What is a Drawer?
A drawer is a person or entity that creates or issues a financial instrument, such as a bill of exchange or a cheque. The drawer is responsible for stipulating the amount to be paid and the date of payment. In essence, the drawer is the party initiating the transaction by instructing a second party (the drawee) to pay the indicated sum to a third party (the payee).
Examples of a Drawer
- Bill of Exchange: Jane Doe, a business owner, issues a bill of exchange to her supplier, ordering her bank (the drawee) to pay $5,000 to the supplier on a specified future date.
- Cheque: John Smith writes a cheque to the local utility company, ordering his bank (drawee) to pay a specified sum of money immediately or upon presentation of the cheque.
Frequently Asked Questions (FAQs)
Q: Who authenticates a bill of exchange?
A: The bill of exchange is authenticated by the drawer’s signature, indicating their responsibility for the order of payment.
Q: Can the drawer be the same as the drawee?
A: No, the drawer and the drawee are distinct parties. The drawer issues the financial instrument, while the drawee is responsible for making the payment.
Q: What are the liabilities of a drawer in case of a dishonored cheque?
A: If a cheque is dishonored due to insufficient funds or any other reason, the drawer may face legal consequences, including penalties, fines, or even criminal charges depending on jurisdiction.
Q: Can an instrument have more than one drawer?
A: Yes, it is possible for a financial instrument to have multiple drawers, especially in partnership or corporate settings.
- Bill of Exchange: A written, unconditional order by one party to pay a certain sum of money to another party on a specified date.
- Cheque: A document ordering a bank to pay a specific amount of money from a person’s account to another individual or entity.
- Drawee: The party, typically a bank, directed by the drawer to pay the specified amount of money mentioned in a bill of exchange or cheque.
- Payee: The person or entity to whom the payment is to be made according to the instructions on a financial instrument.
Online References and Resources
Suggested Books for Further Studies
- “Accounting Made Simple” by Mike Piper: A foundational book that covers basic accounting concepts, including financial instruments like cheques and bills of exchange.
- “Intermediate Accounting” by Donald E. Kieso and Jerry J. Weygandt: This comprehensive text delves into detailed accounting principles and practices.
- “Understanding Financial Statements” by Aileen Ormiston and Lyn Fraser: A detailed guide to interpreting and understanding various financial statements and related financial documents.
Accounting Basics: “Drawer” Fundamentals Quiz
### Who initiates the issuance of a financial instrument?
- [x] The drawer
- [ ] The drawee
- [ ] The payee
- [ ] The banker
> **Explanation:** The drawer is the party that creates or issues the financial instrument, such as a cheque or bill of exchange.
### In a cheque transaction, what is the main role of the drawer?
- [x] To instruct the drawee bank to pay a specified sum on demand
- [ ] To receive the payment
- [ ] To endorse the cheque
- [ ] To determine the cheque's validity period
> **Explanation:** The drawer is responsible for instructing the drawee bank to pay the specified sum of money on demand.
### Can a drawer and a drawee be the same person or entity?
- [ ] Yes, always
- [x] No, they are distinct parties
- [ ] Yes, in certain situations
- [ ] It depends on the agreement terms
> **Explanation:** The drawer and the drawee are always distinct parties; the drawer issues the payment instruction, while the drawee fulfills the payment.
### What happens if a cheque issued by the drawer is dishonored due to insufficient funds?
- [ ] The drawee is liable
- [ ] The payee is liable
- [x] The drawer faces legal consequences
- [ ] A new cheque is issued automatically
> **Explanation:** In the case of a dishonored cheque due to insufficient funds, the drawer may face legal consequences, including penalties or fines.
### What term refers to the party directed to make payment as indicated in a bill of exchange?
- [ ] Drawer
- [x] Drawee
- [ ] Payee
- [ ] Endorser
> **Explanation:** The drawee is the party, often a bank, directed by the drawer to make the payment to the payee as specified in the bill of exchange.
### In a business transaction, who signs a bill of exchange?
- [ ] Drawee
- [x] Drawer
- [ ] Payee
- [ ] Accountant
> **Explanation:** The drawer signs a bill of exchange, committing to pay the specified amount to the payee by the maturity date.
### What is essential for the drawer’s responsibility on a financial instrument?
- [ ] Endorsement
- [ ] Notarization
- [x] Signature
- [ ] Registration
> **Explanation:** The drawer's signature is essential for authenticating the financial instrument and taking responsibility for the payment order.
### Who is the recipient of payment in a cheque transaction?
- [ ] The drawer
- [ ] The drawee
- [x] The payee
- [ ] The banker
> **Explanation:** The payee is the designated recipient of the payment as instructed in the cheque.
### What distinguishes a cheque from a promissory note?
- [x] A cheque involves a payee, whereas a promissory note is a promise to pay
- [ ] A cheque requires interest payments, while a promissory note doesn’t
- [ ] A cheque cannot be endorsed, while a promissory note can
- [ ] Only cheques have maturity dates
> **Explanation:** A cheque orders a bank to pay a specified amount to a payee, while a promissory note is a written promise to pay a certain amount.
### What can a drawer do if a bill of exchange is dishonored?
- [ ] Sue the drawee
- [ ] Void the transaction
- [x] Pursue legal action against the drawee and the backers
- [ ] Nothing, it must be absorbed as a loss
> **Explanation:** If a bill of exchange is dishonored, the drawer can pursue legal action to recover the owed amount.
Thank you for exploring the role of a drawer in financial transactions and testing your knowledge through our comprehensive quiz! Continue to delve deeper into the intricacies of accounting and finance to enhance your expertise.
