiary. In other words, it involves the association of 3 distinct personnel, namely, the person who actually states the details in the bill (the drawer) and authorises the recipient to fulfil the payment (the drawee), and the payee, i.e. the enterprise or individual to whom the payment has to be made. A bill of exchange authorises one individual or business to ask the recipients on the other side to fulfil the sum of payment demanded in the bill.

Did you know?

The earliest format of a bill of exchange was introduced by the Arabs, who used it in the 8th century AD.

Meaning of Bill of Exchange and Its Various Features

A bill of exchange is an authoritative, binding and legal written document that demands the receiving party to make the payment to the concerned payee. If the recipient defaults or errs on payment, the person who makes the bill can sue the drawee. It provides a time frame for the payment to be made by deciding on a date in the future.

Important Features of a Bill of Exchange

  • The document has to be in writing.
  • All details of the concerned individuals like the one who makes the bill, the recipient and the one who has to make the payment are clearly stated in the bill.
  • The bill has to be made by one person or enterprise to another person or enterprise.
  • The bill has to mention the tentative date by which the payment will have to be made.
  • The bill must also clearly state the exact sum of money required to be made by the receiver.

Also Read: What is Bills Receivable Report in Tally?

What Are the Various Types of Bill of Exchange?

There are several types of this bill. These are as follows:

  1. Documentary bill of exchange – Such a bill is validated with specific documents that affirm the trade transaction between the supplier and the beneficiary. This bill is again categorised into two, i.e.:
    1. Documents against payment - The payment must be made to the bank when the buyer is presented with the draft and before any shipping documents are released.
    2. Documents against acceptance - The importer needs to pay on a specified date. Once the buyer accepts the time draft, the bank releases the documents to the buyer.
  2. Demand bill – As the name suggests, the payment is made when the demand bill is provided to the recipient.
  3. Inland bill – True to its name, such a bill can be made by a resident of India and is payable within the territory of India only and not overseas.
  4. Clean bill – This involves a higher interest rate when compared to other bills as it is free of all documents.
  5. Usance bill – A time frame binds this type of bill, and the payment has to be made by the said date.
  6. Foreign bill – When payments stated in a bill of exchange are made outside India's boundaries; it is referred to as a foreign bill.
  7. Accommodation bill – This type of bill of exchange is made and drawn without any specific conditions. It is drawn to furnish monetary support and is agreed upon by both the provider and the beneficiary. It does not include any commerce transactions of products.
  8. Trade bill – This type of bill is signed and drawn by the seller and states the details of the trade activity. The purchaser accepts the terms and conditions stated in such a bill.
  9. Fictitious bill – This involves fictitious names of the one who makes the bill and the one who receives the bill.
  10. Promissory note – The debtor draws this type of instrument, and it states a promise made by the debtor for making a specific payment within a specific time frame.

What are Some of the Advantages of a Bill of Exchange?

Establishes Legality of the Transaction

A bill of exchange produces legality in the trade transaction between purchasers and sellers, the providers of credit, the debtors in question, and the person who writes and signs the bill and the final payee. If any discrepancy arises due to any reason, the bill of exchange serves as valid proof of the commerce transaction.

Trade Details

A bill of exchange states all the details under which the trade transaction is executed. These include the date on which the bill is written and drawn, the value of the money which has to be paid, the date on which the bill matures, the location where the payment is to be made as well as additional fees in the form of interest if required to be paid.

Credit-Based Approach

The 1881 Negotiable Instruments Act states that a bill of exchange is negotiable. As a purchaser, you can purchase products based on credit, and the bill of exchange will enable you to make the required payment after the time frame of the credit is over.

The Convenience of Settling Debts

A bill of exchange helps you settle your debts, and it is a valid document that will facilitate the same.

Also Read: What is an E-Way Bill? How to generate an E-Way Bill

Global Acceptance of the Individuals Involved

The individuals involved get more acceptance as channels of payment.

What Does a Bill of Exchange Format Include?

The format of a bill of exchange includes the following details:

  • The name of the person who writes the bill and authorises the recipient to make a payment.
  • The date on which the payment is to be made.
  • The details of the recipient.
  • Details of the payee.
  • An identification number.
  • Signature of the Drawer, i.e. the person who makes the bill.

Why Are Bills of Exchange Important?

Import-Export is a risky business. Each country has their own set of laws, regulations and customs, and a bill of exchange can help mitigate some of the risks for exporters. 

  • Exchange rates fluctuate every day. Fixed payment terms (laid out in a bill of exchange) between firms in different countries can help with assurances for all parties. 
  • Bills of exchange also provide exporters with coverage concerning payment failures if there is a prior agreement with their bank.

Conclusion

We hope this article's contents helped you understand the importance of a bill of exchange, the different types, and its format. This financial instrument serves as legal and valid proof for most international transactions.

Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.

FAQs

Q: What is a simple bill of exchange example?

Ans:

A simple example involves three entities, i.e. A orders B to make a payment of ₹25000 to C. If B finds it feasible, B will accept the same by furnishing all requisite details on the bill. A becomes the Drawer, B is the acceptor, and C is the beneficiary or payee.

Q: Who draws a bill of exchange?

Ans:

A bill of exchange is drawn by the person who possesses the authority to write the bill. Such a person is also referred to as a Drawer.

Q: How do you explain the bill of exchange in simple words?

Ans:

A bill of exchange is a written agreement by one individual or enterprise to another individual or business enterprise to fulfil a payment obligation on a specific date. This payment can also be requested on-demand, and the bill is binding and legal proof of the trade transaction.

Q: Does a bill of exchange require payment of interest?

Ans:

No. In most cases, it does not. If any interest is to be paid, the written document states the sum.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.