Fundamentals of Financial and Cost Accounting · Bills of Exchange

Bill of Exchange: Meaning, Features and Parties

Updated 10 October 2026 · Fact-checked

A bill of exchange is a written, signed, unconditional order by the drawer directing the drawee to pay a fixed sum of money to a named person (the payee) or the bearer, on demand or at a fixed or determinable future time. A promissory note is instead a written promise by the maker to pay.

Understand Bills of Exchange: Meaning, Features and Parties

Businesses often sell goods on credit. The seller wants a firm, written claim on the buyer, and the buyer wants time to pay. A bill of exchange solves both needs. It is a legal document that records the debt, the amount and the date of payment.

A bill of exchange is an instrument in writing. It contains an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money to a certain person or to the order of a certain person, or to the bearer of the instrument. The order must be to pay money only. The person who writes the order is the drawer. The person ordered to pay is the drawee. The person who receives the money is the payee. Often the drawer and the payee are the same person.

The drawee becomes liable only after he accepts the bill. He does this by signing across the face of the bill, usually writing the word "Accepted". After acceptance, the drawee is called the acceptor. Before acceptance, he has no liability on the bill.

A promissory note is different. It is a written, signed, unconditional promise by the maker to pay a fixed sum of money only to a certain person or to the order of that person. A note cannot be made payable to the bearer. There are only two parties: the maker (debtor) and the payee (creditor). It needs no acceptance, because the maker has already promised to pay.

Remember the core difference: a bill is an order to another person to pay, with three parties; a note is a promise by the signer to pay, with two parties.

Key formulas to remember

Bill of exchange: essential features: In writing + signed by drawer + unconditional order + fixed sum of money only + payable to a certain person or bearer + payable on demand or at a fixed or determinable future time; If any one feature is missing, the document is not a valid bill. The order must be to pay money only, not goods.
Parties to a bill: Drawer (maker of the bill) → orders → Drawee (acceptor after acceptance) → pays → Payee; Drawer and payee can be the same person. In a normal trade bill, drawer and drawee are different persons. Under Section 17 of the Negotiable Instruments Act, 1881, where the drawer and drawee are the same person, or the drawee is a fictitious person or one not competent to contract, the holder may treat the instrument, at his election, as either a bill of exchange or a promissory note.
Parties to a promissory note: Maker (debtor) promises → Payee (creditor); Only two parties. No acceptance is needed. A note cannot be made payable to the bearer.
Bill vs note: nature: Bill = order to another person to pay; Note = promise by the signer to pay; This is the most tested difference.
Bill vs note: acceptance and liability: Bill needs acceptance by drawee; note does not. In a bill, the drawer's liability is secondary; in a note, the maker's liability is primary and absolute; Drawer of an accepted bill is liable only if the acceptor fails to pay.

How to solve Bills of Exchange: Meaning, Features and Parties questions

Most questions on this topic ask you to identify an instrument, name a party or pick the correct difference. Use this method each time.

1Read the wording of the instrument. Ask whether the signer is giving an order or making a promise.
2If the signer directs another person (the drawee) to pay, it is a bill of exchange. If the signer says "I promise to pay", it is a promissory note. Do not rely on the word "pay" alone, because both instruments use it.
3Count the parties. Three parties point to a bill. Two parties point to a note.
4Identify who writes and signs it: drawer (bill) or maker (note).
5Identify who must pay: drawee/acceptor (bill) or maker (note). Identify who receives: payee.
6Check the essentials: writing, signature, unconditional, fixed sum, certain payee, money only.
7If any condition or uncertainty appears (for example, pay if goods arrive), reject it as not a valid instrument.
8Match the remaining options against these checks and choose the one that fits.

Quickest way: Order or promise: the two-second test

When to use it: Use for any MCQ asking you to name the instrument, count parties or choose a difference.

Ask: does the signer direct someone else to pay, or promise to pay himself? A direction to a third party means a bill. "I promise to pay" means a note.
Bill: three parties, needs acceptance. Note: two parties, no acceptance.
The one who signs first is the drawer (bill) or maker (note).
Cross out options with conditions such as "if" or "provided that", or payment in goods.

