Definition of Drawee
The term drawee refers to the entity upon whom a financial document, such as a bill of exchange, cheque, or bank draft, is drawn. Depending on the context, the drawee can be:
- The Individual or Entity on Whom a Bill of Exchange is Drawn: This person or entity is expected to accept and pay the bill on its maturity.
- The Bank on Whom a Cheque is Drawn: This refers to the bank that holds the account of the individual or company that issued the cheque.
- The Bank Named in a Bank Draft: This bank is stipulated to pay the specified amount upon presentation.
The drawee contrasts with the drawer, who is the person or entity that initiates the financial instrument.
Examples
-
Bill of Exchange:
- Scenario: Alice issues a bill of exchange to Bob for $1,000, addressed to Charlie.
- Drawee: Charlie, who is expected to accept and pay the amount on the bill’s maturity.
-
Cheque:
- Scenario: Dave writes a cheque for $500 to Emily, utilizing his checking account at Bank XYZ.
- Drawee: Bank XYZ, which is instructed to pay Emily the specified amount from Dave’s account.
-
Bank Draft:
- Scenario: Frank purchases a bank draft from Bank ABC payable to Grace.
- Drawee: Bank ABC, as it is the bank named in the draft that will pay Grace when presented with the draft.
Frequently Asked Questions (FAQs)
Q1: What happens if a drawee refuses to pay the bill of exchange? A1: If the drawee refuses to accept the bill of exchange, the instrument is dishonored. Legal actions can be taken to recover the amount, and it negatively impacts the drawee’s creditworthiness.
Q2: Can a cheque have more than one drawee? A2: No, typically a cheque will have only one drawee, which is the bank where the drawer holds their account.
Q3: Is the drawee always a bank? A3: No, the drawee can be an individual or entity in the case of bills of exchange, while it is specifically a bank in the case of cheques and bank drafts.
Related Terms
- Drawer: The person or entity who writes or issues a bill of exchange or cheque.
- Bill of Exchange: A written order used primarily in international trade that binds one party to pay a fixed sum of money to another party at a predetermined date.
- Cheque: A written order directing a bank to pay a specified sum from the drawer’s account to the person named or to bearer.
- Bank Draft: A payment instrument issued by a bank guaranteeing the payer’s account validity.
Online References
- Investopedia - Drawee Definition
- Corporate Finance Institute - What is a Bill of Exchange?
- Nolo - Cheque Basics
Suggested Books for Further Studies
- Accounting Principles by Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso
- Financial Accounting: An Integrated Approach by Ken Trotman and Michael E. Gibbins
- Auditing and Assurance Services: An Integrated Approach by Alvin A. Arens, Randal J. Elder, Mark S. Beasley
Accounting Basics: “Drawee” Fundamentals Quiz
### Who is responsible for paying a bill of exchange upon its maturity?
- [x] Drawee
- [ ] Drawer
- [ ] Payee
- [ ] Endorser
> **Explanation:** The drawee is the person or entity expected to accept and pay the bill of exchange upon its maturity.
### In a cheque transaction, who typically acts as the drawee?
- [x] Bank
- [ ] The drawer
- [ ] The payee
- [ ] The endorser
> **Explanation:** In a cheque transaction, the drawee is the bank where the drawer holds their account and from which the funds will be drawn.
### Who issues a bill of exchange?
- [ ] Drawee
- [x] Drawer
- [ ] Endorser
- [ ] Acceptor
> **Explanation:** The drawer is the person who issues a bill of exchange instructing the drawee to pay a specified amount.
### Can the drawee and drawer be the same entity?
- [ ] Yes, always
- [x] Yes, sometimes
- [ ] No, never
- [ ] Only in cheque transactions
> **Explanation:** The drawee and drawer can be the same entity in some cases, such as when an individual issues a bill of exchange to themselves for internal financial management.
### What happens if a drawee refuses to accept a bill of exchange?
- [x] The bill is dishonored
- [ ] The bill is paid immediately
- [ ] The drawer pays the bill without delay
- [ ] The payee must approach a different drawee
> **Explanation:** If the drawee refuses to accept the bill of exchange, it is considered dishonored, which can lead to legal action for recovery.
### In the context of bank drafts, who serves as the drawee?
- [x] The bank named in the draft
- [ ] The individual purchasing the draft
- [ ] The payee
- [ ] The endorsing party
> **Explanation:** In bank drafts, the drawee is the bank named in the draft, which is responsible for making the payment upon presentation.
### Which term describes the person who writes and signs a cheque?
- [ ] Drawee
- [x] Drawer
- [ ] Payee
- [ ] Acceptor
> **Explanation:** The person who writes and signs a cheque is referred to as the drawer. They instruct the drawee (bank) to make the payment.
### What is the primary role of the drawee in a cheque transaction?
- [ ] To receive the payment
- [ ] To write the cheque
- [x] To pay the specified sum
- [ ] To endorse the cheque
> **Explanation:** The primary role of the drawee in a cheque transaction is to pay the specified sum from the drawer's account to the payee.
### Can an individual act as a drawee in a bill of exchange?
- [x] Yes
- [ ] No
- [ ] Only in cheques
- [ ] Only in international transactions
> **Explanation:** Essentially, an individual can act as a drawee in a bill of exchange if they are named as the entity responsible for payment upon acceptance.
### Who assumes the financial responsibility of paying a bank draft?
- [ ] The drawer
- [x] The drawee bank
- [ ] The payee
- [ ] The endorser
> **Explanation:** The drawee bank named in the bank draft assumes the financial responsibility of paying the draft amount upon the payee's presentation.
Thank you for embarking on this journey through our comprehensive accounting lexicon. Keep striving for excellence in your financial knowledge, and make sure to revisit this page whenever you need a refresher!
