Monday, October 22, 2012

AHSEC - Class 11: Accounting for Bills of Exchange Transactions

Unit – 6: Accounting for Bills of Exchange Transactions
Q.1. What is bills of exchange? Mention its features. Name the three parties of bills of exchange.         2015
Ans: Bills of Exchange: A bill of exchange as, "an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a sum of money only to or to the order of a certain person or to the bearer of the instrument." A bill of exchange is also called a draft.
Features of bills of exchange:
a)      A bill of exchange must be in writing.
b)      It is an order to make payment.
c)       The order to make payment is unconditional.
d)      The maker of the bill of exchange must sign it.
e)      The payment to be made must be certain.
f)       The date on which payment is made must also be certain.
g)      The bill of exchange must be payable to a certain person.
h)      It must be stamped as per the requirement of law.
There are three parties to a bill of exchange namely:
a)      Drawer
b)      Drawee and
c)       Payee.
Drawer is the maker of the bill of exchange. A seller/creditor that is entitled to receive money from the debtor can draw a bill of exchange upon the buyer/debtor.

Drawee is the person upon whom the bill of exchange is drawn. Drawee is the purchaser or debtor of the goods upon whom the bill of exchange is drawn.
A payee is the person to whom the payment is to be made. The drawer of the bill himself will be the payee if he keeps the bill with him till the date of its payment.
Q.2. Mention four advantages of bills of exchange.
Ans: Advantages of bill of exchange
a)      Framework for relationship: A bill of exchange represents a device, which provides a framework for enabling the credit transaction between the seller/creditor and buyer/debtor on an agreed basis.
b)      Certainty of terms and conditions: The creditor knows the time when he would receive the money so also debtor is fully aware of the date by which he has to pay the money.
c)       Convenient means of credit: A bill of exchange enables the buyer to buy the goods on credit and pay after the period of credit.
d)      Conclusive proof: The bill of exchange is a legal evidence of a credit transaction implying thereby that during the course of trade buyer has obtained credit from the seller of the goods; therefore, he is liable to pay to the seller.
e)      Easy transferability: A debt can be settled by transferring a bill of exchange through endorsement and delivery.
Q.3. Draft a specimen copy of bills of exchange.
Specimen of bill of exchange
Mr. X
Rs.50,000
Assam
April 01,2015
Three months after date pay to me or my order, the sum of rupees Fifty Thousand only, for value received.
STAMP
Accepted
(signed)
Mr. Y
Dibrugarh, Assam
(Signed)
Mr. X
Tinsukia, Assam

Mr. Y
Dibrugarh, Assam

Q.4. Write a brief note on calculation of legal due date in case of bills of exchange. (for knowledge only)
Ans: Legal Due Date of a bill of exchange: The Legal Due Date of Bill of Exchange is that when the amount of the bill is payable by the drawee. The calculation of due date of a bill of exchange is dependent on the nature of the bill.
A bill of exchange is of two types:
(a) A bill payable on demand or at sight (Presentation) e.g., Cheque,
(b) Term bill.     
A term bill may be payable after:
(a) A certain period after date, or
(b) A certain period after sight.
A cheque which is drawn on a banker is payable of demand. The banker is liable to pay as and when a cheque is presented to him for payment provided there is sufficient balance in drawer’s account and cheque is properly drawn.
In case of a Bill Payable after date, the legal due date is calculated from the date of drawing of the bill.
For Example, on 1.1.2009 Mr. A draws a bill on Mr.B for Rs. 20,000 for 3 months payable after date. In this case the due date will be:
                Date of Drawing of Bill                                                                                   1.1.2009              
                Period (Months)                                                                                                 3        .             
                Maturity Date                                                                                                    1.4.2009
                Days of Grace (3 days Added in case of every B/E)                            3           .
                Due Date                                                                                                             4.4.2009

