Category: Commerce Notes PPT

In the process of accounting and book-keeping, a journal is a record of financial transactions where transactions of a business are ordered by date. A journal is defined as the book of original entry while the definition is more appropriate when the transactions were written in a journal before manually posting them to their respective accounts. There are a variety of journals like the sales journal, purchases journal, cash receipts journal, cash disbursements journal, and general journal.

 

We will further know about Journals in the following sections.

 

Diving Deep To Understand the Concept of the Journal:

A journal is referred to as a digital document or physical record which is kept as a spreadsheet or data within the accounting software and used only for accounting. To understand this better let’s visit a bookstore: Suppose Shyam visits a bookstore to buy a book. He buys the book and proceeds towards the desk for transition then the bookshop owner makes a financial transaction as a journal entry of the book bought by Shyam in his accounting records.

 

But here if we consider that an expenditure made by the bookshop owner affected his business accounts then the journal entry will keep details about that as well.

 

Double-Entry Bookkeeping Journal:

This is one of the most generic forms of accounting. How the journal entries are recorded and how it affects the way journals are kept depends directly on the double-entry bookkeeping. The exchange between the two accounts marks the transactions made by the business. This thus clears that the two columns are used to record the journal entry. For example A business owner purchases [$] 2000 worth of merchandise with cash then the bookkeeper records two transactions in the journal making an entry of the same. Whereas, the cash account decreases by [$] 2000 and the merchandise account having the current asset is increased by [$] 2000.

 

Single-Entry Bookkeeping Journal:

In accounting and business generally, single-entry bookkeeping is used. It is more like a chequebook in which a single account is used for every journal entry thus making it one of the basic forms of accounting journals. It just keeps records about the cash outflow and cash inflow. For example A business owner purchases [$] 2000 worth of merchandise with cash, then a single entry is made in the journal about the [$] 2000 cash reduction in the cash mentioning the total ending balance below it. The entry is made about separate total income and separate total cash outflow in two columns in a business account to track the same and not just the aggregate ending balance.

 

The Use of Journals in Investing and Trading:

In the investment finance sector, a journal is used to keep records. It keeps the record of the tax, evaluation and auditing purpose of the investors’ account. This journal is a comprehensive one keeping a record of the trades that take place in the investor’s account more of a professional managerial account. To learn from the past successes and failures a quantifiable hierarchical journal is used by traders for their trading performance over time. However, a past performer generally doesn’t justify how the trader might perform in future. The journal helps you just get a quick look and review about how the traders may have chosen their strategy in the past even including the emotional element.

 

The Process of Making an Accounting Journal Entry:

Firstly, we need to record our transactions in daily life for creating our very own accounting journal. We need to look over invoices, purchased orders, receipts, cash register tapes and other data sources for detailed financial transactions.

 

These detailed financial transactions that we’ve derived are documented in chronological order in the journal. The journal entry made is about every transaction that we’ve listed in the journal. The following information is further registered in the ledgers. The double-entry bookkeeping method is used for these journal entries that are being made for recording the transaction entries. These are made in the two columns respectively under the names: debit and credit.

 

Functions of Journal

The basic book of accounting is known as the journal. The journal is said to be the book of prime entry which means day book where the trader records his total daily transactions in the book. The process of recording the accounting transactions into this journal is called ‘Journalizing’.

Journal may be described as the book in which the transactions are recorded in the order of their occurrence i.e. in chronological order. This is called a book of prime entry or the original entry as all business transactions are entered first and in priority in this book. 

 

The main functions of Journal are as follows:

 At the time of recording a transaction in the journal, each transaction is analyzed into the debit aspect and the credit aspect. This helps in understanding how each transaction will affect the business. 

This is a business language that helps to keep the record of the transactions based on the principles. The recording entry is supported by a brief narration, which explains every transaction in a layman’s language. 

The Journal book contains a chronological record of the recording of transactions for future references. This will further help the business to analyze their past performance and chalk out their future possibility.

 

Advantages of the Journal

Journalizing the business transaction is done by the majority of businesses. Journal helps a business to keep a systematic record of its financial events. To know the advantages of maintaining the same, we can sum it in the following points:

• Journal records all the financial transactions of a business in one place on a time and date basis.

• The transactions are recorded, in support of a bill, to check the authenticity of each of these journal entries with their bills.

• There is less chance to avoid transactions as in a journal we record every transaction on a date basis.

• The accountant writes each journal entry’s narration below every journal entry so that another auditor can audit it without any confusion.

• In a journal, we record these transactions which help in the deep analysis of the two accounts based on a double-entry system, and this prevents a minimum chance of mistake in the journal.

• Journal posts the transactions in their respective ledger accounts. Without making this journal, an accountant will be unable to make the ledger accounts.  

