Financial Accounting · Bills of Exchange

Bills of Exchange: Meaning and Features

Updated 10 October 2026

A bill of exchange is a written, signed, unconditional order by the drawer directing a certain person (the drawee) to pay a fixed sum of money to a named person (the payee) or to the bearer. It becomes binding on the drawee only after acceptance. You solve questions by identifying the parties and checking the essentials.

Understand Bills of Exchange: Meaning and Features

Credit sales create a debt. The seller wants proof of that debt and a fixed date for payment. A bill of exchange gives both. It is a written order, so the debt is documented and the due date is clear.

The person who writes the bill and orders payment is the drawer (usually the seller or creditor). The person ordered to pay is the drawee (usually the buyer or debtor). The person who receives the money is the payee. The drawer and payee can be the same person. Often they are.

The drawee is not bound until he signs his acceptance on the bill. After signing, he is called the acceptor. Until then, the document is only an order. Acceptance turns it into a liability.

A promissory note is different. Here the maker writes a promise to pay. There are two parties: the maker (debtor) and the payee (creditor). No acceptance is needed, because the maker signs it at the time of making it.

Both are negotiable instruments under the Negotiable Instruments Act, 1881. This means ownership can pass by delivery (or by endorsement and delivery), and a holder in due course can get a good title. Both can be payable on demand or after a fixed period.

There is a rule on bearer instruments, and it is different for the two instruments (Section 31 of the Reserve Bank of India Act, 1934). Except for the Reserve Bank and the Central Government, nobody can draw a bill payable on demand to bearer. A bill payable after a fixed time can be made payable to bearer. A promissory note cannot be made payable to bearer at all, whether on demand or after a time, except by the Reserve Bank or the Central Government (Section 31(2)). So the bearer rule is a genuine point of difference between a bill and a note.

Key rules to remember

Bill of exchange (essentials): Written + signed by drawer + unconditional order + certain sum + certain parties + money only; If any one is missing, the instrument is not a valid bill. Acceptance by the drawee makes it binding on him.
Parties to a bill: Drawer, Drawee (Acceptor after acceptance), Payee; Three parties, though one person can hold two roles (drawer and payee). Later parties: endorser, endorsee, holder.
Promissory note (essentials): Written + signed by maker + unconditional promise + certain sum + certain payee + money only; Two parties: maker and payee. A promissory note cannot be made payable to bearer, whether on demand or after a time, except by the Reserve Bank or the Central Government.
Date of maturity: Due date = (Day after acceptance or sight + term of bill) + 3 days of grace; Use this for instruments payable after a fixed period or after sight/date. Days of grace do not apply to instruments payable on demand or at sight on presentation. Count the term from the day after acceptance or sight (Section 22). Then add 3 days of grace. If the resulting date is a public holiday (other than an emergency holiday), the instrument falls due on the preceding business day (Section 25). Apply the holiday adjustment after adding the grace days.
Bill vs promissory note: Bill: order, 3 parties, acceptance needed. Note: promise, 2 parties, no acceptance; The most repeated comparison in theory questions. Add the bearer point as a difference: a bill payable after a fixed time can be payable to bearer, but a note cannot be payable to bearer at all (except by the Reserve Bank or the Central Government).
Payable to bearer: Bill on demand: not to bearer (except Reserve Bank and Central Government). Bill after a fixed time: can be to bearer. Promissory note: cannot be to bearer, on demand or after a time (except Reserve Bank and Central Government); Based on Section 31 of the Reserve Bank of India Act, 1934. Section 31(2) bars anyone other than the Reserve Bank or the Central Government from making or issuing a promissory note payable to bearer.

How to solve Bills of Exchange: Meaning and Features questions

Use this for any theory or short-answer question on meaning, parties or features.

1Write the definition in one sentence: written, signed, unconditional order to pay a certain sum to a certain person or bearer.
2Name the parties and tag them to the given facts: who sold goods (drawer), who bought (drawee), who gets money (payee).
3Check each essential against the facts: in writing, signed, unconditional, certain sum, money only, certain parties.
4Check whether the drawee has accepted. If not, he is not yet liable.
5If the question mentions a note, switch roles: maker and payee, and no acceptance.
6If the question is a comparison, draw a two-column answer with 5 to 6 points, covering order vs promise, parties, acceptance and liability. Add the bearer rule as a difference: a bill payable after a fixed time can be payable to bearer, but a note cannot be payable to bearer at all (except by the Reserve Bank or the Central Government).
7For maturity questions on instruments payable after a fixed period or after sight/date, count the term from the day after acceptance or sight, add 3 days of grace, then check whether the date is a public holiday. If it is (and not an emergency holiday), the due date is the preceding business day. Do not add grace days for instruments payable on demand or at sight on presentation.

Quickest way: Role-tagging in 30 seconds

When to use it: For MCQs asking who is the drawer, drawee or payee, or whether an instrument is a bill or a note.

