Bill of Exchange

A bill of exchange comes from an open credit arrangement where the creditor gets the documentary evidence of the amount owing and also the terms of payment. The buyer must pay the amount shown on the bill of exchange on the specified date. Therefore, a bill of exchange can be defined as a legal evidence of debt (an acknowledgement of debt), and which fixes the date of payment. If the buyer has some claim over the seller (e.g. quantity received less than ordered or defective goods delivered, etc.) the former may sue the latter for relief. But this suit has nothing to do with the question of payment of bill of exchange.

“A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of instrument.”

Three parties in a bill of exchange

1.  Drawer ( Maker)
2. Drawee (acceptor or debtor)
3. Payee ( the person who receives money , drawer may make bill himself)

Bills receivable and Bills Payable

Every bill has to be accepted by drawee and it made payable to payee, Since the drawer (creditor) draws the bill, a bill from the point of view of the drawer is called a Bills Receivable because the money receivable by him.

On the other hand, the same bill from the point of view of the drawee (the debtor, who accept the bill) is called a Bills Payable because the money is payable by him.

Advantages of bill of exchange are the drawer c can obtain payment from banker before its due date and a bill can be transferred freely if it is bearer instrument.