• In case of a mistake in the ledger accounts, this can be easily rectified with the help of a journal or by passing a rectified journal entry in the journal.

• All the opening journal entries, closing journal entries and all other transactions which cannot be recorded in any other subsidiary books can be recorded in the journal proper.

• Even in accounting software, journals are required. Accounting software can make an auto system of posting the journal entries to the ledger by their automatic processing system.

• There is a single column of ledger folio, which is very helpful for checking the reference of each account’s posting with its original journal entry.

Example:

There are many options available for accounting journals and each one has a slightly different purpose. The general transactions are recorded under a general journal and they don’t fit into the other journals. The general journal is classified as a “catch-all” journal.

The one used to record inventory sales credit is known as a sales journal.

The receipts journals are the ones in which cash inventory is recorded.

The inventory that was once sold but later returned due to some issue is recorded in the sales return journal.

The inventory bought and the equipment purchased by the companies are registered or recorded in the purchases journal.

There are an infinite number of journals available in the market but only a few of them are used by the companies.

You already know that business transactions are recorded in various Accounting books. The Accounting process does not stop here. The transactions are written in several Accounting books in chronological order. Such recording of business transactions only serves little purpose in the Accounting process. Items of the same name under all the books need to be recorded under a special place called to Account. Every item has a separate Account and all these Accounts are recorded in a book called Ledger.

 

Meaning and Features of Ledger

All the Accounts recognized based on transactions recorded in different journals will be opened and maintained in a separate book called Ledger. 

So a Ledger is a book of Accounts; in which all types of Accounts relating to assets, liabilities, capital, expenses and revenues are maintained. It is a complete set of Accounts of a business enterprise.

Ledger is in a  book with pages consecutively numbered. It can also be a bundle of sheets.

All the items from the journal are recorded in Ledger Accounts and this process is known as posting entries from Journal to Ledger Accounts.

 

Features of Ledger Account

1. A Ledger book is an Accounts book to which various transactions of an enterprise are posted under different Accounts.

2. It follows the double-entry system.

3. It is also known as the Principal book of Account as it is the book of final entry of transactions after the journal or all-purpose books. 

4. In the Ledger, all the types of Accounts relating to assets, liabilities, capital and revenue are maintained. 

5. It is the only record of the business transaction classified into relevant Accounts.

6. It facilitates the preparation of financial statements in future.

Format of a Ledger Account

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Types of Ledger Accounts

1. General Ledger- 

A general Ledger is the master collection of all the Accounts that summarize all transactions occurring within an enterprise. There may be a small set of Ledgers that fall under the general Ledger. The general Ledger is used to record all the transactions in the financial statements of the business.  

It comprises a debit and credit entry for every transaction recorded into it, to match the total debit and credit balance. It has to match to prepare the financial statements from it. 

They are of two types-

1. Nominal Ledger-  As the name suggests it contains all nominal Accounts i.e. expense, losses, incomes and gains. Examples – Salaries, Sales, Purchases, Returns Inward/Outward, Rent, Stationery, Insurance, Depreciation, etc.

2. Private Ledger- Private Ledger consists of Accounts that are confidential such as capital, drawings, salaries, etc. These Accounts are only accessible by selected individuals.

2. Purchase Ledger

Purchase Ledger records all the transactions the company has done with the suppliers. It shows which purchases are paid and which are outstanding. If the purchasing volume is relatively low, then there is no need for a purchase Ledger. Instead, this information is recorded directly within the general Ledger. 

Each Account will generally have a credit balance and this shows the amount owed to a supplier by the business. The Sum of all the money owed by a business to its suppliers is known as Accounts payable. 

3. Sales Ledger- 

If the business just has one customer, it will not need to maintain a sales Ledger but just one Account in the Nominal Ledger will be enough. But, many businesses sell in credit and have many customers, for them maintaining a sales Ledger is very important.

This Account records all the transactions in which the goods have been sold to the customer in credit. The Sum of all the money which has been given on credit is called Accounts receivable.

 

Importance of Ledger Balance

Ledger is the spine of business Accounting as it has all the records of all the transactions in separate Accounts. Towards the end of the Accounting period, all Accounts will contain the entire information of all the transactions relating to it. 

1. Core information about business

Ledger provides a comprehensive report of all the transactions which helps the business to look through the expenses and incomes. If there are any discrepancies are found amongst both, then necessary actions are taken.

2. Knowledge of book value of assets

Ledger is a hub of all the assets related records of the business.it keeps a separate Account for each asset and all the transactions relating to it. The book value of any asset can be derived from the Ledger at any time.

3. Useful for management

Information given by the Ledger Accounts is used further in financial statements to derive the company’s growth or reasons for any loss. Management can make effective decisions based on it.

