What is a Promissory Note?
A promissory note is a type of negotiable tool which contains a written promise of full payment. These are duly signed and stamped by its drawers, declaring to pay a certain sum of money to the holder at a specific date or on-demand. Used by debtors to borrow from creditors, promissory notes may not be accepted by a creditor after being drawn by a debtor. They have the following features.
Written notes promising to repay a creditor.
Must be signed by drawer or promisor.
The date of payment is predetermined.
Agreed upon by both promisor and promisee for payment of an agreed sum of money.
The legal currency of the relevant country is used for settlement.
It Involves the Following Two Parties:
Drawer/Maker: This is the debtor who promises to pay a specific sum to its creditor.
Drawee: This is the creditor who is promised a certain sum of money on a specific date.
What is a Bill of Exchange?
A bill of exchange is also a negotiable tool, which is a written note legally bound, and duly stamped and signed by its drawer. It instructs payment of a certain sum of money to the holder of this instrument on demand, or within a specific time frame. Requiring to be accepted by a debtor to be valid, these are usually the payment for goods and services. It has these features mentioned below.
It must be appropriately dated.
Contains an order of payment.
The signature of the drawer/maker is mandatory.
Bill must be accepted by a drawee.
Order of payment and its amount should be defined.
It must be delivered to the relevant payee.
It involves the following three parties:
Drawer: An issuer of this instrument who receives the payment.
Drawee: An individual who has to pay the relevant amount.
Payee: This is an individual who receives payment, and in most circumstances, is the same as the drawer.
How are Promissory Notes Different from Bills of Exchange?
While promissory notes, bill of exchange, and cheque have some similarities among themselves, these are distinctly different from each other. Despite being financial instruments with a written promise for payment, these have different features and purposes, which every commerce student must understand.
Every distinguishing feature about a bill of exchange vs promissory note is listed below in detail.
While this table above describes fundamental differences between promissory notes and bills of exchange, students should also learn their differences to that of a cheque – another financial instrument.
Similar to the difference between promissory notes and bill of exchange, there are numerous crucial topics in the standard 10 + 2 curricula for commerce students. Subsequently, Vedantu offers detailed study materials on all these topics written by expert teachers to help students in their studies. Additionally, students can also attend live classes offered by Vedantu to clear any doubt they might have.
Key Differences between Promissory Note and Bill of Exchange
As you know now, there are several differences between bills of exchange and promissory notes. Here are some of the most notable differences between them:
A bill of exchange is a negotiable instrument that is issued when the debtor is ordered to pay the due amount to the creditor within a certain length of time. A promissory note, on the other hand, is a written agreement between the drawer and the drawee in which the drawer agrees to pay a specific sum within a given time frame.
Drawer, drawee, and payee are the parties engaged in a Bill of Exchange. Drawer and payee/drawee are the persons involved in a promissory note.
In the event of a bill of exchange, the debtor must accept it in order for it to be considered valid. There is no requirement for the drawee's acceptance in the event of a promissory note.
A notice is sent to all parties concerned if the Bill of Exchange is not respected. In the event of a promissory note, no notice of dishonor is sent to the promissory note's "maker."
There is no asset held as security in the case of a bill of exchange. In some situations, such as with promissory notes, an asset can be held as collateral for a loan.
In business, bills of exchange and promissory notes are just as significant as cheques. However, these concepts, which are essential for commercial transactions and financing reasons, are rarely discussed. When a debtor acquires items on credit, bills of exchange are one of the most important negotiable documents. The creditor sends a bill of exchange to the debtor, instructing him to pay the amount within the specified time frame.
The promissory note is similar, but it is issued by the debtor and states that he will pay the requisite amount within a certain time frame. These principles will help you understand business from a practical standpoint, and you will be able to use them in your own business or employment.
FAQs on Promissory Note vs. Bill of Exchange: Definitions and Differences
1. What is a Promissory Note?
A promissory note is a written agreement for the repayment of a loan. It is a promise to pay, and the details of the agreement should be included. A promissory note can be issued by a bank, but it can also be issued by an individual, a company, or a business—anyone who is lending money.
Although a promissory note is not a contract, you will almost certainly be required to sign one before taking out a mortgage. The conditions of a loan agreement, the lender, and the borrower are all identified in promissory agreements. They mention the amount of money borrowed, as well as the frequency and quantity of needed installments A promissory note should also state the interest rate and, if applicable, the collateral. It should include the date and location of the note's issuance. It should also include the borrower's signature.
2. What is the Bill of Exchange?
Payments are crucial to any company's success. However, as everyone who has ever followed an invoice knows, getting paid is not always simple. A bill of exchange is intended to hold everyone accountable for making timely payments. A bill of exchange is a formal, written IOU that specifies when a certain sum of money must be paid. They are also known as international bills of exchange, and they are similar to contracts in that they commit one side to a certain payment amount.
3. How are Promissory Notes Different From Bills of Exchange?
A promissory note need not be accepted by a drawee to be legal and binding, while the latter must be accepted by the drawee. Consequently, notices are not served on dishonouring of a promissory note unlike in the case of a bill of exchange.Â
4. State the difference between a cheque and a bill of exchange?
A bill of exchange is comparable to a cheque in that it must include the same information as a cheque, and both papers serve as requests for payment from one party to another. A cheque, on the other hand, is a request from a bank's client to have the bank pay someone from a specified account. A bill of exchange asks for payment from the receiver, regardless of where the cash came from.
A cheque specifies where the money will come from and is significantly more straightforward: one person writes the cheque, another person banks it, and the bank fulfills it. The bill writer may have no further role in the actual payment of the money in the event of a bill of exchange. They should, however, aid the payee if the drawee is late or unwilling so that they maintain some accountability.
5. What are the features of bills of exchange?
The following items must be included on a bill of exchange:
The bill of exchange must be in the form of a written document.
It must include the names of all relevant parties.
It must be addressed to the other party with whom the agreement is to be made.
It must be signed by the person who is offering it.
It should specify when the money is due.
It needs to specify the amount of money that needs to be paid.
Another distinguishing aspect of a bill of exchange is that it has three parties:
The drawer: The drawer is the person who creates the bill and issues the payment order.
The drawee: The drawee is the one who is obligated to pay.
The payee: The payee is the one that is owed money.
That implies the drawer who originally demanded the money is not always the one who should be paid. An international bill of exchange is a document that permits one party to demand payment from another.
6. Where can I find the notes on the difference between promissory notes and bills of exchange?
Vedantu provides notes and questions on the difference between promissory notes and bills of exchange. It discusses features of promissory notes and bills of exchange, as well as their differences. Professional educators create content that is simple to understand and remember for students. Vedantu also provides students in grades 1 through 12 with study materials and a range of competitive exams. Notes, important topics and questions, revision notes, and other materials are included in the contents. All of these resources are available for free on Vedantu. Students must first register on the Vedantu website in order to access any of these materials. You may also use the Vedantu smartphone app to sign up.
