Chapter 8: Bills of Exchange

📚 JAIIB 2026 • AFM • Module A • Chapter 8 of 11

Bills of Exchange
(The “I Owe You” System of Business — Written Promises to Pay)

When you sell goods on credit, how do you make sure the buyer will pay? You make them sign a WRITTEN promise! That written promise = Bill of Exchange. It’s the formal “IOU” of the business world — with legal backing under the Negotiable Instruments Act. This chapter covers the 3 parties, due dates, discounting, endorsement, dishonour, and all accounting entries.

⏱ 20 min read🎯 High Exam Weightage🧠 8 Memory Tricks⚡ 12 Flash Cards

Banky Learns About the “Legal IOU”! 📜

A customer sold goods worth ₹10,000 on credit. Instead of just trusting the buyer’s word, he drew a “Bill of Exchange” — a formal, legal document saying “Pay me ₹10,000 in 2 months.” The buyer ACCEPTED it by signing. Now it’s a legal promise! If the buyer doesn’t pay, the seller can go to court with this document.

“Sir, a customer came with a paper saying ‘Bill of Exchange.’ He wants us to give him cash NOW and collect from the buyer LATER. Is that legal?” 🤔 — “That’s called DISCOUNTING a bill, Banky. Banks do it every day!”
🤔
Section 1 of 9

Why Should You Know This?

🧑‍💼
Sir, people use UPI now. Who uses bills?
👨‍🏫
Banky, in big businesses — manufacturers selling to wholesalers, importers paying exporters — credit transactions worth CRORES happen daily. Bills of Exchange provide LEGAL SECURITY for these transactions. Banks DISCOUNT these bills (give immediate cash to the seller). It’s a MAJOR banking product! Also, a cheque IS a type of bill of exchange (Section 6, NI Act). If you work in trade finance, bills are your bread and butter!
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Exam Gold

4–6 questions! Drawer vs Drawee, BOE vs PN, due date + 3 days grace, discounting entries, dishonour entries. Very scoring!

💼

Daily Banking

Bill discounting, bill collection, LC-backed bills — core trade finance operations. Every commercial banker handles these.

🌍

Life Wisdom

Even a post-dated cheque is a type of bill! Understanding IOUs helps in personal lending and business dealings.

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Section 2 of 9

What Will You Learn?

👨‍🏫
5 things: 1️⃣ 2 instruments of credit — Bill of Exchange (Section 5, NI Act) and Promissory Note (Section 4). 2️⃣ Key differences — BOE vs PN, BOE vs Cheque. 3️⃣ 10+ important terms — due date, days of grace, holder, endorsement, discounting, retirement, renewal, accommodation bill, noting, protest, rebate. 4️⃣ Accounting entries — in books of Drawer (creditor) and Drawee (debtor) for 4 scenarios + honour and dishonour. 5️⃣ Bill Books — Bills Receivable Journal and Bills Payable Journal.
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Section 3 of 9

Key Words — Like Explaining to Your Friend

Instrument 1
Bill of Exchange
A written ORDER by the seller (creditor) telling the buyer (debtor) to pay a certain amount on a certain date
📜 Section 5

Definition (Section 5, NI Act): An instrument in writing, signed by the maker, containing an unconditional ORDER to pay a certain sum of money to a certain person, on a certain fixed future date or on demand.

3 Parties: (1) Drawer — the person who WRITES (draws) the bill. Usually the SELLER/CREDITOR. He ORDERS the buyer to pay. (2) Drawee — the person ON WHOM the bill is drawn. Usually the BUYER/DEBTOR. He has to PAY. When he signs “Accepted,” he becomes the Acceptor. (3) Payee — the person who will RECEIVE the money. Often the Drawer himself is the Payee.

For the Drawer: This bill is called Bills Receivable (he will RECEIVE money). It’s an ASSET. For the Drawee: This bill is called Bills Payable (he has to PAY). It’s a LIABILITY.

