Chapter 8 Bills of Exchange NCERT SOLUTION CLASS 11TH ACCOUNTS | EDUGROWN NOTES

Short Answer type question:

Q.1 Write two points of distinction between bills of exchange and promissory note.
Solution:

Q2. State any four essential features of bill of exchange.
ANSWER:
Essential features of bills of exchange are as follows:

1. A bill of exchange is a written order to make payment.
2. It is an unconditional order to make payment by a person i.e. drawee.
3. The amount of bill of exchange and the date of payment are certain.
4. It is signed by the drawer of the bill.
5. It is accepted by the drawee by signing on it.
6. The amount specified in the bill of exchange is payable either on demand or on the expiry of a fixed period.
7. The amount specified in the bill is payable either to a certain person or to his order or to the bearer of the bill.
8. It is stamped as per legal requirements.

Q3. State the three parties involved in a bill of exchange.
ANSWER:
There are three parties in a bill of exchange:

1. Drawer is the person who makes the bill of exchange. She/he is a person who has granted credit to the person on whom the bill of exchange is drawn. The drawer is entitled to receive money from the drawee (acceptor).
2. Drawee is the person on whom the bill of exchange is drawn for acceptance and to whom credit has been granted by the drawer. He/she is liable to pay money to the creditor/drawer.
3. Payee is the person who receives the payment from the drawee. Usually the drawer and the payee are the same person.

Q4. What is meant by maturity of a bill of exchange?
ANSWER:
The date calculated after adding 3 days of grace to the due date of a bill is called the date of maturity of a bill. It is to be noted that when a bill is to be payable on demand/at sight, then days of grace is not applicable. When the period of a bill is mentioned in days, the maturity of bill is calculated in days. Similarly, when the period of a bill is mentioned in months, the maturity of bill is calculated in months. In certain cases, when the maturity date of any bill falls on a public holiday, then the maturity date of the bill will be the previous business day.

Q4. What is meant by maturity of a bill of exchange?
ANSWER:
The date calculated after adding 3 days of grace to the due date of a bill is called the date of maturity of a bill. It is to be noted that when a bill is to be payable on demand/at sight, then days of grace is not applicable. When the period of a bill is mentioned in days, the maturity of bill is calculated in days. Similarly, when the period of a bill is mentioned in months, the maturity of bill is calculated in months. In certain cases, when the maturity date of any bill falls on a public holiday, then the maturity date of the bill will be the previous business day.

Q5. What is meant by dishonour of a bill of exchange?
ANSWER:
When the drawee of the bill fails to make the payment on the maturity date of the bill, then the bill is said to have been dishonoured. Hence, liability of the acceptor is restored. Entries made for recording dishonour of the bill of exchange are as follows:
In the books of drawer

Q6. Name the parties to a promissory note
ANSWER:
There are two parties to a promissory note:

1. Maker- The person who makes the note and undertakes to pay the amount.
2. Payee- The person who receives the payment.

Q 7. What is meant by acceptance of a bill of exchange?
ANSWER:
A bill of exchange is a written instrument which contains an unconditional order directing a person to pay a certain amount on an agreed date. In other words, it is drawn by the creditor on her/his debtors to make a payment of a certain amount on the mentioned date. Such a bill comes into existence after the consent of both the parties. A bill cannot come into existence without the acceptance of a debtor. Hence, the debtor of the bill has to accept the terms of the bill, sign the same and make it a legal document.

Q8. What is noting of a bill of exchange?
ANSWER:
When the drawee of the bill fails to make the payment on the maturity date of the bill, then the bill is said to have been dishonoured. To have a legal proof of the dishonour, the bill gets noted by the notary public who is approved by the central/state government. The notary public charges fees called the noting charges for noting and protesting the bill of exchange of its dishonour

Q9. What is meant by renewal of a bill of exchange?
ANSWER:
When the drawee does not have enough funds to make the payment, he may approach the drawer and ask for an extension of time for the payment. If the drawer agrees, then a new bill is drawn which is known as renewal of bill. The new bill may include interest for the extended period.

