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Terminology of Bills-of-Exchange

Bills Receivable” and “Bills Payable”.

Bills Receivable
is a bill of exchange in the hand of a person who is entitled to receive the amount due on it. A drawer or endorsee treats the bill of exchange as bills receivable.

Bills Payable is a bill of exchange for a person who is liable to pay it on due date. An acceptor of the bill treats the bill of exchange as bills payable.

Days of grace

Days of grace are three extra days added to the period of the bill to ascertain date of maturity. Days of grace can be claimed as a matter of legal right. Suppose a bill is drawn on 8the March and is payable three months after the date, its date of maturity will be 11th June.


Accommodation bills

An accommodation bill may be defined as a bill of exchange which is drawn and accepted to accommodate the other party. In other words, an accommodation bill is drawn and accepted without any consideration just to oblige some friend. There is no relationship of debtor and creditor between the drawee and drawer.

Maturity of a Bill

Maturity means the date on which a bill of exchange falls due for payment. The date of maturity is to be calculated in respect of bills which are payable after a specified time. Every instrument payable at specified period after date or after sight is entitled to 3 days of grace.
 

Days of grace can be claimed as a matter of legal right. The bill is presented for payment only on the last day of grace. Thus time bills are at maturity on the third day after the day on which they are expressed to by payable.

 

Rules of calculation of the date of maturity :

(1) When an instrument is payable at a stated number of months after date or after sight or after a certain event, it matures three days after the corresponding date of the month after the stated number of months.

(2) If the month in which specified number of months will terminate, has no corresponding date, the instrument will mature on the last day of the month.

(3) 
When a note or bill is payable after date or after sight or after happening of a certain event, the date of maturity is calculated by excluding the day on which it is drawn or presented for acceptance or the day on which such event happens.
If the maturity day of a negotiable instrument comes out to be a public holiday, the instrument shall be deemed to be due on the next preceding business day. In case the date of maturity is an emergency holiday, the instrument shall fall due for payment on the next succeeding business day. Public holidays include all Sundays and any other day declared by the Central.

 

Endorsing a Bill


The transfer of a bill by the holder by putting his signature on its back is called endorsing a bill. In this way, transferee becomes the holder of bill of exchange. Now the bill of exchange would be payable to the endorsee instead of the transfe


Retiring a Bill Under Rebate

 
Sometimes the acceptor of a bill may offer the holder of the bill to accept the payment before its date of maturity provided the acceptor is allowed some rebate. If the holder agrees to do so, the process is called retiring a bill under rebate.

Renewal of a Bill


When the acceptor of a bill finds himself in financial difficulty to honour the bill on the due date, he may repeat the drawer of the bill to cancel the original bill and to draw another bill for the amount plus some interest. This process is known as the renewal of a bill.


Discounting a Bill

Sometimes the holder of the bill may need cash before the maturity of the bill. For this, he has to handover the bill to his bank. The bank charges a normal discount for its services. This process of encashing a bill any time before the maturity is known as discounting a bill. In this case, bank will have to wait till the date o maturity.
 

Discounting of a bill” and journal entries for recording these.
 

Discounting of a bill means canceling the old acceptance for a consideration of a new bill or part payment in cash and part payment in bill. The accounting effect of dishonour and cancellation of bill is the same. Following entry is passed:
 

Bank A/c.

Dr.

Discount A/c.          

Dr.

To Bills Receivable

A/c.

 

Cancellation of a bill and journal entries for recording these


Cancellation of a bill means canceling the old acceptance for a consideration of a new bill or part payment in cash and part payment in bill. The accounting effect of dishonour and cancellation of bill is the same. Following entry is passed:

Acceptor’s A/c.  Dr.

To Bills Receivable A/c.

Endorsement

Endorsement is a process by which an instrument is made payable to any third person. Endorsement is an instruction to the drawee that he should pay to a person named in the instrument. Sec. 15 of the Negotiable Instruments Act, 1881, defines the endorsement as follows:

“When the maker or holder of a negotiable instrument signs the same otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto… he is said to endorse the same and is called the endorser.”
The person in whose name endorsement is made is called endorsee.

 

The effect of endorsement of a bill of exchange

The effect of endorsement of a bill of exchange is that the property in the instrument is transferred to the endorsee who has a right to further negotiate the instrument. It vests in the endorsee a right of action against all parties whose name appears in the instrument.

The drawer of a bill, if he does not keep the bill with himself till maturity, he can endorse the bill to a third party in discharge of his debts. The endorsee will collect the payment of the bill of maturity from the acceptor.

 

Dishonour of a Bill


Dishonour of a bill means the situation which arises when the acceptor of bill fails to meet his commitment on the date of maturity. The effect of the dishonour is that the acceptor becomes debtor of the drawer because the bill becomes valueless. The holder of a bill, upon its dishonour, has a right of action against other parties to the bill. All expenses incurred formalizing the fact of dishonour is recovered from the person from whom the bill was received.






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