📑 Topics on this page (Jump to Topic):
📌 1. Bill of Exchange & Promissory Note
- Negotiable Instruments Act 1881: Section 4 — promissory note; Section 5 — bill of exchange; Section 6 — cheque.
- Bill of exchange: a written, unconditional order, signed by the maker, directing a certain person to pay a certain sum to a certain person, or to his order, or to the bearer.
- Promissory note: a written, unconditional promise — the maker himself promises to pay; no acceptance is needed.
| Basis | Bill of exchange | Promissory note |
|---|---|---|
| Nature | Order | Promise |
| Parties | Three — drawer, drawee (acceptor), payee | Two — maker, payee |
| Acceptance | Required | Not required |
| Drawer and payee | Can be the same person | Maker and payee cannot be the same |
| Notice on dishonour | Notice to drawer required | No notice to the maker needed |
📌 2. Term, Maturity & Days of Grace
- Days of grace: 3 days are added to the due date of a time bill (Section 22). No days of grace for bills payable on demand / at sight.
- If the maturity date is a public holiday, the bill is due on the preceding business day; if it is an emergency holiday declared suddenly, on the next business day.
| Bill | Due date | Maturity (with grace) |
|---|---|---|
| 1 Jan, 2 months | 1 Mar | 4 Mar |
| 31 Jan, 1 month (non-leap year) | 28 Feb | 3 Mar |
| 10 Mar, 60 days | 9 May | 12 May |
- Terms in months count calendar months; terms in days exclude the date of drawing.
📌 3. Uses of a Bill & Accounting
| Options for the holder of a bill receivable | Drawer's entry |
|---|---|
| Retain till maturity | Bank/Cash A/c Dr. To Bills Receivable A/c |
| Discount with bank | Bank A/c and Discount A/c Dr. To Bills Receivable A/c |
| Endorse to a creditor | Creditor's A/c Dr. To Bills Receivable A/c |
| Send to bank for collection | Bills Sent for Collection A/c Dr. To Bills Receivable A/c |
| Entries in the drawer's books | ||||
|---|---|---|---|---|
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
| Bills Receivable A/c Dr. To Mohan's A/c (Mohan accepted a 3-month bill) | 10,000 | 10,000 | ||
| Bank A/c Dr. Discount A/c Dr. To Bills Receivable A/c (Bill discounted with bank at 12% p.a. (3 months)) | 9,700 300 | 10,000 | ||
| Mohan's A/c Dr. To Bank A/c (Discounted bill dishonoured; with noting charges ₹50) | 10,050 | 10,050 | ||
Discount = 10,000 × 12% × 3/12 = ₹300; bank pays ₹9,700.
📌 4. Dishonour, Noting, Renewal & Accommodation Bills
- Dishonour: non-acceptance or non-payment on maturity. On dishonour, the bill amount (and noting charges) is debited back to the drawee.
- Noting: an authenticated record of dishonour by a notary public; noting charges are finally borne by the acceptor. Protest = the notary's formal certificate.
- Renewal: if the acceptor cannot pay, the old bill is cancelled and a new bill is drawn with interest.
- Retiring under rebate: paying before maturity and getting a rebate.
- Accommodation bill: drawn without any trade transaction, only for mutual financial help.
- Foreign bills are usually drawn in sets of three.
⚠️ Exam Traps:
- A promissory note needs no acceptance; a drawee is not liable on a bill until he accepts it.
- In the drawer's books the bill is a bill receivable; in the acceptor's books a bill payable.
- A cheque is always drawn on a bank and is payable on demand — no days of grace.
💡 Memory Tip: "Bill = order (3 parties), note = promise (2 parties), +3 days of grace".
