Bill of Exchange

Definition

A Bill of Exchange is an unconditional order in writing, addressed by one person (the drawer) to another (the drawee), and signed by the person giving it. It requires the drawee to pay on demand or at a fixed or determinable future time a specified sum of money to or to the order of a specified person (the payee) or to the bearer.

If the bill is payable at a future time, the drawee signifies acceptance, making the drawee the party primarily liable upon the bill. The drawer and endorsers may also be liable upon the bill. The use of bills of exchange enables one person to transfer to another an enforceable right to a sum of money. A bill of exchange is not only transferable but also negotiable; a holder in due course can obtain a good title to it even if it was transferred by a person without an enforceable right to the money.

Examples

International Trade: A company in the US purchases goods from a supplier in France. The supplier issues a bill of exchange to the buyer, requiring payment 60 days after delivery. The US company accepts the bill, agreeing to pay the specified amount on the maturity date.
Domestic Transactions: A customer buys a car from a dealer but doesn’t have the immediate cash available. The dealer issues a bill of exchange, which is accepted by the customer, stipulating that payment will be made in installments over the next six months.
Commercial Lending: A small business requires immediate funds for expansion. Its bank agrees to provide credit if the business issues a bill of exchange payable in 90 days. The business can then use this promise to repay to secure the needed funds.

Frequently Asked Questions (FAQs)

What are the main parties involved in a bill of exchange?

Drawer: The person who writes and signs the bill.
Drawee: The person who is directed to pay the sum specified in the bill.
Payee: The person to whom the payment is to be made.

How does acceptance of a bill of exchange work?

Acceptance occurs when the drawee agrees to the terms of the bill of exchange by signing it, thereby committing to pay on the due date. This acceptance makes the drawee primarily liable for the bill.

Can a bill of exchange be transferred to another party?

Yes, a bill of exchange can be transferred and negotiated. This means that the holder can transfer the instrument to another party, who then becomes the new payee or holder.

What is a “holder in due course”?

A holder in due course is a person who has obtained a bill of exchange in good faith and for value. This person has rights that are superior to the original payee and can enforce the bill against all parties, even if there were defects in the transfer.

What happens if a bill of exchange is dishonoured?

If a bill of exchange is dishonoured, it means that the drawee refuses to accept or pay the bill. The holder can then pursue legal action against all parties liable on the bill, including the drawer and any endorsers.

Accommodation Bill: A bill of exchange where a party acts as the drawer, drawee, or endorser without receiving value in return, doing so to lend their name to benefit another party.
Dishonour: The refusal to accept or pay a bill of exchange. This can occur if the drawee does not accept the bill on presentation or fails to pay on the maturity date.

Online References

Suggested Books for Further Studies

“The Law of Bills, Notes, and Cheques” by Melvin A. Eisenberg
“Negotiable Instruments and Payment Systems” by Wayne K. Lewis
“Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
“Fundamentals of Corporate Finance” by Stephen A. Ross, Randolph W. Westerfield, and Bradford D. Jordan
“Financial Accounting” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso

Accounting Basics: “Bill of Exchange” Fundamentals Quiz

### Which party in a bill of exchange is primarily responsible for payment once accepted? - [ ] Drawer - [x] Drawee - [ ] Payee - [ ] Endorser > **Explanation:** Once a bill of exchange is accepted, the drawee becomes the party primarily responsible for making the payment. The drawer and endorsers may be secondarily liable. ### Can a bill of exchange be transferred to another party after it is issued? - [x] Yes, it is negotiable and can be transferred. - [ ] No, it stays with the original payee. - [ ] Only if the drawee consents to the transfer. - [ ] It depends on the amount specified on the bill. > **Explanation:** A bill of exchange is both transferable and negotiable. This means it can be endorsed and passed on to another party, who then obtains the right to the money specified in the bill. ### What is the specific role of a 'drawer' in a bill of exchange? - [x] The person who writes and signs the bill. - [ ] The person who accepts the bill. - [ ] The person who should pay the bill. - [ ] The person who guarantees the bill. > **Explanation:** The drawer is the party that writes and signs the bill, directing the drawee to make the payment to the payee or holder of the bill. ### If a bill of exchange is not accepted, what is it considered? - [ ] Fulfilled. - [ ] Negotiated. - [x] Dishonoured. - [ ] Endorsed. > **Explanation:** If a bill of exchange is not accepted, it is considered dishonoured. This means that the drawee has refused to accept the obligation to pay the bill. ### What must a bill of exchange include to be valid? - [x] An unconditional order to pay. - [ ] A condition to pay on the drawee’s consent. - [ ] The sign of both the drawer and drawee. - [ ] A reference to underlying goods or services. > **Explanation:** To be valid, a bill of exchange must include an unconditional order to pay. This means there should be no conditions attached to the payment except the timeline and amount specified. ### Which party may become secondarily liable on a bill of exchange? - [x] The drawer and endorsers. - [ ] Only the original drawer. - [ ] Only the payee. - [ ] None, only the drawee is liable. > **Explanation:** The drawer and endorsers can become secondarily liable on a bill of exchange if the drawee fails to make the payment upon acceptance. ### What defines a 'Holder in Due Course' in the context of a bill of exchange? - [ ] A person who initially issues the bill. - [ ] The drawee who accepts the bill. - [x] A person who takes the bill in good faith and for value. - [ ] Anyone who possesses the bill. > **Explanation:** A Holder in Due Course is someone who has obtained the bill in good faith and for value and possesses superior rights against previous holders, even if the transfer involved defective titles. ### When do drawees signify their acceptance of a bill of exchange? - [x] By signing the bill. - [ ] By verbally agreeing. - [ ] By making the payment. - [ ] By endorsing the bill. > **Explanation:** Drawees signify their acceptance by signing the bill, showing their agreement to pay the specified amount at the determined time. ### Which document can assist in enforcing the payment in a bill of exchange transaction? - [ ] Mortgage agreement. - [ ] Salary slip. - [x] Bill of exchange. - [ ] Lease contract. > **Explanation:** The bill of exchange itself acts as the enforceable document in the transaction, enabling the holder to demand payment as stipulated. ### The process of endorsing a bill of exchange allows for what? - [ ] Cancelling the bill. - [ ] Making the bill non-transferable. - [x] Transferring rights to another party. - [ ] Modifying the amount payable. > **Explanation:** Endorsing a bill of exchange allows the current holder to transfer their rights to another party, thus making the bill negotiable and facilitating its circulation as an instrument of credit.

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