🧒 Like a school fee reminder: The school (Drawer) sends a letter to the parent (Drawee) saying “Pay ₹10,000 by 15th April.” The parent signs it “Accepted.” The school will RECEIVE = Bills Receivable. The parent has to PAY = Bills Payable. 🏫
Instrument 2
Promissory Note
A written PROMISE by the buyer (debtor) saying “I WILL pay you ₹X on this date”
📝 Section 4

Key difference from BOE: In a Bill of Exchange, the CREDITOR orders the debtor to pay (it’s an ORDER). In a Promissory Note, the DEBTOR himself promises to pay (it’s a PROMISE). Only 2 parties: Maker (the promisor/debtor) and Payee (receiver). No acceptance needed because the debtor himself is writing it!

FeatureBill of ExchangePromissory Note
NatureUnconditional ORDERUnconditional PROMISE
Made byCREDITOR (seller)DEBTOR (buyer)
AcceptanceRequired (drawee must accept)NOT required
PartiesTHREE (drawer, drawee, payee)TWO (maker, payee)
On dishonourNoted by Notary PublicNoting NOT necessary
🧒 BOE = Your mom TELLS you “Give ₹100 to your sister by Sunday” (she ORDERS). PN = YOU write a note “I PROMISE to give sis ₹100 by Sunday” (you PROMISE). Same result, different initiator! 📝
Due Date
Term + 3 Days of Grace
The bill’s payment date = end of the stated period + 3 extra “grace” days
📅 +3 Days

The period written on the bill is called the “Term” or “Tenor.” If a bill is drawn on 1st March for 1 month, the term expires on 1st April. But the law gives the drawee 3 extra days of grace. So the actual due date = 1st April + 3 days = 4th April.

If the due date falls on a public holiday? Payment becomes due on the PREVIOUS working day (earlier, not later!).

Cheque has NO days of grace — it’s payable on demand. Bills of exchange and promissory notes get 3 days of grace.

🧒 Like an exam deadline — your assignment is due on Monday, but the teacher gives you 3 extra days “grace.” Real deadline = Thursday. But if Thursday is a holiday, submit on Wednesday! 📅
Key Actions
What Can You DO With a Bill?
4 things the drawer can do with the bill before due date
4 Options

Once the Drawer receives the accepted bill, he has 4 options:

(a) RETAIN: Keep it safely until due date. On due date, present it to drawee and collect cash. Simplest option.

(b) DISCOUNT: Need cash NOW? Go to your bank. The bank gives you cash immediately but DEDUCTS some interest (called “discount”). Example: ₹10,000 bill → bank gives ₹9,800 cash now and keeps ₹200 as discount. Bank will collect ₹10,000 from drawee on due date.

(c) SEND TO BANK FOR COLLECTION: Give the bill to the bank and ask them to collect on due date. Bank collects on your behalf (charges a small fee).

(d) ENDORSE: Transfer the bill to someone else (say your own creditor C). Now C becomes the new holder. You settle YOUR debt to C using this bill.

🧒 You have a gift card of ₹1,000 (= bill). You can: (a) KEEP it and use it yourself on expiry date, (b) SELL it to a friend for ₹950 (= discounting), (c) ASK someone to redeem it for you (= collection), (d) GIVE it to someone you owe money to (= endorsement)! 🎁
Outcomes
Honour vs Dishonour
Bill is “honoured” if drawee pays. “Dishonoured” if he refuses or can’t pay.
✅ vs ❌

Honour (Met): Drawee pays the full amount on due date. Everyone’s happy. The bill is cancelled.

Dishonour: Drawee is unable or refuses to pay on due date. The drawer must now recover the amount directly from the drawee. Noting charges (paid to Notary Public for recording the dishonour) are also charged to the drawee.

Retirement: Drawee pays BEFORE the due date. The drawer may give a small discount called “Rebate” for early payment.

Renewal: Drawee can’t pay on due date but wants more time. He pays a PART in cash and accepts a NEW bill for the balance + interest. Old bill cancelled, new bill created.

Accommodation Bill: A bill drawn without any actual trade transaction — just for mutual financial help. Both parties know it’s not for real goods. If dishonoured, the drawer can NOT drag drawee to court!

Insolvency: If drawee goes bankrupt, only a portion of the debt is recovered. The rest becomes Bad Debts.

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Section 4 of 9

The Full Chapter — Simple Story

📝 Part 1 — The Accounting Entries (Drawer = Seller, Drawee = Buyer)

When bill is DRAWN and ACCEPTED:

Drawer’s books: Bills Receivable A/c Dr. | To Drawee’s A/c Cr. (asset created — I’ll receive money!)