Q10. Give the performa of a Bills Receivable Book.
ANSWER:

Q11. Give the performa of a Bills Payable Book.
ANSWER:

Q12. What is retirement of a bill of exchange?
ANSWER:
When the drawee of the bill pays off the amount of the bill before the maturity of the bill it is called retirement of the bill. Holder of the bill may give discount for such earlier payment which is called as ‘rebate’.
Entry in the books of the holder of the bill

Q13. Give the meaning of rebate.
ANSWER:
If the drawee wishes to pay the bill before the due date of the bill to the holder and the holder accepts such request, then due to the early payment, the holder may give some discount to the drawee. Such a discount is termed as rebate.

Q10. What is meant by renewal of a bill of exchange?
Solution:
When the drawee does not have enough funds to make the payment, he may approach the drawer and ask for an extension of time for the payment. If the drawer agrees, then a new bill is drawn which is known as renewal of bill. The new bill may include interest for the extended period.

Long Answer Type Question:

Q.1A bill of exchange must contain an unconditional promise to pay. Do you agree with a statement?

ANSWER: According to Negotiable Instrument Act, 1981, “A bill of exchange is defined 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 to the order of, a certain person or to the bearer of the instrument.”

Q.2A bill of exchange contains an unconditional promise to pay a certain sum of money on an agreed date to the drawer or the bearer by the drawee of the bill.

ANSWER: An unconditional order to pay: It is one of the important characteristic of a negotiable instrument. Unconditional order implies no condition should be attached by the acceptor regarding the payment. The conditions like, payment of bill (only in case of profit on sales), payment of bill (only if the prices of goods increase), etc. should not be attached with the bill. Moreover, the language of the bill should not be ambiguous.

Q.3Briefly explain the effects of dishonour and noting of a bill of exchange.

ANSWER:

When a bill is presented for payment and the acceptor fails to make the payment, the bill gets dishonoured. In this situation, liability of the acceptor is restored.

Entry in the books of drawer (if Noting charges are not paid):

Drawee	Dr.
	To Bills Receivable A/c
(Bill dishonoured)

Entry in the books of drawee:

Bills Payable A/c	Dr.
	To Drawer
(Bill dishonoured)

Noting charges are charged by the notary public for keeping a proof that the bill is dishonoured. The noting charges are paid by the holder of the bill but actually due on the drawee or the acceptor of the bill..

Notary public notes the below given facts.

1. Date and amount of bill

2. Reasons for dishonour

3. Amount of noting charges

Effect of Noting charges in the books of holder of bill (if Noting charges are paid):

Drawee	Dr.
	To Bills Receivable A/c
	To Cash A/c (Noting charges)
(Bill dishonoured and Noting charges paid)

In the books of drawee:

Bills Payable A/c	Dr.
Noting charges A/c	Dr.
	To Drawer
(Bill dishonoured and Noting charges due)

Q.4 Explain briefly the procedure of calculating the date of maturity of a bill of exchange? Give example.

ANSWER:

The procedure to calculate the date of maturity of a bill of exchange is given below.

1. Ascertain the date on which the bill will be honoured.

2. Add three days of grace to the above date.

For example, a bill with maturity period of one month is drawn on 1^st July and due date is 1^st September. Then add 3 days of grace and payment will be made on 4^th September.

Days of grace depend on the following situations:

1. Declared holidays: If the payment day happens to be a national holiday or Sunday, then the preceding day becomes the payment day.

For example,

1. If a bill is drawn on 12^th July and its due date is 12^th August, then after adding 3 days of grace the maturity day is 15^th August. However, as 15^th August is a national holiday; so, 14^th August becomes the payment day.
2. If a bill is drawn on 1^st May and the maturity period is of one month, then the due date is 1^st June. After adding 3 days of grace, the payment date becomes 4^th June. However, if 4^th June happens to be a Sunday, then the payment will be made on 3^rd June.