In case of a Bill Payable after sight, the legal due date is calculated from the date of acceptance of the bill. For Example, on 1.1.2009 Mr. A draws a bill on Mr.B for Rs. 20,000 for 3 months payable after sight. The bill was accepted on 7.1.2009. In this case the due date will be:
                Date of acceptance of Bill                                                                             7.1.2009              
                Period (Months)                                                                                                 3        .             
                Maturity Date                                                                                                    7.4.2009
                Days of Grace (3 days Added in case of every B/E)                            3           .
                Due Date                                                                                                             10.4.2009
(If no information is given about the type of the bill, due date is calculated assuming bill is payable after date)
If the due date falls on a day which is a public holiday, the due date the due date shall be the preceding business day and if the preceding day is a public holiday, if will due on the day preceding the previous day.
For Example, if the due date of a bill is 26th January, it falls due on 25th January, if 25th January is also a public holiday (Sunday), it will fall due on 24th January.
In the due date falls on a day which is a Sudden holiday, the due date the due date shall be the following business day. For Example, on 1.1.2009 Mr. A draws a bill on Mr.B for Rs. 20,000 for 3 months payable after sight. The bill was accepted on 7.1.2009. 10th April was a sudden holiday. In this case the due date will be 11th April.
If the period of bill is stated in days, the calculation of the due date will be in days which include the date of payment but exclude the date of transaction. For example, on 1.8.2009 Mr. A draws a bill on Mr.B for Rs. 20,000 for 30 days payable after sight. The date of acceptance is 8.8.2009. In this case the due date will be:
                Date of acceptance of Bill                                                                             8.8.2009              
                Period (days)                                                                                                     30         .             
                Maturity Date    (from 9.8.2009)                                                                 7.9.2009
                Days of Grace (3 days Added in case of every B/E)                            3          .
                Due Date                                                                                                             10.9.2009
If the period of the bill is given in months, the calculation will be made in terms of month, ignoring the number the number of days in a month (as calculated above)
                If the bill is payable on demand, no days of grace is allowed.
Q.5. What is Promissory note? Mention its features. Who are the parties of bills of exchange? Draft a specimen copy of promissory note.
Ans: Promissory note: A Promissory note is defined as an instrument in writing, containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to or to the order of a certain person, or to the bearer of the instrument.
Features of Promissory note are:
a)      It must be in writing.
b)      It must contain an unconditional promise to pay.
c)       The sum payable must be certain.
d)      It must be signed by the maker.
e)      The maker must sign it.
f)       It must be payable to a certain person.
g)      It should be properly stamped.
Specimen of Promissory Note
Mr. X
Rs.50,000
Assam
April 01,2010
Three months after date I promise to pay Mr. Y or order a sum of Rupees Fifty Thousand only for value received.
STAMP

To,
Mr. Y
Dibrugarh, Assam
Mr. X
Tinsukia, Assam

Q.6. Mention five differences between bills of exchange and promissory note.                               2015
Ans: Difference between bill of exchange and Promissory Note
Basis
Bill of Exchange
Promissory Note
Drawer
It is drawn by the creditor
It is drawn by the debtor
Order or Promise
It contains an order to make payment. There can be three parties to it, viz. the drawer, the Drawee and the payee.
It contains a promise to make payment. There are only two parties to it, viz. the drawer and the payee.
Acceptance
It requires acceptance by the Drawee or someone else on his behalf.
It does not require any acceptance.
Payee
Drawer and payee can be the same party
Drawer cannot be the payee of it
Set
A bill of exchange can be drawn in sets.
Promissory note cannot be drawn in sets.


Q.7. Distinguish between Trade Bill and Accommodation bill.
Basis
Trade Bill
Accommodation Bill
Purpose
There are drawn for trade purposes.
These are drawn and accepted for financial assistance.
Consideration
These are drawn against proper consideration.
These are drawn in the absence of any consideration.
Proof
These bills are proof of debt.
These bills are not a proof of debt.
Legal action
For obtaining the debt from Drawee, Drawee can resort to legal action.
Legal action cannot be resorted the recovery of amount against these bills by the immediate parties.

Q.8. Distinguish between cheque and bills of exchange.
Ans: Difference between cheque and bill of exchange
Basis
Cheque
Bills of Exchange
Drawee
A cheque is always drawn on a bank or banker.
A bill of exchange can be drawn on any person including a banker.

Acceptance
A cheque does not require any acceptance.
A bill must be accepted before the Drawee can be made liable upon it.
Payment
A cheque is payable immediately on demand without any days of grace.
A bill of exchange is normally entitled to three days of grace unless it is payable on demand.
Stamp
A cheque does not require any stamp.
A bill of exchange must be stamped.
Protection
A banker is given statutory protection with regard to payment of cheques in certain circumstances.
No such protection is available to the Drawee or acceptor of a bill of exchange.

Q.9. Loading comments...

Problems loading Discus?
Distinguish between discounting and retiring of bill of exchange
Ans: Difference between discounting and retiring of bills of exchange
Discounting
Retiring
a)      It is the process of selling the bill to the bank or anyone else before the due date.
b)      The reduction made by the bank is called discount.
c)       Discount is a loss to the person who discounts the bill and a gain to the bank.

a)   It is the process of paying the amount of the bill before due date.
b)   The concession allowed to the acceptor is called rebate.
c)    Rebate is a loss to the payee and a gain to the acceptor.


