Bills of exchange: entries in the books of drawer and drawee

A bill of exchange turns a spoken promise to pay later into a signed paper that can be held, sold to a bank or passed on to someone else.

What a bill of exchange is

When goods are sold on credit, the seller may want something firmer than an entry in his books. He draws a bill ordering the buyer to pay a certain sum on a certain date, and the buyer signs his acceptance on it. Under the Negotiable Instruments Act, 1881, a bill of exchange is 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.

Parties

Drawer: the seller or creditor who makes the bill.
Drawee (acceptor): the buyer or debtor on whom it is drawn and who accepts it.
Payee: the person to whom payment is to be made. Often the drawer himself, or his bank or creditor.

A promissory note is different: it is a written promise made by the debtor himself, so it has two parties (maker and payee) and needs no acceptance.

Terms

Term (tenor): the period of the bill.
Days of grace: three extra days added to the term.
Due date (date of maturity): date of the bill + term + three days of grace. A bill dated 1 January for three months falls due on 4 April. If the due date is a public holiday, the bill is due on the preceding business day.
Bill at sight (on demand): payable when presented; no days of grace.
Bills receivable (B/R): the bill in the hands of the person who will receive money: an asset. Bills payable (B/P): the same bill for the person who must pay: a liability.

The basic example

On 1 January 2026 Amit sells goods worth ₹50,000 to Bina on credit and draws a bill on her for three months. Bina accepts it and returns it to Amit. The bill is due on 4 April 2026. Amit can now do one of four things with it.

Case 1: Amit keeps the bill until maturity and it is honoured

In the books of Amit (drawer)
Date	Particulars	Dr. (₹)	Cr. (₹)
Jan 1	Bina Dr.	50,000
	To Sales A/c		50,000
	(Goods sold on credit)
Jan 1	Bills Receivable A/c Dr.	50,000
	To Bina		50,000
	(Acceptance received)
Apr 4	Cash A/c Dr.	50,000
	To Bills Receivable A/c		50,000
	(Bill honoured on the due date)
	Total	1,50,000	1,50,000

In the books of Bina (drawee)
Date	Particulars	Dr. (₹)	Cr. (₹)
Jan 1	Purchases A/c Dr.	50,000
	To Amit		50,000
	(Goods bought on credit)
Jan 1	Amit Dr.	50,000
	To Bills Payable A/c		50,000
	(Bill accepted)
Apr 4	Bills Payable A/c Dr.	50,000
	To Cash A/c		50,000
	(Bill paid on the due date)
	Total	1,50,000	1,50,000

Bina's entries are the same in all four cases when the bill is honoured: she has accepted the bill and pays whoever holds it. Only Amit's books change.

Case 2: Amit discounts the bill with his bank

Amit needs money at once. On 1 January he discounts the bill with his bank at 12% a year. Discount = ₹50,000 × 12% × 3/12 = ₹1,500. The bank pays him ₹48,500.

In the books of Amit
Date	Particulars	Dr. (₹)	Cr. (₹)
Jan 1	Bank A/c Dr.	48,500
	Discount A/c Dr.	1,500
	To Bills Receivable A/c		50,000
	(Bill discounted with the bank)

On the due date the bank collects from Bina. If she pays, Amit makes no entry.

Case 3: Amit endorses the bill to his creditor

Amit owes Chetan ₹50,000. On 5 January he endorses (signs over) Bina's acceptance to Chetan.

In the books of Amit
Date	Particulars	Dr. (₹)	Cr. (₹)
Jan 5	Chetan Dr.	50,000
	To Bills Receivable A/c		50,000
	(Bill endorsed to Chetan)

Case 4: Amit sends the bill to his bank for collection

In the books of Amit
Date	Particulars	Dr. (₹)	Cr. (₹)
Mar 30	Bills Sent for Collection A/c Dr.	50,000
	To Bills Receivable A/c		50,000
	(Bill sent to bank for collection)
Apr 4	Bank A/c Dr.	50,000
	To Bills Sent for Collection A/c		50,000
	(Bill collected by the bank)
	Total	1,00,000	1,00,000

Dishonour of a bill

If Bina does not pay on the due date, the bill is dishonoured. The holder may have the fact recorded by a Notary Public; the fee is called noting charges and is recoverable from the acceptor. Suppose noting charges are ₹250. In every case Amit's entry debits Bina with ₹50,250, because she now owes him the bill and the charges. The credit depends on who held the bill.

In the books of Amit, on dishonour
Date	Particulars	Dr. (₹)	Cr. (₹)
Apr 4	Bina Dr.	50,250
	To Bills Receivable A/c		50,000
	To Cash A/c		250
	(Case 1: bill kept by Amit dishonoured; noting charges paid by him)
Apr 4	Bina Dr.	50,250
	To Bank A/c		50,250
	(Case 2: discounted bill dishonoured; bank recovers bill and charges from Amit)
Apr 4	Bina Dr.	50,250
	To Chetan		50,250
	(Case 3: endorsed bill dishonoured; Amit again owes Chetan)
	Total	1,50,750	1,50,750

In the books of Bina, on dishonour
Date	Particulars	Dr. (₹)	Cr. (₹)
Apr 4	Bills Payable A/c Dr.	50,000
	Noting Charges A/c Dr.	250
	To Amit		50,250
	(Bill dishonoured; noting charges payable)

Renewal of a bill

Bina may ask, before the due date, for more time. The old bill is cancelled and a new one is drawn, usually after part payment and with interest for the extra period.

Example. On 4 April Bina pays ₹20,000 in cash and accepts a new bill for two months for the balance with interest at 12% a year, and the noting charges. Balance = ₹50,250 − ₹20,000 = ₹30,250. Interest = ₹30,250 × 12% × 2/12 = ₹605. New bill = ₹30,855.

In the books of Amit, on renewal
Date	Particulars	Dr. (₹)	Cr. (₹)
Apr 4	Cash A/c Dr.	20,000
	To Bina		20,000
	(Part payment received)
Apr 4	Bina Dr.	605
	To Interest A/c		605
	(Interest charged for two months)
Apr 4	Bills Receivable A/c Dr.	30,855
	To Bina		30,855
	(New acceptance received)
	Total	51,460	51,460

Dr. Bina (in the books of Amit) Cr.
Date	Particulars	₹	Date	Particulars	₹
Jan 1	To Sales A/c	50,000	Jan 1	By Bills Receivable A/c	50,000
Apr 4	To Bills Receivable A/c (dishonour)	50,000	Apr 4	By Cash A/c	20,000
Apr 4	To Cash A/c (noting charges)	250	Apr 4	By Bills Receivable A/c (new bill)	30,855
Apr 4	To Interest A/c	605
		1,00,855			1,00,855

Retiring a bill

If the acceptor pays before the due date, the bill is retired. The holder usually allows a rebate for the unexpired period. For the holder the rebate is an expense; for the acceptor it is a gain.

Advantages of a bill

It is written proof of the debt and fixes the date of payment.
The seller can turn it into cash at once by discounting.
It can be passed on by endorsement to settle the seller's own debts.
The buyer gets a definite period of credit.

Questions students ask

How is the due date of a bill calculated?

Add the term of the bill to its date and then add three days of grace. A bill dated 1 January for three months is due on 4 April. A bill payable at sight has no days of grace.

Who bears noting charges?

The acceptor (drawee), because the charges arise from his failure to pay. The holder pays them first and recovers them from him.

What is the difference between a bill of exchange and a promissory note?

A bill is an order to pay, drawn by the creditor, with three parties, and needs acceptance. A promissory note is a promise to pay, made by the debtor, with two parties, and needs no acceptance.