Drawee’s books: Drawer’s A/c Dr. | To Bills Payable A/c Cr. (liability created — I have to pay!)

When bill is DISCOUNTED with bank:

Drawer: Cash/Bank A/c Dr. (amount received) + Discount A/c Dr. (bank’s cut) | To Bills Receivable A/c Cr.

Drawee: No entry (he doesn’t know/care what drawer did with the bill)

When bill is ENDORSED to C:

Drawer: C’s A/c Dr. | To Bills Receivable A/c Cr. (settled my debt to C using this bill)

When bill is HONOURED on due date:

If retained: Drawer: Cash A/c Dr. | To Bills Receivable A/c Cr. Drawee: Bills Payable A/c Dr. | To Cash A/c Cr.

When bill is DISHONOURED:

Drawer: Drawee’s A/c Dr. (+ noting charges) | To Bills Receivable A/c Cr. (bill cancelled, debt revives)

Drawee: Bills Payable A/c Dr. | To Drawer’s A/c Cr. (+ noting charges)

🧑‍💼 Banky: “Drawer sees bill as RECEIVABLE (asset). Drawee sees bill as PAYABLE (liability). Both are REAL accounts!”

📋 Part 2 — BOE vs Cheque (5 Differences)

FeatureBill of ExchangeCheque
Drawn onAny personOnly on a BANK
AcceptanceRequiredNOT required
Days of grace3 days allowedNO grace (payable on demand)
StampMust be STAMPEDNo stamp needed
Dishonour noticeNecessaryNOT necessary

Section 6 of NI Act: A cheque is a bill of exchange drawn upon a specified banker and payable on demand.

🧑‍💼 Banky: “A cheque IS a bill of exchange — just a special kind! It’s drawn on a BANK, payable ON DEMAND, and needs NO stamp or acceptance. Think of cheque as the ‘express version’ of a bill!” ⚡

🤝 Part 3 — Accommodation Bill + Bill Books

Accommodation Bill: No real trade. Just mutual help. A draws a bill on B. B accepts. A discounts it at the bank and shares the cash with B. On due date, B pays the bank. If B can’t pay → the bill is dishonoured, but A can’t take B to court because there was no real transaction. It’s risky and considered bad practice.

Bill Books: Two subsidiary journals: (1) Bills Receivable Journal — records all bills receivable (assets). (2) Bills Payable Journal — records all bills payable (liabilities). These are posted to the General Ledger periodically.

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Section 5 of 9

Exam-Ready Points

🎯 Must Remember!

  • Bill of Exchange (Section 5, NI Act): Written ORDER to pay. Made by CREDITOR. 3 parties. Acceptance REQUIRED. Must be stamped.
  • Promissory Note (Section 4, NI Act): Written PROMISE to pay. Made by DEBTOR. 2 parties. NO acceptance needed. Noting NOT necessary.
  • Cheque (Section 6, NI Act): A BOE drawn on a BANK, payable ON DEMAND. No stamp, no acceptance, no grace days.
  • 3 Parties of BOE: Drawer (writes), Drawee (accepts/pays), Payee (receives money). Drawer often = Payee.
  • Due Date = Term period + 3 days of grace. Holiday → PREVIOUS working day.
  • Bills Receivable = For the DRAWER (asset). Bills Payable = For the DRAWEE (liability). Both are REAL accounts.
  • 4 options for drawer: Retain, Discount (get cash from bank − discount), Send for Collection, Endorse (transfer to creditor)
  • Discounting entry (Drawer): Cash Dr + Discount Dr | To B/R Cr. Drawee has NO entry for discounting.
  • Endorsement entry (Drawer): Creditor’s A/c Dr | To B/R Cr
  • Honour: Drawee pays on due date. Dishonour: Drawee fails to pay → debt revives + noting charges.
  • Noting charges: Paid to Notary Public for recording dishonour. Charged TO the drawee.
  • Retirement: Payment BEFORE due date. Drawer may give rebate (discount for early payment).
  • Renewal: Can’t pay → part cash + new bill for balance + interest. Old bill cancelled.
  • Accommodation Bill: No real trade. Mutual help. Can’t sue in court on dishonour.
  • Insolvency: Drawee bankrupt → partial recovery. Unrecovered = Bad Debts.
  • Drawee is MAKER of a bill = NOT true. Drawer is maker. Drawee is ACCEPTOR.

