Difference between Promissory Note and Bill of Exchange

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 these following features.

  • Written notes promising to repay a creditor.

  • Must be signed by drawer or promisor.

  • Date of payment is predetermined.

  • Agreed upon by both promisor and promisee for payment of an agreed sum of money.

  • Legal currency of the relevant country is used for settlement.

It Involves These Following Two Parties:

  1. Drawer/Maker: This is the debtor who promises to pay a specific sum to its creditor.

  2. Drawee: This is the creditor who is promised of 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.

  • 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:

  1. Drawer: An issuer of this instrument who receives the payment.

  2. Drawee: An individual who has to pay the relevant amount.

  3. 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.

Point of Comparison

Promissory Notes

Bills of Exchange

Basic Definition

It is a negotiable financial instrument, which is issued by a debtor. It is a written promise for the payment of a specific sum on demand by its creditor or by a predetermined date mentioned on this agreement. Essentially, it is a promise of payment.

A negotiable financial instrument issued by a creditor, it directs a debtor for payment. These payments must be made when it is demanded by its creditor or by a predetermined date. Essentially, it is an order of payment.

Section

It is mentioned in the Negotiable Instruments Act of 1881 under Section 4. 

It is mentioned under Section 5 of the Negotiable Instruments Act of 1881.

Issuance 

These are issued by debtors and contain their stamp and signature along with a predetermined date for payment and a fixed amount.

These are issued by creditors and contain their stamp and signature along with a predetermined date for payment and a fixed amount.

Involved Parties

It involves only two parties which are drawer/maker and a payee.

It might involve three parties, which are drawer/maker, drawee and payee. Often, payee and drawer are the same under specific circumstances.

Acceptance and Legality

These negotiable financial tools need not be accepted by a drawee to be valid and legally binding.

These negotiable financial tools must be accepted by a drawer before paying for it to be valid and legally binding.

Liability 

In the case of promissory notes, the liability of its drawer is primary and absolute. 

In the case of bills of exchange, the liability of its drawer is only secondary and conditional.

Event of Dishonouring

When a drawer dishonours a promissory note, no notice is served to this individual.

When a drawer dishonours a bill of exchange, notice is served to every party involved in the relevant transaction.

Availability of Copies

These financial instruments do not allow any copies of it.

These financial instruments allow copies and do not have any specified limit.

Payable Entity

The same individual as its drawer cannot also be the entity who is a payee for a promissory note.

While a bill of exchange can have different entities as its drawer, drawee and payee; it can also have one entity serving as its drawee and payee.


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 note 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.

FAQ (Frequently Asked Questions)

1. What is a Promissory Note?

It is a written promise issued by a drawer that guarantees the payment of a certain sum of money to its holder on demand, or by a predetermined date. A creditor might not accept these notes after being drawn by a debtor. Settlement against a promissory should be made in the currency of the relevant nation.

2. What is the Bill of Exchange?

A written agreement between two parties, buyers and sellers, it is a document where the drawee is directed to pay a certain sum of money by the predetermined date, or on demand. This negotiable tool is valid only when the concerned debtor accepts it and is generally used to settle outstanding debts between different parties involved in a transaction.

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.