CA Foundation · Accounting

Bills of Exchange and Promissory Notes for CA Foundation Accounting

A bill of exchange is a written order by a drawer asking a drawee to pay a fixed sum on a set date. A promissory note is a written promise to pay. To solve questions, find the due date, pass entries in both parties' books, then handle discounting, dishonour or renewal.

What this chapter covers

This chapter covers credit instruments. A seller (drawer) writes a bill on a buyer (drawee). Once the buyer accepts it, the bill becomes a legal promise to pay on a fixed date. A promissory note is the same idea, but the debtor writes the promise. The chapter teaches you what happens to the books at each stage of the bill's life.

The bill's life has a clear sequence: drawing and acceptance, holding till maturity, or discounting, endorsing or sending for collection, and then payment or dishonour. After dishonour you may see noting charges, retirement before the due date, renewal, or the acceptor's insolvency. Each stage has its own journal entry. Learn the sequence and the entries follow.

This chapter links to several other parts of the Accounting paper. It uses journal entries, ledger accounts and the trade receivable and payable ideas you meet early on. Bills receivable and bills payable accounts also appear in final accounts, in partnership questions and in reconciliation-style problems. Strong command here makes those chapters easier.

Accounting is a subjective paper, so you earn marks for each correct entry and working note, not only the final answer. Bills questions are built from many small entries, which suits step marking. If you learn the formats, you can collect most of those marks even when one figure goes wrong. The chapter is also rule-based, so with steady practice it is one of the more predictable areas. The main risk is losing marks through date errors or entries in the wrong party's books, and both can be fixed by practice.

Bills of Exchange and Promissory Notes: topics in the order to study them

1Meaning and Features of Bills of ExchangeStart here, because every later topic depends on knowing the drawer, drawee, payee and what acceptance means.
2Promissory Note vs Bill of ExchangeOnce you know a bill, the differences with a promissory note are easy to see and remember.
3Due Date, Maturity and Calculation of DatesYou need the correct due date before you can decide whether a bill is dishonoured, discounted or renewed.
4Accounting Treatment in Books of Drawer and DraweeThis is the core entry set, and all later topics are variations on it.
5Discounting, Endorsement and Collection of BillsThese are the ways to use a bill before maturity, and they build directly on the basic entries.
6Dishonour, Noting Charges and Retiring of BillsYou must know the normal path of a bill before you can reverse it on dishonour or settle it early.
7Renewal of Bills and Insolvency of AcceptorRenewal and insolvency extend the dishonour entries, so they come after dishonour.
8Accommodation BillsStudy this last, as it combines acceptance, discounting and sharing of proceeds between two parties.

How to prepare Bills of Exchange and Promissory Notes

Treat this chapter as a timeline with entries at each point. Practise on paper, not by reading solutions.

Read the meaning and features once, then write the parties (drawer, drawee, payee) from memory for a sample bill.
Learn the due date rule: for a bill payable after date, count the term from the date of drawing; for a bill payable after sight, count it from the date of acceptance. Then add three days of grace. Practise month-end cases such as a bill drawn on 31 January for one month.
Make a one-page entry sheet with two columns, Drawer and Drawee, and the entries for drawing, acceptance, maturity, discounting, endorsement, dishonour and renewal. Rewrite it until you do not need to look.
Solve questions in a fixed order: find the due date, pass the entries in the required party's books, then prepare the ledger account if asked. Show working notes for interest and discount.
Practise discounting with a simple formula: discount = face value × rate % p.a. × (unexpired days ÷ 365), or face value × rate % p.a. × (unexpired months ÷ 12). Compute it on the full face value of the bill, for the unexpired period from the discounting date to the due date.
For renewal and insolvency, identify first how much is paid in cash and how much is on a new bill. Then add interest, and for insolvency compute the loss on the unpaid portion.
Finish with timed mixed questions, and check each answer for the correct party, correct account name and correct date.

Common mistakes in Bills of Exchange and Promissory Notes

Calculating the due date wrongly, such as forgetting grace days or miscounting month-end dates.
Fix: Write the date count step by step. For terms in months, move by calendar months first, then add three days of grace.
Passing entries in the wrong party's books.
Fix: Underline the party named in the question before you start. The drawer holds Bills Receivable; the drawee holds Bills Payable.
Calculating discount on the wrong amount or period.
Fix: Discount is on the face value of the bill for the time left to run, from the discounting date to the due date.
Not reversing entries properly on dishonour.
Fix: Ask where the bill is at the time of dishonour, then credit Bank, Bills Receivable or the endorsee accordingly.
Missing interest or noting charges in the renewal amount.
Fix: List the old bill, interest, noting charges and cash paid. The new bill is for the balance that remains.
Skipping narrations and working notes.
Fix: Give a short narration under each entry and show the working for interest and discount, so you can earn step marks.

Last-day revision: Bills of Exchange and Promissory Notes

Drawer writes the bill; drawee accepts it; payee receives the money.
A bill needs acceptance by the drawee; a promissory note is made by the debtor and needs none.
Due date = date of drawing (bill payable after date) or date of acceptance (bill payable after sight) + term + 3 days of grace.
If the due date is a public holiday, the bill is due on the next working day. If it is an emergency holiday, the bill is due on the preceding working day.
Drawer debits Bills Receivable on acceptance and credits the drawee's personal account.
Drawee credits Bills Payable on acceptance and debits the drawer's personal account.
Discounting: the drawer debits Bank and Discount, and credits Bills Receivable.
Endorsement to a creditor: debit the creditor, credit Bills Receivable.
On dishonour, the drawer debits the drawee's account and credits Bank, Bills Receivable or the endorsee, depending on where the bill was.
Noting charges are paid by the holder and usually recovered from the drawee.
Retiring a bill early gives a rebate to the drawee: debit Bills Payable and credit Bank and Discount Received.
Accommodation bills are not for a real trade deal; the parties share proceeds and each records their own share.

Bills of Exchange and Promissory Notes practice questions

Bills of Exchange and Promissory Notes: frequently asked questions

What are the grace days in a bill of exchange?

Three days of grace are added to the term of a bill that is not payable on demand. So the due date is the date of drawing (for a bill payable after date) or the date of acceptance (for a bill payable after sight), plus the term, plus three days. Do not add grace to bills payable on demand.

What is the difference between a bill of exchange and a promissory note?

A bill of exchange is an order written by the drawer, and the drawee must accept it. A promissory note is a promise written by the debtor, so it has two parties, not three. The note does not need acceptance.

How is a bill of exchange different when it is discounted and when it is endorsed?

With discounting, you give the bill to a bank and receive cash less discount. With endorsement, you pass the bill to a creditor to settle a debt, so no cash or discount arises. Both transfer the bill before the due date.

How should I practise this chapter for the exam?

Keep an entry sheet of drawer and drawee entries and rewrite it from memory. Then solve full questions on paper in a fixed order: due date, entries, ledger accounts. Practise at least one question each on discounting, dishonour, renewal and accommodation bills.