Q.10. What do you mean by dishonour of a cheque? Under what circumstances a bank may dishonour a cheque.
Ans: Dishonour of cheques: Cheque is ordinarily paid by the drawee bank if it is in perfect order. But sometimes a cheque is not paid. When a cheque is paid by the drawee bank, it is said to be honoured. When it is not paid it is said to be dishonoured.
In the Following cases the bank may dishonour a cheque:
a)      When the customer has died and the bank has notice of his death.
b)      Where the customer has become insolvent or an order of adjudication has been passed against him.
c)       When a customer becomes a lunatic and the banker has got notice of his insanity.
d)      Where the drawer countermands payment.
e)      When the customer has not got sufficient funds with the bank and there is no overdraft arrangement.
f)       Where there are material alterations or signatures of the drawer or endorses are irregular.
g)      When the drawer has closed his account prior to the presentation of cheque.
h)      When a cheque is mutilated.
Q.11. What do you mean by endorsement of bill? Mention its various types.
Ans: Endorsement of Bill: Endorsement is the act of signing a cheque for the purpose of transferring it to somebody else. Under Negotiable Instruments Act it means the writing of one’s name on the back of the instrument or any paper attached to it with the intention of transferring the rights therein.
Endorsements are of various kinds, the most important being as follow:
Blank or general endorsement: A blank or general endorsement is one in which the endorser simply puts down his signature. The name of the endorsee, it should be noticed is not put down. The effect of such an endorsement is to make the cheque a bearer cheque.
Special endorsement: Special or full endorsement is that which contains not only the name of the endorser but also the name of the endorsee. The effect of special endorsement is that the endorsee must endorse it again if he wants to transfer the property in the cheque to somebody else.
Restrictive endorsement: When an endorsement restricts the negotiability or transferability of proprietorship of a cheque, it is known as restrictive endorsement.
Partial endorsement: A partial endorsement is one which means to transfer the cheque only for a part of its value. For instance a cheque for Rs. 500 may be endorsed only for Rs.300. Legally such an endorsement is invalid. 

Labels

Absorption Costing (1) Accountancy (4) accounting for partnership firms (3) Accounting for Share Capital (3) accounts of non trading concern (3) advanced financial accounting (13) AHSEC (92) ahsec 11 (47) ahsec 12 (60) ahsec notes (89) AHSEC Question Papers (27) Assam Slet (10) bcfm (11) bills of exchange (6) branch accounting (3) Budgetary Control (3) Budgetary Control Notes (2) business communication (29) Business Environment Notes (7) business regulatory framewrok (47) Business Statistics Notes (23) cash flow statement (5) cbse 12 (19) cbse notes (27) commerce (13) company law (23) corporate accounting (33) corporate laws (14) cost accounting (63) cost and management accounting (34) cpt (36) cpt 200 (7) cpt notes (30) dibrugarh university (980) dibrugarh university notes (534) dibrugarh university question paper (342) dibrugarh university solved papers (211) dibrugarh university syllabus (47) direct tax law (49) eco - 01 (4) ECO - 02 (2) ECO - 03 (2) ECO - 05 (6) ECO - 06 (1) ECO - 07 (1) eco - 08 (4) eco - 09 (1) ECO - 10 (2) ECO - 11 (3) ECO - 12 (7) ECO - 13 (2) ECO - 14 (4) entrepreneurship (14) fianancial accounting (3) financial accounting (48) Financial Accounting Notes (11) financial management (18) Financial statements analysis (10) funds flow statement (3) guwahati university (304) guwahati university syllabus (54) Hire Purchase (5) Human Resource Management (14) icwai (38) icwai notes (39) ignou solved assignments (57) ignou solved question papers (63) income from house property (5) income from salary (4) Income Under the head Salaries (11) information technology (10) Installment Purchase (4) issue of shares (4) kkhsou (13) M.com (63) Management Accounting Notes (25) MCQ (11) paper I (1) paper II (9) paper III (1) principle of business mangement (16) Principles of Marketing Notes (16) royalty accounts (3) sale of goods act (8) semester I (157) Semester II (148) semester III (64) semester IV (136) semester V (101) semester VI (70) slet (13) Slet Ne (10) Small Business Management (5) solved assignments (22) UGC - NET: Commerce (08) (14) UGC - NET: Commerce (08) Paper II (3) UGC - NET: Commerce (08) Paper III (14) ugcnet solved question papers (23) Variance Analysis Notes (1)