How a Bill of Exchange Functions


How a Bill of Exchange Functions:

In order to fully grasp the transactions relating to bill of exchange we thoroughly learn the procedure. The following example will make it clear.

Suppose A sells goods to the value of $500 to B. The most ready means of closing the transaction will be cash payment by B to A. But payment of this nature are not many in actual practice. The greatest volume of business is done on credit. That being the case A will have to wait for some time to receive payment from B. A, merchant can hardly afford to be out of funds for long. Moreover, to sell goods on credit is rather a risky job. Therefore as soon as A sells goods to B, he will draw a bill for $500 on B and forward the same to him together with the goods with instructions to B to accept the bill and return the same to A. Upon receipt of the bill, B would write on the face of the bill “accepted” and put his signature below. It means that B approves the bill and also binds himself to pay the amount thereof when due. The bill is thus complete and comes back to A to remain in his possession till maturity or can be endorsed or discounted by him. On the due date the holder of the bill presents it before the acceptor and receives payment of the bill from the acceptor.

Thus the bill of exchange is the instrument, rather the mechanism which finances the major portion of all commercial transactions these days and it helps both the debtor and the creditor alike.

Tenor and Usance:

Tenor is the period of time after which a bill becomes payable. Thus, where a bill is payable after 90 days from the date of drawing or acceptance, the tenor of the bill is 90 days. Bill may be made payable:

On Demand. The bill so drawn is payable as soon as its payment is demanded by the holder of the bill.

A Sight. A bill of exchange so drawn becomes payable immediately it is brought to the notice of the drawee.

After Date. When a bill is drawn ‘after date’ its due date is calculated from the date of the bill.

After Sight. When a bill is drawn ‘after sight’ its due date is calculated from the date on which it is sighted or seen by the drawee i.e., from the date of acceptance by the drawee.

Usance. It is the usual time of payment of a bill of exchange as fixed by custom.

Days of grace:

In calculating the due date of payment it is customary in business circle to allow three additional days to the drawee or acceptor to meet the bill. The extra days are called “days of grace” or “grace days”. Thus a bill dated 15th March, for three months becomes payable on the 18th June and this is the due date.

Holder:

Holder of a bill is a person who is entitled in his own right to the possession thereof and to claim the amount due thereon.

Holder in Due Course:

When a person takes a bill, complete and regular on the face of it and before its due date, in good faith and for valuable consideration he is called the holder in due course.

Acceptance:

When a drawee signs his name across the face of along with the word “accepted” the bill is said to be accepted and this act of the drawee is called acceptance of a bill. Before this is done, the drawee cannot be made liable for the bill.

Different Kinds of Acceptance:

General Acceptance:

When a bill is accepted without any condition to the order of the drawer, it is called general acceptance.

General Acceptance:

When a bill is accepted with some qualifications to the order of the drawer it is called qualified acceptance.

A qualified acceptance again may be of five different types. These are following types:

Time. When the acceptor agrees to pay the bill on some day other than the date required by the drawer, it is called qualified acceptance as to time.

Place. When a bill is payable at a particular place and there only, it is called local qualified acceptance.

Partial. When a bill is accepted for a part of the amount of a bill, it is called partial qualified acceptance.

Parties. When a bill is accepted by one or two of the drawees, but not all, it is called qualified acceptance as to parties.

Condition. When a bill is accepted subject to a certain condition being fulfilled it is called conditional qualified acceptance.

You may also be interested in other articles from “accounting for bills of exchange page” chapter:

  1. Definition and Explanation of Bill of Exchange
  2. Advantages of a Bills of Exchange
  3. How a Bill of Exchange Functions
  4. Promissory Note
  5. Difference between Bill of Exchange and Promissory Note
  6. Difference Between Bill of Exchange and Cheque/Check
  7. Recording Transactions of Bill of Exchange
  8. Drawing, Acceptance, and Payment of Bill of Exchange
  9. Discounting of Bill of Exchange
  10. Bills of Exchange for Collection
  11. Endorsement of a Bill of Exchange
  12. Dishonour of a Bill of Exchange
  13. Renewal of a Bill of Exchange
  14. Retiring of a Bill of Exchange
  15. Accommodation Bill of Exchange
  16. Insolvency of the Acceptor in a Bill of Exchange

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