Table: Bill of Exchange vs Promissory Note – Definition, Parties, Acceptance & Examples
Understanding the difference between bill of exchange and promissory note is essential for Commerce students. Both are key negotiable instruments used in business, exams, and daily financial transactions. Knowing their differences helps you answer exam questions accurately and make better business decisions in future roles or competitive exams.
| Aspect | Bill of Exchange | Promissory Note |
|---|---|---|
| Definition | A written order by the creditor to the debtor to pay a fixed amount on demand or at a future date. (Section 5, Negotiable Instruments Act, 1881) |
A written promise by the debtor to pay a fixed amount to the creditor on demand or at a future date. (Section 4, Negotiable Instruments Act, 1881) |
| Number of Parties | Three – Drawer (creditor), Drawee (debtor), Payee | Two – Maker (debtor), Payee (creditor) |
| Issued By | Creditor (Seller) | Debtor (Buyer) |
| Acceptance Required | Yes, the drawee must accept the bill | No acceptance is needed |
| Liability | Drawer's liability is secondary and conditional | Maker's liability is primary and absolute |
| Copies Allowed | Yes, multiple copies can be drawn (foreign bills) | No, only original is allowed |
| Notice on Dishonour | Notice required to all parties involved | No notice to the maker is needed |
| Section of NI Act | Section 5 | Section 4 |
Bill of Exchange – Meaning and Explanation
A bill of exchange is a negotiable financial instrument. It involves an order made by a creditor (drawer) to a debtor (drawee) to pay a certain sum to the payee either on demand or at a fixed future date. The bill must be accepted by the drawee to become legally valid. Bills of exchange help in settling business debts, especially in trade and commerce. They are defined under Section 5 of the Negotiable Instruments Act, 1881.
Promissory Note – Meaning and Explanation
A promissory note is a written promise by the debtor (maker) to pay a specified amount to the creditor (payee) either on demand or at a fixed future date. Unlike a bill of exchange, it is not an order but a promise. It does not require acceptance by the payee. Promissory notes are used for lending, personal loans, or private borrowings and are defined under Section 4 of the Negotiable Instruments Act, 1881.
Parties Involved – Bill of Exchange vs Promissory Note
| Instrument | Parties Involved |
|---|---|
| Bill of Exchange |
|
| Promissory Note |
|
Key Differences Between Bill of Exchange and Promissory Note
Understanding the difference between bill of exchange and promissory note is critical for clarity in exams and accounting practice. The table below highlights the major points.
| Point of Difference | Bill of Exchange | Promissory Note |
|---|---|---|
| Order vs Promise | Order to pay | Promise to pay |
| Parties | Three parties involved | Two parties involved |
| Issued By | Creditor (Seller) | Debtor (Buyer) |
| Acceptance | Required | Not required |
| Copies | Allowed | Not allowed |
| Legal Provision | Section 5, NI Act | Section 4, NI Act |
Examples of Bill of Exchange and Promissory Note
Bill of Exchange Example
Suppose Mr. X sells goods worth ₹10,000 to Mr. Y and draws a bill of exchange payable after three months. Mr. Y accepts the bill, promising to pay ₹10,000 to Mr. X or order after three months. This transaction can be recorded and accounted for using the methods explained in Journal Entry for Bills of Exchange on Vedantu.
Promissory Note Example
Suppose Mr. Y borrows ₹5,000 from Mr. X and issues a promissory note stating, "I promise to pay Mr. X or order ₹5,000 after two months." No acceptance is needed from Mr. X. This simple format is clarified further at Promissory Note on Vedantu.
Where Are They Used?
- Bill of Exchange: Common in business, especially export/import and credit sales.
- Promissory Note: Used for personal loans, lending between individuals, and private borrowings.
Application in Exams and Business
Commerce students frequently face exam questions asking to distinguish between bill of exchange and promissory note. Accurate recall of definitions and parties is crucial. These instruments are also used practically in business transactions to secure payments or obtain bank finance. For more detailed concepts, visit Bills of Exchange and Difference Between Promissory Note and Bill of Exchange on Vedantu.
Summary
In summary, the difference between bill of exchange and promissory note lies in the number of parties, nature (order vs promise), who issues it, and legal acceptance. Mastery of these points helps students in school and competitive exams, as well as in practical business scenarios. Vedantu ensures you understand these key Commerce topics with clarity and confidence.
FAQs on Difference Between Bill of Exchange and Promissory Note
1. What is the main difference between a bill of exchange and a promissory note?
The primary difference lies in the nature of the instrument: a bill of exchange is an unconditional order to pay a certain sum of money, while a promissory note is an unconditional promise to pay. A bill involves three parties (drawer, drawee, payee), whereas a promissory note involves two (maker and payee).
2. Who are the parties involved in a bill of exchange vs a promissory note?
A bill of exchange involves three parties: the drawer (the person who creates the bill), the drawee (the person ordered to pay), and the payee (the person to whom payment is made). A promissory note involves two parties: the maker (the person promising to pay) and the payee (the person to whom payment is promised).
3. Is acceptance required for a bill of exchange or a promissory note?
Acceptance is crucial for a bill of exchange; the drawee must formally agree to pay the bill. A promissory note doesn't require acceptance; the maker's signature constitutes a promise to pay.
4. Which sections of the Negotiable Instruments Act define bills of exchange and promissory notes?
The Negotiable Instruments Act, 1881, defines bills of exchange and promissory notes. Specific sections would need to be consulted for precise legal definitions, but generally, Section 4 addresses promissory notes and Section 5 handles bills of exchange.
5. Can a promissory note or bill of exchange be issued in copies?
No, neither a bill of exchange nor a promissory note is typically issued in copies. They are legally binding documents; issuing multiple copies could lead to fraud or disputes. A promissory note might be drawn in duplicate for record-keeping purposes, but only one is legally valid.
6. What is the difference between a bill of exchange and a promissory note and cheque?
While both bills of exchange and promissory notes are negotiable instruments, a cheque is a specific type of bill of exchange drawn on a bank. A bill of exchange is an order to pay, a promissory note is a promise to pay, and a cheque is a demand draft drawn on a bank.
7. What is the difference between a note and a promissory note?
The term 'note' is general; a promissory note is a specific type of note, a formal written promise to pay a certain sum of money. Other notes might be informal or pertain to different obligations.
8. Is a promissory note bill of exchange or cheque payable?
A promissory note is neither a bill of exchange nor a cheque. It's a distinct negotiable instrument representing a promise to pay, not an order to pay.
9. What is the difference between promissory note and agreement?
A promissory note is a specific type of negotiable instrument representing a legally binding promise to pay. A general agreement can cover various obligations, not necessarily financial.
10. What is the difference between bill of exchange and promissory note with example?
A bill of exchange, like a draft, involves three parties and an order to pay. For example, A draws a bill on B to pay C. A promissory note, however, involves two parties (maker and payee) and is a promise to pay; for instance, X promises to pay Y a certain sum.
11. Why is the liability of the drawer different in bills of exchange and promissory notes?
In a bill of exchange, the drawer's liability is secondary (only after the drawee's default), while in a promissory note, the maker's liability is primary and unconditional.
12. What practical mistakes do students make when drawing bills of exchange in accountancy problems?
Common mistakes include incorrect identification of parties (drawer, drawee, payee), errors in accounting entries (especially for acceptance, dishonor, and renewal), and misinterpreting the legal implications of acceptance or non-acceptance.
