What is a Promissory Note?
A Promissory Note is a financial instrument in writings issued by the purchaser of the goods (the debtor) as a promise to pay a certain fixed amount to the seller either on-demand or on expiry of a certain fixed period. There are only two parties to a Promissory Note:
- Drawer: A person who draws a note and signs it to make a promise to pay the fixed amount to the seller.
- Payee: A person to whom the amount is payable.
Definition
“A Promissory Note is an instrument in writing containing an unconditional undertaking signed by the maker to pay a certain sum of money to, or to the order of, a certain person.” – The Indian Negotiable Instruments Act, 1881
Characteristics of a Promissory Note:
The following are the characteristics of a promissory note:
- A Promissory Note must be written.
- The note must be unconditional.
- There must be a promise to pay the fixed amount.
- The amount of a bill is pre-defined.
- It must be signed by the maker.
- The Promissory Note cannot be made payable to the bearer.
- It must bear a stamp as per the value.
Difference between Bills of Exchange and Promissory Note:
|
Basis |
Bills of Exchange |
Promissory Note |
|---|---|---|
| Meaning | Bills of Exchange is a written document that binds one party to pay a certain amount to another party on demand or on the expiry of a fixed period of time. | A Promissory Note is a financial instrument in writings issued by the purchaser of the goods (the debtor) as a promise to pay a certain fixed amount to the seller either on demand or on expiry of a certain fixed period. |
| Parties | There are three parties to the bills of exchange, namely the Drawer, the Drawee, and the Payee. | There are only two parties to a Promissory Note, namely The Drawer and the Payee. |
| Drawer | It is drawn by the seller or the creditor. | It is drawn by the purchaser or the debtor. |
| Nature | It is an order to pay. | It is a promise to pay. |
| Acceptance | It must be accepted and signed by the drawee. | No acceptance is needed as such. |
| Liability of the Drawer | The liability of the drawer is secondary. He is liable only when the drawee does not pay the amount. | The liability of the drawer is primary. |
| A drawer as a Payee | The Drawer can be the payee if he retains the bill till the date of maturity. | The Drawer cannot be the Payee as he is the person liable to pay the amount. |
| Copies | In the case of foreign trading, three copies are made, otherwise, one copy is made. | Always one copy is made. |
| Stamps | No stamping is needed in case of bills payable “on-demand”. | A promissory note must bear a stamp always. |
Difference between Bills of Exchange and Promissory Note
Bills of Exchange and Promissory Notes are two different concepts of accountancy.