Find the word 'order' or 'promise'. Order means bill. Promise means note.
Count the parties. Three means bill. Two means note.
The seller who raises the document is normally the drawer. The buyer is the drawee.
If the drawee has not signed, he is not an acceptor yet.
If the document has a condition, or a sum that is not fixed, reject it as a bill or note.

Common mistakes in Bills of Exchange: Meaning and Features

Treating the drawee as liable before acceptance.
Students assume the buyer owes money the moment the seller writes the bill.
Fix: Remember that the drawee becomes the acceptor only after signing. Until then he has no liability on the bill.
Saying a promissory note has three parties.
The bill's structure gets carried over to the note.
Fix: A note has only a maker and a payee. The maker promises, so no drawee exists.
Calling a conditional order a valid bill.
Students overlook the word 'unconditional' in the definition.
Fix: An order such as 'pay if goods arrive safely' is not a bill. Always test for conditions.
Forgetting the three days of grace when finding the due date.
The term of the bill is read as the final date.
Fix: For a bill or note payable after a fixed period or after sight/date, add the days of grace to the term, unless the question says otherwise. Do not add them for instruments payable on demand or at sight on presentation. For example, a 2-month bill accepted on 1 January falls due on 1 March plus 3 days, which is 4 March (if 4 March is not a public holiday).
Confusing drawer and payee.
Both usually receive money, so they look alike.
Fix: The drawer writes the bill. The payee is the one named to receive the money. They can be the same person, but they need not be.

Worked examples

Example 1

Mehta Traders of Surat sold goods worth ₹80,000 to Rao & Sons of Pune on credit. Mehta Traders drew a bill for 3 months on Rao & Sons, payable to Mehta Traders. Rao & Sons signed their acceptance on 10 March. Identify the parties and state the date of maturity. Assume 13 June is not a public holiday.

Show the solution

Drawer: Mehta Traders, because they wrote the bill and ordered payment.
Drawee: Rao & Sons, the party ordered to pay. After signing on 10 March, Rao & Sons is the acceptor.
Payee: Mehta Traders, since the bill is payable to them. So drawer and payee are the same person.
Term ends: counting from the day after acceptance, 3 months after 10 March is 10 June.
Add 3 days of grace: 10 June + 3 days = 13 June.
13 June is not a public holiday, so no adjustment is needed.

Answer: Drawer and payee: Mehta Traders. Drawee and acceptor: Rao & Sons. Date of maturity: 13 June.

Example 2

Distinguish between a bill of exchange and a promissory note.

Show the solution

Nature: A bill is an order to pay. A note is a promise to pay.
Parties: A bill has three parties (drawer, drawee, payee). A note has two (maker and payee).
Who creates it: The creditor draws a bill. The debtor makes a note.
Acceptance: A bill must be accepted by the drawee before he is liable. A note needs no acceptance, as the maker signs it at the outset.
Liability: In a bill, the drawer is liable only if the drawee does not pay, while the acceptor is the principal debtor. In a note, the maker is primarily liable from the start.
Payable to bearer: A bill payable after a fixed time can be made payable to bearer, although a bill payable on demand cannot be drawn to bearer except by the Reserve Bank or the Central Government. A promissory note cannot be made payable to bearer at all, whether on demand or after a time, except by the Reserve Bank or the Central Government (Section 31, Reserve Bank of India Act, 1934).

Answer: A bill is an unconditional order made by the creditor, with three parties and compulsory acceptance. A note is an unconditional promise made by the debtor, with two parties and no acceptance. On bearer payment the rule differs: a bill payable after a fixed time can be made payable to bearer, but a promissory note cannot be made payable to bearer at all, except by the Reserve Bank or the Central Government.

Exam tips

Learn the two definitions word for word in your own plain phrasing. Examiners give marks for 'written', 'unconditional', 'certain sum' and 'money only'.
For a comparison question, use a two-column table-style answer with at least five points. Point count earns marks.
In MCQs, read the party descriptions carefully. The same person can be the drawer and the payee.
In maturity-date questions, show the calculation line by line: acceptance date, term, days of grace, holiday check, due date.
Link this topic with the accounting entries chapters. Meaning questions are short, so spend saved time on journal entries.

Practice questions from Bills of Exchange

Bills of Exchange: Meaning and Features: frequently asked questions

Who are the parties to a bill of exchange?

The three main parties are the drawer, the drawee and the payee. The drawer orders payment, the drawee is ordered to pay, and the payee receives the money. After acceptance, the drawee is called the acceptor.

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

A bill is an order to pay and needs the drawee's acceptance. A promissory note is a promise to pay by the maker. A bill has three parties and a note has two.

Can the drawer and the payee be the same person?

Yes. This is common when a seller draws a bill on a buyer and keeps it payable to himself. The roles are different, but one person can hold both.

Are bills of exchange and promissory notes governed by law?

Yes. Both are negotiable instruments under the Negotiable Instruments Act, 1881. This allows transfer by delivery or endorsement and gives certain protection to a holder in due course.