Meaning and Features of Bills of Exchange

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. 

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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 (Frequently Asked Questions)

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 is the term 'discounting bills of exchange' meaning to convey?

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.