What are Bills of Exchange?
In an international trade to bind one party to pay a fixed sum of money to another party a written order is passed where in the sum of money is to be paid on demand or at a predetermined date, this is known as Bill of Exchange.
The checks and promissory notes are kind of the same, which can be drawn by the individuals or by the banks, also they are transferable by endorsements.
Key Notes –
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A bill of exchange is a type of written order which is binding on one party for a fixed sum of money to be paid to another party on demand or in the future.
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A bill of exchange consists of three parties—the drawee is the party who pays the sum, the payee is one who receives that sum, while the drawer is the one who obliges the drawee to pay the payee.
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A bill of exchange is used in the international trade as it helps the importers and exporters to fulfil transactions.
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The involved parties can use this bill to specify the terms of a transaction, like the credit terms and the rate of accrued interest.
Working of Bill of Exchange
Maximum of three parties are involved in the bill of exchange. The drawee is the party who pays the sum which is specified in the bill of exchange. The one who receives that sum is called the payee. The drawer on the other hand, is the party that obliges the drawee to pay the payee. The drawer and the payee are generally the same entity unless the drawer transfers this bill of exchange to a third-party who becomes the payee.
Classification of Bill of Exchange
1. On the Basis of Place
Bills are classified as inland bills and foreign bills. In Inland bill, the parties are from the same country. While, the other type of bill which is called the foreign bill, parties belong to different countries. Inland bill examples are trade bills or accommodation bills, while foreign bill examples can be a trade bill.
2. On the Basis of Purpose
On the basis of purpose, bills are to be classified as trade bills or accommodation bills. Trade bills arise from trade transactions. The accommodation bill is for raising funds among the parties and for discounting in the money market.
3. Documentary Bill
When bills are attached with trade documents, they are called the documentary bills. Bill not attached to any document is called a clean bill. Documentary bill is re-classified as documents against acceptance or the D/A bill and documents against payment bill or the D/P bill. When an exporter sends to an importer a D/A bill, the bill will be accompanied by the following documents:
4. Parties or Payee
When a bill is payable to a specific person whose name is already appearing on the bill, this is called an order bill. This type of bill can be transferred only by endorsement and delivery method. Bearer bill, is another type of bill which is payable to any person who is in legal possession of the bill as on the date of maturity and this bill is to be made payment to the drawee.
5. Time Bill
A bill payable after a specified date or time is known as the time bill and a bill payable on demand is known as the demand bill. Time bill is also called an usance bill. Example for demand bill – cheque.
These were the different types of bill of exchange. In the trade, the bills are very popular, the bills facilitate the ease and smoothness in the same work.