Definition
Bill (in Accounting)
A “bill” in accounting has two primary definitions:
-
Bill of Exchange: A written, unconditional order by one party (the drawer) to another (the drawee) to pay a specific sum of money to a third party (the payee) either on demand or at a predetermined future date.
-
Sales Invoice: A commercial document issued by a seller to a buyer, indicating the products, quantities, and agreed prices for products or services the seller has provided the buyer with. A sales invoice outlines the terms of the sale and serves as a formal request for payment.
Examples
Example 1: Bill of Exchange
- Situation: A clothing retailer orders goods from a manufacturer.
- Bill of Exchange: The manufacturer issues a bill of exchange to the retailer, ordering them to pay the specified amount within 90 days.
Example 2: Sales Invoice
- Situation: A consulting firm completes a project for a client.
- Sales Invoice: The firm sends a sales invoice to the client, listing the services provided, the total billed amount, and the payment terms (e.g., due within 30 days).
Frequently Asked Questions (FAQs)
What is the primary purpose of a bill of exchange?
Answer: The primary purpose of a bill of exchange is to facilitate trade between buyers and sellers by providing a formal, legally binding document that specifies payment terms and conditions.
How does a sales invoice benefit a business?
Answer: A sales invoice helps in maintaining accurate records, tracking sales transactions, managing accounts receivable, and ensuring timely payment from customers.
Can a bill of exchange be transferred to another party?
Answer: Yes, a bill of exchange can be transferred to another party by endorsement, allowing the holder to pass the payment responsibility to someone else.
What are common components of a sales invoice?
Answer: Common components include the seller’s details, buyer’s details, invoice number, date of issue, due date, itemized list of goods or services, quantities, prices, total amount due, and payment terms.
How is a bill of exchange different from a promissory note?
Answer: A bill of exchange involves three parties (drawer, drawee, and payee) and orders the drawee to pay a certain amount, while a promissory note is a two-party agreement in which one party (the maker) promises to pay a certain amount to another party (the payee).
- Drawer: The person who writes or creates a bill of exchange.
- Drawee: The person or entity directed to pay the amount specified in a bill of exchange.
- Payee: The individual or entity that is to receive payment in a bill of exchange or sales invoice.
- Endorsement: The act of signing a bill of exchange, allowing the transfer of payment responsibility to another party.
- Accounts Receivable: Money owed to a business by its customers for goods or services delivered but not yet paid for.
Online References
Suggested Books for Further Studies
- “Accounting All-in-One For Dummies” by Kenneth W. Boyd
- “Financial Accounting” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- “Principles of Accounting” by Belverd E. Needles and Marian Powers
- “Advanced Accounting” by Joe Ben Hoyle, Thomas Schaefer, and Timothy Doupnik
Accounting Basics: “Bill” Fundamentals Quiz
### What is a primary function of a bill of exchange?
- [x] To facilitate trade and specify payment terms.
- [ ] To record internal transactions within a company.
- [ ] To provide tax deductions for a business.
- [ ] To serve as a ledger for expenses.
> **Explanation:** A bill of exchange serves the primary function of facilitating trade by providing a formal, legally binding document specifying payment terms and conditions.
### How many parties are involved in a bill of exchange?
- [x] Three
- [ ] Two
- [ ] Four
- [ ] Six
> **Explanation:** A bill of exchange involves three parties: the drawer (who creates the bill), the drawee (who is directed to pay), and the payee (who receives the payment).
### What must a sales invoice contain to be effective?
- [x] Seller’s details, buyer’s details, itemized list of goods/services, and payment terms.
- [ ] Only the total amount due.
- [ ] Seller’s details and payment terms.
- [ ] Buyer’s details and order number.
> **Explanation:** A sales invoice must contain the seller’s details, buyer’s details, an itemized list of goods or services, quantities, prices, total amount due, and payment terms to be thorough and effective.
### Can a bill of exchange be endorsed to another party?
- [x] Yes, through the process of endorsement.
- [ ] No, it remains with the original parties.
- [ ] Only if both the drawer and drawee agree.
- [ ] Only if the original payment terms were not met.
> **Explanation:** A bill of exchange can be transferred to another party via endorsement, effectively passing on the right to receive payment.
### Who issues a sales invoice?
- [ ] The buyer
- [x] The seller
- [ ] An accounting firm
- [ ] A financial institution
> **Explanation:** The seller issues a sales invoice to the buyer to request payment for goods or services provided.
### In a bill of exchange, who orders the payment?
- [x] The drawer
- [ ] The drawee
- [ ] The payee
- [ ] The endorsor
> **Explanation:** The drawer is the party who writes or creates the bill of exchange and orders the drawee to make the payment to the payee.
### What component is crucial for a sales invoice?
- [x] Payment terms
- [ ] Company logo
- [ ] Customer feedback form
- [ ] Shipping address
> **Explanation:** Payment terms are crucial as they define when and how the payment should be made, providing clarity and legally enforceable terms for the transaction.
### What distinguishes a bill of exchange from a promissory note?
- [x] A bill of exchange involves three parties, while a promissory note involves two parties.
- [ ] A bill of exchange is written by a bank, while a promissory note is written by an individual.
- [ ] A promissory note is more formal than a bill of exchange.
- [ ] A bill of exchange requires a witness, while a promissory note does not.
> **Explanation:** A bill of exchange involves three parties (drawer, drawee, and payee), while a promissory note involves two parties (the maker and the payee).
### What is another term commonly used for a sales invoice?
- [x] Bill
- [ ] Receipt
- [ ] Purchase Order
- [ ] Voucher
> **Explanation:** A sales invoice is commonly referred to as a "bill," which is a formal request for payment.
### When might a company issue a bill of exchange?
- [ ] When hiring new employees
- [ ] To request tax refunds
- [x] In a trade transaction requiring deferred payment
- [ ] To record petty cash expenses
> **Explanation:** A company might issue a bill of exchange in trade transactions where deferred payment terms are stipulated, providing a formal, legally enforceable payment order.
Thank you for taking the quiz and furthering your understanding of bills in accounting. Dive deeper into accounting principles with our suggested resources!
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