Common mistakes in Bills of Exchange: Meaning, Features and Parties

Saying the drawer of a bill pays the amount.
Students link "drawer" with giving money.
Fix: The drawer creates the bill and orders payment. The drawee, after acceptance, pays.
Calling the drawee liable before acceptance.
Students forget that acceptance creates the drawee's liability.
Fix: Until the drawee signs acceptance, he is not liable on the bill.
Writing that a promissory note has three parties.
Confusion with a bill of exchange.
Fix: A note has only maker and payee. Remember: note, two.
Treating a conditional order as a valid bill.
Students overlook words like "if" or "on delivery".
Fix: The order must be unconditional. A conditional document is not a bill.
Assuming drawer and payee must be different.
Students count three names as three persons.
Fix: The drawer can also be the payee. Then there are really two persons, but the three roles remain.

Worked examples

Example 1

Ravi Traders sells goods on credit to Mohan Stores. Ravi Traders writes an order directing Mohan Stores to pay ₹50,000 to Ravi Traders after three months. Mohan Stores signs "Accepted" on it. Identify the drawer, drawee, payee and acceptor.

Show the solution

The document contains an order to pay, so it is a bill of exchange.
Ravi Traders wrote the order, so it is the drawer.
Mohan Stores is ordered to pay, so it is the drawee.
The money is payable to Ravi Traders, so it is also the payee.
Mohan Stores signed acceptance, so it is now the acceptor.

Answer: Drawer and payee: Ravi Traders. Drawee and acceptor: Mohan Stores.

Example 2

Which one of these is a valid promissory note? (A) "Pay Sita ₹10,000 after two months." signed by Gopal, addressed to Hari. (B) "I promise to pay Sita ₹10,000 after two months." signed by Gopal. (C) "I promise to pay Sita ₹10,000 if I sell my car." signed by Gopal. (D) "I promise to deliver 100 kg rice to Sita after two months." signed by Gopal.

Show the solution

Option A is not a promise by Gopal. It is a direction from Gopal to Hari, a third person, to pay Sita. An unconditional order to another person is the mark of a bill of exchange, so it is not a note.
Option B is a written, signed, unconditional promise by the maker to pay a fixed sum of money to a named person. It meets all essentials.
Option C is conditional on selling a car, so it is invalid.
Option D promises goods, not money, so it is invalid.

Answer: Option B is a valid promissory note.

Exam tips

Questions often ask for the difference in one line. Learn: order vs promise, three parties vs two, acceptance needed vs not needed.
Read each option for hidden conditions or payment in goods. These make an instrument invalid.
Be clear about who plays which role when drawer and payee are the same person.
Note that the drawee becomes the acceptor only after signing. Options may test this word change.
There is no negative marking, so always attempt every question after eliminating wrong options.

Practice questions from Bills of Exchange

Bills of Exchange: Meaning, Features and Parties: frequently asked questions

What is a bill of exchange?

It is a written, signed, unconditional order by the drawer to the drawee to pay a fixed sum of money to the payee or bearer, on demand or at a fixed or determinable future time. The drawee is liable only after accepting it.

Who are the parties to a bill of exchange?

The three parties are the drawer, who writes the bill, the drawee, who is ordered to pay, and the payee, who receives the money. The drawer and payee may be the same person. After acceptance, the drawee is called the acceptor.

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

A bill is an order to another person to pay and has three parties. A note is a promise by the maker to pay and has two parties, the maker and the payee. A bill needs acceptance by the drawee, while a note needs none.

Can the drawer and the drawee be the same person?

In a normal trade bill, they are different persons, because the drawer orders another person to pay. Section 17 of the Negotiable Instruments Act, 1881 covers the exceptional case where the drawer and drawee are the same person, or the drawee is a fictitious person or one not competent to contract. The holder may then treat the instrument, at his election, as either a bill of exchange or a promissory note.