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CA Intermediate · Financial Management and Strategic Management · Management of Payables (Creditors)

Which of the following is a feature of a bill of exchange based payable (trade acceptance) compared with open account credit, as a source of managing payables?

A bill of exchange accepted by the buyer is a negotiable instrument that formally evidences the debt, so it is legally enforceable and the seller can discount it with a bank before maturity. Open account credit has only ledger entries without such a written acknowledgement.

  1. AThe buyer's liability is evidenced by a negotiable instrument, giving the seller a legally enforceable claim that can be discountedCorrect
  2. BNo written acknowledgement of debt is created, only an entry in the ledger
  3. CThe supplier cannot discount it with a bank before maturity
  4. DThe buyer pays only after the goods are sold to customers

Explanation

A bill accepted by the buyer is a negotiable instrument, so the debt is formally evidenced and the seller can discount it with a bank for early cash. Open account credit rests only on ledger entries, so the second option describes open account, not a bill.

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