2. Undeclared holidays: If the payment day happens to be an emergency holiday, then the succeeding day becomes the payment day. For example, if a bill is drawn on 1^st May and is payable after 15 days, then, after adding 3 days of grace period, the due date becomes 18^th May. However, if a national strike is declared on 18^th May, then 19^th May becomes the due date of the bill.

Q.5 Distinguish between bill of exchange and promissory note.

ANSWER:

Basis of Difference	Bills of Exchange	Promissory Note
Order or promise	It is an order to pay.	It is a promise to pay.
Parties	There are three parties involved, drawer, acceptor and payee.	There are two parties involved, maker and payee.
Drawer	It is drawn by the creditor.	It is drawn by the debtors.
Acceptance	It needs acceptance by the drawee.	As it is prepared by promissor, so no acceptance is required.
Payee	Drawer and payee may be the same.	Promissor cannot be the payee.
Noting	In case of dishonour of the bill, the bill may get noted.	Noting is not necessary.
Liability	Drawer is not primarily liable.	Promissor is the primarily liable.

Q.6 Briefly explain the purpose and benefits of retiring a bill of exchange to the debtor and the creditor.

ANSWER:

When a holder receives the amount of a bill before the maturity date on request of the acceptor, it is called retirement of the bill of exchange. Holder of the bill may give discount for such earlier payment. This discount is termed as ‘rebate’.

Rebate is given by the holder to the acceptor of the bill on account of payment before the due date. Rebate is a loss for the holder of the bill; so, it is debited in the books of the holder when payment is received.

Cash A/c	Dr.
Rebate A/c	Dr.
	To Bills Receivable A/c
(Payment received and rebate allowed for early payment)

Acceptor of the bill gets rebate for the payment made before the due date. The rebate is a gain for the drawee; so, it is credited in the books of the drawee.

Bills Payable A/c	Dr.
	To Cash A/c
	To Rebate A/c
(Bill paid before the due date and rebate received for early payment)

Q.6Explain briefly the purpose and advantages of maintaining of a Bills Receivable Book.

ANSWER:

Bills Receivable Book is a special purpose book that is maintained to keep records of bills received from the debtors. It contains details such as acceptor’s name, date of bill, due date, amount, etc. for future references. It is totalled periodically and its balance is transferred to the debit side of the bills receivable account.

Benefits of Maintaining the Bill Receivable Book

1. Availability of information: All the information related to the bills receivable, such as amount, due date, etc., are recorded at one place and hence are easily accessible.

2. Possibility of fraud: Since all the bills are recorded at one place, possibility of fraud is minimised.

3. Responsibility: The person who maintains the bills receivable book will also be responsible for any errors or omissions. Therefore, higher degree of accountability and responsibility exists. Also, if any error is detected, then it can be fixed quickly.

4. Time efficient: Recording of bills receivable through the bills receivable book takes lesser time than that of journal entry. Therefore, it saves time of the accountant in recording numerous transactions of repetitive and routine nature.

Q.7 Briefly explain the benefits of maintaining a Bills Payable Book and state how is its posting is done in the ledger?

ANSWER:

A Bills Payable Book is a special purpose book, maintained to keep records of acceptance of bills, given to the creditors. It contains details of the amount, date of bill, due date, to whom acceptance is given, etc., for future references. It is totalled periodically and its balance is transferred to the credit side of the bills payable account.

Benefits of Maintaining Bills Payable Book

1. Availability of information: All the information related to the bills payable are recorded at one place, such as the amount, due date, etc.

2. Possibility of fraud: Since all the bills are recorded at one place, possibility of fraud is minimised.

3. Responsibility: All the transactions are recorded by the same person. Therefore, errors can be easily detected and rectified. This leads to a higher degree of responsibility and accountability of the accountant.