📌 5. Worked Examples
Example: drawing, discounting and dishonour (drawer's books)
On 1 January 2026 Ram sold goods worth ₹20,000 to Shyam and drew a 3-month bill, which was accepted. On 4 January the bill was discounted with the bank at 12% p.a. At maturity it was dishonoured; noting charges ₹50. Due date = 1 April + 3 days of grace = 4 April 2026. Discount = 20,000 × 12% × 3/12 = ₹600 (exam convention).
| Journal in Ram's books | ||||
|---|---|---|---|---|
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
| 1 January | Shyam A/c Dr. To Sales A/c (credit sale) | 20,000 | 20,000 | |
| 1 January | Bills Receivable A/c Dr. To Shyam A/c (bill accepted) | 20,000 | 20,000 | |
| 4 January | Bank A/c Dr. Discount A/c Dr. To Bills Receivable A/c (bill discounted) | 19,400 600 | 20,000 | |
| 4 April | Shyam A/c Dr. To Bank A/c (discounted bill dishonoured, with noting charges) | 20,050 | 20,050 | |
📌 6. Practice MCQs
📝 Practice MCQs (prepared by SF Prep — not PYQs)
Q1. The bill of exchange is defined in which section of the NI Act? Practice
Correct answer: (B)
Section 4 is the promissory note; Section 6 the cheque.
Section 4 is the promissory note; Section 6 the cheque.
Q2. The Negotiable Instruments Act was passed in: Practice
Correct answer: (C)
In force from 1 March 1882.
In force from 1 March 1882.
Q3. A time bill gets how many days of grace? Practice
Correct answer: (C)
Section 22.
Section 22.
Q4. The maturity date of a 2-month bill drawn on 1 January is: Practice
Correct answer: (D)
1 March + 3 days of grace.
1 March + 3 days of grace.
Q5. A promissory note has: Practice
Correct answer: (A)
The maker himself promises to pay.
The maker himself promises to pay.
Q6. The person who draws a bill of exchange is the: Practice
Correct answer: (B)
The drawer gives the order.
The drawer gives the order.
Q7. Which instrument needs no acceptance? Practice
Correct answer: (A)
The maker is bound by his own promise.
The maker is bound by his own promise.
Q8. A ₹10,000 bill discounted 3 months before maturity at 12% p.a. The discount is: Practice
Correct answer: (C)
10,000 × 12% × 3/12.
10,000 × 12% × 3/12.
Q9. The official who records the dishonour of a bill is a: Practice
Correct answer: (D)
This is called noting.
This is called noting.
Q10. Noting charges are finally borne by the: Practice
Correct answer: (B)
He caused the dishonour.
He caused the dishonour.
Q11. A bill drawn without a trade transaction, only for mutual financial help, is a/an: Practice
Correct answer: (B)
It is also called a kite bill.
It is also called a kite bill.
Q12. If the maturity date is a public holiday, the bill is due on the: Practice
Correct answer: (C)
Section 25.
Section 25.
Q13. When a discounted bill is dishonoured, the drawer records: Practice
Correct answer: (D)
The bank is repaid; the drawee owes again.
The bank is repaid; the drawee owes again.
Q14. A bill payable at sight gets: Practice
Correct answer: (A)
Days of grace apply only to time bills.
Days of grace apply only to time bills.
Q15. In the acceptor's books, the bill is a: Practice
Correct answer: (D)
He will pay it.
He will pay it.
Q16. Cancelling the old bill and drawing a new one with interest is called: Practice
Correct answer: (A)
Used when the acceptor cannot pay.
Used when the acceptor cannot pay.
Q17. A 1-month bill drawn on 31 January (non-leap year) matures on: Practice
Correct answer: (B)
February has no 31st, so 28 Feb + 3.
February has no 31st, so 28 Feb + 3.
Q18. Handing over a bill to a creditor to settle a debt is called: Practice
Correct answer: (C)
Transfer by signing on the back of the bill.
Transfer by signing on the back of the bill.
Q19. Foreign bills are usually drawn in: Practice
Correct answer: (C)
To guard against loss in transit.
To guard against loss in transit.
Q20. Which is true of a cheque? Practice
Correct answer: (D)
Section 6.
Section 6.