📝 Past Exam Questions

Q: Noting charges are ___?
A: Paid to Notary Public for recording dishonour
Q: Which is NOT true? (a) No difference in appearance between trade and accommodation bill, (b) BOE must be accepted, (c) Drawee is maker of bill, (d) Creditor draws bill on debtor
A: (c) Drawee is NOT maker — Drawer is maker. Drawee is acceptor.
Q: When due date falls on public holiday, bill is payable on?
A: The PREVIOUS (earlier) working day
Q: An insolvent is a person from whom?
A: Some portion of debt is recoverable (not full, not zero — SOME)
🧠
Section 6 of 9

Memory Tricks

🧠 Trick 1 — BOE vs PN

ORDER vs PROMISE
BOE = “BOSS ORDERS employee to pay” 👔
(Creditor orders debtor)
PN = “EMPLOYEE PROMISES to pay” 🙋
(Debtor promises creditor)
BOE: 3 parties, acceptance needed, ORDER. PN: 2 parties, no acceptance, PROMISE.

🧠 Trick 2 — 3 Parties

Drawer-Drawee-Payee
“DDP = Dad Draws, Papa Pays!” 👨
Drawer = DRAWS the bill (seller)
Drawee = Must PAY (buyer)
Payee = Gets PAID (often = drawer)
Remember: drAWER writes, drAWEE pays. The “-ER” writes, the “-EE” pays.

🧠 Trick 3 — Due Date

+3 Days of Grace
“Bill date + Term + 3 GRACE days”
1 March + 1 month = 1 April + 3 = 4 April
Holiday? Go BACK, not forward! ⬅️
Always add 3 days of grace. If that date is a holiday, go to the PREVIOUS working day. Cheques have NO grace days.

🧠 Trick 4 — 4 Options (RDCE)

What to do with a bill
“RDCE = Retain, Discount, Collect, Endorse”
R = Keep it till due date 📦
D = Sell to bank for cash now 🏦
C = Ask bank to collect on due date 📮
E = Transfer to your creditor 🔄
4 things a drawer can do. Drawee has NO say in what drawer does with the bill.

🧠 Trick 5 — Receivable vs Payable

Asset vs Liability
“I will RECEIVE = my ASSET! 😊
I have to PAY = my LIABILITY! 😰”
Drawer = Bills Receivable (asset)
Drawee = Bills Payable (liability)
Both Bills Receivable and Bills Payable are REAL accounts. Debit what comes in, credit what goes out.

🧠 Trick 6 — Dishonour

Bill bounced!
“Bill BOUNCED = debt REVIVES! 💀→🧟”
Drawer: Drawee A/c Dr (debt back!)
+ Noting charges (Notary fee)
To B/R Cr (bill cancelled)
When dishonoured, the original debt comes back alive. Plus noting charges are added. Like a zombie debt!

🧠 Trick 7 — Accommodation Bill

Friendly IOU
“FAKE bill between FRIENDS! 🤝
No real goods traded
No appearance difference from real bill
Can’t sue in court if dishonoured!”
Accommodation bills look exactly like trade bills but have no underlying transaction. Risky — if dishonoured, no legal recourse.

🧠 Trick 8 — Cheque = Special BOE

Section 6, NI Act
“Cheque = BOE’s QUICK brother! ⚡
Drawn on BANK only
Payable ON DEMAND
NO stamp, NO acceptance, NO grace!”
A cheque is technically a bill of exchange but with special features: only on banks, demand-based, no formalities.
📊
Section 7 of 9

