What is Bill of Exchange – Definition, Features and how it works – Nobody is interested to sell the goods or extended it services to customers on credit. But many retail traders sell goods and services on credit to increase their sales and profit. But in future, buyer may deny the payment for goods he purchased from the seller. So to ensure the payment seller draws a bill of exchange on buyer who want to purchase goods with no money. Buyer accept the bill of exchange drawn on him at a future date for the value of goods he purchased. Thus buyer enter into a legal binding / agreement to pay the money at a future date, for value received.
What is Bill of Exchange : Definition
As Per Negotiable Instrument Act 1881, Bill of Exchange is a negotiable instrument containing an unconditional order in writing signed by maker (creditor/drawer) directing a another person (debtor/drawee) to pay a fixed amount of money only to or to the order of, a certain person or to the bearer of the instrument. BoE is primarily used in International Trade.
Features of Bill of Exchange :
- It is unconditional order to make payment
- It must be in writing
- It should be signed by the Maker of the Bill
- Amount should be specified or certain
- The date of payment should be specified on Bill.
- It should be payable to specific person.
- Amount in Bill is payable either on demand or on expiry of a fixed period of time.
- It must be stamped as per law.
There are three parties involved with a Bill of Exchange :
Drawer : The Person who write the Bill or seller of goods is called the drawer.
Drawee : The person on whom the Bill of Exchange is drawn is called the drawee or who pay the amount specified on bill of exchange to payee. The person may be buyer of goods. Drawee becomes acceptor on acceptance of Bill of Exchange for payment.
Payee : The person who is entitled to receive the amount from acceptor is called “Payee”. Drawer of the bill himself will be the payee if he keeps the bill with him till the date of its payment.
Payee may change in case of discounting and endorsement.
- In case if the drawer has got the bill discounted, the person who has discounted the bill will become the payee.
- In case the drawer has endorsed the bill in favour of his creditor, the creditor will become the payee.
How does a Bill of Exchange Works ?
Suppose Mr. Ram wants to purchase some electronics item from Manufacturer (Mr. Sham), but he has no money.
Manufacturer (Mr. Sham) agrees to sell the items to Mr. Ram on 60 days credit worth ₹50,000/-.
To ensure the payment on due date, Manufacturer (drawer) draws a bill of exchange for ₹ 50,000/- on Mr. Ram (drawee).
Before it is accepted by Ram it will be called draft. It will become a bill of exchange when it is accepted by Ram and sign it by writing the word ‘Accepted’.
It becomes Bill of Exchange Receivable for Mr. Sham and Bill of Exchange Payable for Mr. Ram.
Drawer keeps the Bill till due date and present it on due date before drawee and receive payment. It is known as realization of Bill.