What is Bills of Exchange?

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. There are three parties to the bills of exchange, namely:

1. Drawer: The drawer is the seller of the goods who draws the bill and is entitled to receive the amount of the bill.
2. Drawee: The drawee is the purchaser of the goods on whose name the bill is being drawn, and is liable to pay the amount of the bill.
3. Payee: The payee is the person to whom the payment is to be made. The payee can be the drawer himself if he holds the bill on the day of maturity, or the Bank in case the bill has been discounted from the bank or the third party (endorsee) to whom the bill has been endorsed by the drawer.

“A Bills of Exchange is an instrument in writing, an unconditional order signed by the maker directing to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.” – The Indian Negotiable Instruments Act, 1881

Characteristics of Bills of Exchange:

According to the above definition, the following are the characteristics of a Bills of Exchange:

• A Bills of Exchange must be in writing.
• It is an order to make payment, not a request. 
• The order must be unconditional.
• The amount of a bill is pre-defined.
• A bill has a fixed maturity date.
• A bill must be signed by the drawer and the drawee. A bill, before being accepted and signed by the drawee, is called a draft.
• A bill amount is payable either on-demand or on the expiry of a fixed period of time.
• A bill is payable either to a specified person or to the bearer of the bill.
• A bill is either drafted on a stamped paper or bears a stamp.

Bills of Exchange and Promissory Notes are two different concepts of accountancy.