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Meaning and Features of Bills of Exchange

Last updated date: 13th Apr 2024
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Elements of Bill of Exchange

When dealing with monetary issues, there are many instruments of exchange that we maintain for official reasons. One such tool for administering money transfer matters is a Bill of Exchange. Since these matters act as official documentation, we have rules and regulations for these. For the governance of bills of exchange, we have the Negotiable Instruments Act of 1881. You can see the meaning of the Bill of Exchange or the definition in Section 5 of the Act. The Bill of Exchange definition states that it is a document in writing that contains an unconditional order signed by the issuer, and this order directs a person to pay an amount of money only to the order of that person or to the one who bears the Bill of Exchange. We have a valid Bill of Exchange when a person accepts an order in writing. This article will speak about the features of bills of exchange. 


Meaning of Bill of Exchange 

A Bill of Exchange is a document in writing which instructs a person to pay another party a certain amount of money by a specified period. A Bill of Exchange only becomes valuable when the person who is going to pay accepts it with a signature or stamp. For example, A draws a Bill of Exchange against an amount of 5000 rupees against B. B agrees with this by signing it. Generally, the sellers often provide a credit period to the purchaser when it comes to goods or services. However, at times the seller is not in a position to give this window of time, and the purchaser isn't in a place to pay right away. In such a condition, a Bill of Exchange is crucial as it is a written promise that the party in debt will pay the mentioned amount by a specific time. These bills can often become instruments of credit, and banks will also accept these and pay the person in advance. One can also pass these bills to another party. 


Features of Bills of Exchange 

The following are some features of bills of exchange that one must keep in mind:

  • It is a piece of writing and an instrument of monetary negotiation 

  • The person drawing and signing the bill is known as the drawer 

  • The person on whom the drawer drafts the bill, asking for a specific amount is known as the drawee

  • The bill is an unconditional order for the drawee 

  • For the bill to be an instrument of value, the drawee needs to accept it

  • The drawee shall pay the amount mentioned to the person specified in the bill or to his/her order or the drawer 

  • The bill cites the date by which the drawee must carry out the transaction 

  • The payment is valid only in the legal currency of the nation 

  • A Bill of Exchange must have a proper stamp and a revenue stamp 

Solved Examples 

Q. Mention the Uses of the Bill of Exchange

Answer: A Bill of Exchange is essentially a document that instructs one party to pay a certain amount of money to another at a specified time or when the latter demands. The uses of a Bill of Exchange are as follows:

  • It helps draw up an official agreement between three bodies in general. We have the drawer, i.e., the person who is issuing the Bill of Exchange. Then we have the payee who receives a certain amount of money and the drawee, who has to pay the money to the payee by order of the drawer or when demanded. 

  • A Bill of Exchange is often used in international markets and trade to assist the groups of importers and exporters in completing their payments. 

  • Although a Bill of Exchange is not a contract, it can still help in composing the terms and conditions of a transaction. 

FAQs on Meaning and Features of Bills of Exchange

1. What is the meaning of the Bill of Exchange? State an example.

A Bill of Exchange means an instrument drawn by a specific party known as a drawer that instructs a party called drawee to pay a certain amount of money to another person referred to as payee. This bill can now have several agreements and regulations. An example of a Bill of Exchange is as below:

Suppose Mr. P issues a Bill of Exchange against a purchase made by Mr. Q of about 10,000 rupees. Mr. P issues this bill on 20th November, which is the date of purchase. However, Mr. Q only accepts the bill of 25th November by signing it. This situation means that during the five days from 20th to 25th November, the document wasn't a Bill of Exchange but rather a simple draft. It got the status of a bill on the day Mr. Q accepted it.

2. What does the term 'discounting bills of exchange' mean?

The term discounting bills of exchange is a situation that can arise when the payee, or the person who will receive the money, needs the money before the decided date or before the drawee can pay. For example, suppose X buys some equipment from Y and owes Y a certain amount of money. However, X does not have that money right away, so he draws a Bill of Exchange stating his debt and hands it over to Y. Now suppose, Y needs the money immediately and can't wait till the time X can pay. He then takes the Bill of Exchange to a bank, and the bank pays Y the desired sum after taking some commission. This process is what we call discounting bills of exchange. When the bills are mature, X will pay his due to the bank.

3. What is the importance of bills of exchange?

There is numerous importance of the Bill of Exchange :

  • It is a legal instrument, and if the drawee fails to make the payment, the drawer will have an easier time recovering the money legally.

  • Discounting Facility - In situations where the drawer requires money right away, the bill can be changed into cash by discounting it from a bank for a small fee.

  • Endorsement is a possibility —this Bill of Exchange can be exchanged from one person to another in order to settle a debt.

You can study complete details about Bills of Exchange with Vedantu where the experts provide you with the best study material to go through and prepare yourself for the final examination. Also, the team of Vedantu is highly qualified and experienced that they guarantee the accuracy of the study material, and also if the students follow the exact pattern they ensure them to excel in their class and pass their exams with flying colors. Bills of exchange is an important concept that should be studied thoroughly as it is asked in the higher grades and competition exams too. Students will find the use of the concept of bills of exchange in practical life too. 

4. What are the different types of Bill of Exchange?

The different types of bills of exchange are listed below and you can get a complete description of their meaning and features on Vedantu’s site. Here is the list of types of bills of exchange:

  • Documentary Bill -The Bill of Exchange is accompanied by the required documentation that attests to the validity of the sale or transaction between the seller and the buyer.

  • Demand Bill - It is a bill that must be paid when it is demanded. Because there is no set payment date for the bill, it must be cleared whenever it is delivered.

  • Usage Bill - A usage bill is a time-bound bill, which indicates that payment must be made within the specified time frame.

  • Inland Bill - An inland bill is exclusively payable in one country and cannot be used in any other country. This law is completely contradictory to the foreign bill.

  • Clean Bill - An inland bill is exclusively payable in one country and cannot be used in any other country. This law is completely contradictory to the foreign bill.

  • Clean Bill - Since this bill lacks verification of a document, the interest rate is higher than the other bills.

  • Foreign Bill - The word "foreign bill" refers to a bill that can be paid outside of India. An export bill and an import bill are two examples of foreign bills.

  • Accommodation Bill - An accommodation bill is a bill that has been sponsored, drawn, and accepted without any conditions.

  • Trade Bill - The bill that is solely concerned with trade.

  • Supply Bill - A supply bill is a bill that is withdrawn from a government department by a supplier or contractor.

5. Where can I find the best study material for Bills of Exchange?

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The best study material for bills of exchange provided by Vedantu Covers all the topics like Meaning and Features of Bills of exchange and it is 100% accurate and you can easily download it free of cost from the most reliable platform Vedantu. The revision notes and important questions are prepared by the expert subject teacher that has deep knowledge about the subject and they have years of experience in training their students to score well and get a good rank.