The Whole Chapter in One Picture

AFM Chapter 8 — Bills of Exchange 📜 THE LEGAL IOU OF BUSINESS 📜 BILL OF EXCHANGE (Section 5) ORDER to pay | Made by CREDITOR | 3 parties | Acceptance needed | Stamp required Drawer (writes) → Drawee (accepts/pays) → Payee (receives) 📝 PROMISSORY NOTE (Section 4) PROMISE to pay | Made by DEBTOR | 2 parties | No acceptance | No noting Maker (promises) → Payee (receives) 📅 DUE DATE Term + 3 days of grace Holiday → PREVIOUS working day 📦 4 OPTIONS (RDCE) Retain | Discount | Collect | Endorse Drawee has NO say in drawer’s choice ✅❌ HONOUR vs DISHONOUR Honour = paid on due date ✅ Dishonour = refused/unable ❌ + Noting charges 📒 ACCOUNTING ENTRIES Drawer: B/R Dr, Drawee Cr | Drawee: Drawer Dr, B/P Cr Discount: Cash+Discount Dr, B/R Cr | Endorse: Creditor Dr, B/R Cr 🔄 SPECIAL CASES Retirement = early pay + rebate | Renewal = part cash + new bill + interest Accommodation = no real trade | Insolvency = partial recovery → bad debts ⚡ CHEQUE (Section 6) = BOE drawn on BANK + payable ON DEMAND + NO stamp/acceptance/grace days 📚 BILL BOOKS: Bills Receivable Journal (assets) + Bills Payable Journal (liabilities) bankerbro.com/ • JAIIB AFM Chapter 8 • Module A
Section 8 of 9

Last-Minute Flash Cards

Bill of Exchange
Written ORDER to pay | Section 5 NI Act
3 parties: Drawer (writes), Drawee (pays), Payee (receives) | Acceptance needed | Stamp required
Promissory Note
Written PROMISE to pay | Section 4 NI Act
2 parties: Maker (promises), Payee (receives) | NO acceptance | Noting not needed
Cheque
BOE drawn on BANK, payable ON DEMAND
Section 6 NI Act | No stamp, no acceptance, no grace days
Due Date
Term + 3 Days of Grace
Holiday → PREVIOUS working day | Cheques have NO grace days
Bills Receivable
For DRAWER (seller) = ASSET
“I will RECEIVE money” | Real account | Debit when bill received
Bills Payable
For DRAWEE (buyer) = LIABILITY
“I have to PAY” | Real account | Credit when bill accepted
4 Options (RDCE)
Retain | Discount | Collect | Endorse
Discount = bank gives cash − discount charge | Endorse = transfer to your creditor
Discounting Entry
Cash Dr + Discount Dr | To B/R Cr
Drawee has NO entry | Bank collects from drawee on due date
Dishonour
Debt REVIVES + Noting charges added
Drawer: Drawee Dr (+ noting) | To B/R Cr | Zombie debt! 🧟
Accommodation Bill
No real trade | Mutual help | Can’t sue
Looks same as trade bill | If dishonoured, no court action possible
Retirement & Renewal
Retire = pay early + get rebate | Renew = new bill + interest
Retirement: early payment rewarded. Renewal: can’t pay → extension with cost.
Exam Trap!
Drawee is NOT the maker of a bill!
DRAWER = maker/writer of bill. DRAWEE = acceptor/payer. Don’t confuse!

⚡ Chapter 8 Done! Everything in 8 Lines:

  • BOE (Section 5): Written ORDER by creditor. 3 parties (Drawer, Drawee, Payee). Acceptance needed. Stamp needed.
  • PN (Section 4): Written PROMISE by debtor. 2 parties (Maker, Payee). No acceptance. No noting.
  • Cheque (Section 6): BOE on a bank, payable on demand. No stamp, acceptance, or grace days.
  • Due Date: Term + 3 days grace. Holiday → previous working day.
  • B/R = Drawer’s asset. B/P = Drawee’s liability. Both are Real accounts.
  • 4 Options: Retain, Discount (cash − discount), Collect (bank collects), Endorse (transfer to creditor).
  • Honour = paid. Dishonour = debt revives + noting charges. Retirement = early pay + rebate. Renewal = new bill + interest.
  • Accommodation Bill: No real trade. Can’t sue. Insolvency → partial recovery → bad debts.

Banky says: “BOE = Boss ORDERS! PN = Employee PROMISES! Cheque = Express BOE on bank! Due date = Term + 3 grace days. RDCE = what to do with a bill. Got it!” 🎉📜

Next: Chapter 9 — How banks actually record their accounting entries (it’s different from normal businesses!)

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