Bill of Exchange Test - 2

a bill of exchange has three parties namely- drawer, drawee and payee.

in a bill of exchange one person (drawer) directs (orders) another person (drawee) to make the payment to the payee(payee may be the drawer himself or a third party).

the payee is the person whose name is mentioned in the bill of exchange and to whom the amount is to be paid. the payee may be the drawer himself or a third party.

due date of the bill of exchange- 30 January 2011+ 1 month+3 days(days of grace)= 3 March 2011

days of grace= days of grace means 3 extra days added to the period of a bill. however, days of grace are not allowed when a bill is payable on demand or at sight.

the promissory note should be signed by the maker of the promissory note, i.e., promisor.

if a bill of exchange is dishonoured, the liability of the drawer(creditor) will be restored. hence, in such case in the books of the drawee, drawer A/C will be credited. the journal entry is:-

               bills payable A/C                                                     Dr

              noting charges A/C                                                 Dr

                       To drawer A/C(creditor)

(being bill is dishonoured and credit of drawer is restored)

it is a custom to add 3 days in the period of a bill to calculate due date of the bill. such 3 extra days are called days of grace.

a bill may be encashed before the maturity of the bill by presenting it to any bank. the bank shall disburse the amount of bill after deducting its charges(discounting charges).

because of the inability of the drawee to pay the amount of bill he requests the drawer to substitute the old bill with a new one. this is called the renewal of the bill.

bill of exchange is a valid evidence of debt because it is a legal document under the negotiable instrument Act, 1881.