4. Reason for the disparity in expenses or incomes

The Ledger records all the expenses of the business and all the incomes too. So if there is any difference in their balance, then they have to reevaluate and fix the problem.

 

Posting a Ledger Entry

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Posting-

1. Every journal entry will have to be posted into all separate and respective Accounts which have been debited and credited in the journal entry. For example, for purchase machinery, machinery a/c is debited and purchases a/c  is credited in the journal. When this entry is posted in the Ledger, it must be posted in machinery a/c and as well as in Sales Account. 

2. Posting will be done on the debit side of the Account which has been debited in the journal book, and the credit side of the Account which has been credited in the journal book. In the case of the above example of the machinery purchase, posting will be made on the debit side of the machinery a/c Account, as it has been debited in a journal and the credit side of Purchases a/c as it had been credited in the journal. 

3. The date of the transaction has to be put in the date column. The method of recording the data in the Ledger is the same as in a journal. 

4. While posting on the debit side of an Account, in the particulars column we should write the name of the Account which had been credited in the journal and add the word ‘To’ before the name. 

5. Similarly while posting on the credit side of an Account, we should put the name of the Account which has been debited in the journal and add the word ‘By’ before the name. In the case of the above example, we shall write ‘To purchases A/c’ in the particulars column on the debit side of the Cash Account; and ‘By Machinery A/c’ in the particulars column on the credit side of the Sales Account. 

6. Posting in both sides, debit and credit should have entries then only a Ledger Account is complete.

7. In the folio column, we have to mention the page number of the journal where the concerned journal entry is recorded. At the same time, the page number of the Ledger Accounts will be entered in the Ledger folio.’ column in the journal to complete the cross-reference. 

8. The amount is written in the journal entry must be entered in both the amount columns of the Ledger Account.

The Definition of a Ledger Account

A Ledger Account is a book in which a business keeps track of all of its transactions and financial statements. The balance sheet is arranged under the general Ledger with many Accounts such as assets, Accounts receivable, Accounts payable, stockholders, liabilities, equities, revenues, taxes, expenses, profit, loss, funds, loans, bonds, stocks, salaries, wages, and so on. In this article, we’ll go through the format and examples of Ledger Accounts, as well as the many types of Ledgers, Ledger posting, and Ledger Account templates in Excel, Google Sheets, and PDF.

Meaning of Ledger Accounts

A Ledger is a book in which the Accounts are kept. Only the Accounts produce any financial statement relating to the company’s financial status. As a result, this Ledger is referred to as the main book. As a result of all of this, it is important to link all of the data for any Account available in the Ledger. This Accounting book is the most significant in every firm, which is why it is referred to as the “King of All Books.” In addition, the Ledger book is often known as the final entry book. The Ledger Account is the book that contains all of the company’s Accounting information.

The Different Types of Ledgers

There are three different types of Ledgers:

1. Sales Ledger – A sales Ledger is a book in which a corporation records the sale of products, services, or the cost of things to clients. The sales revenue and income statement are depicted in this Ledger.

2. Purchase Ledger – A purchase Ledger is a Ledger in which a corporation records the transactions of purchasing services, products, or goods from other companies. It allows you to see how much money the company has paid out to other companies.

3. General Ledger – There are two types of the general Ledger: nominal Ledger and private Ledger. The nominal Ledger records spending, revenue, depreciation, insurance, and other financial transactions. Private Ledgers contain private information such as salary, wages, capital, and so on. A private Ledger is not accessible to everyone.

7 Key Features of a Ledger

The following are Ledger’s seven most important features:

• In Ledger, each Account will have its heading.

• A special table is used to keep track of Account transactions.

• The Account’s transactions are organised by date.

• Each Ledger contains a two-amount column. Debit and credit are used to write the transaction amount in each column.

• On both sides of the Account, there is a column where you may write the ref number.

• At the end of the period, the Account balance is calculated.

• The Debit and Credit Columns are closed after the calculation is completed by drawing two parallel lines underneath the sum of both sides.

LLP the abbreviation for Limited Liability Partnership. This type of business is defined as a recent business set in India. It was finally acknowledged and enacted by the Parliament on December 12, 2008, commencing from the year 2009 as ‘The Limited Liability Partnership Act 2008’.

This is indeed an interesting business model formed keeping in mind all the disadvantages of the partnership form of business. Let us excavate on this structure in a detailed manner.

The Limited Liability Partnership Act 2008

The Act is divided into 14 chapters, four schedules, and with a wide number of sections ranging from section 1 to section 81. In each chapter, the Act details about the formation of such a business model – their definitions are defined in-depth, the nature of the LLP is discussed, it’s a process of incorporation, what kind of relations are shared among the partners, their contributions in the business, financial disclosures are too further detailed out in the Act.

Provided below are the 14 chapters with their related names:

1. Chapter I – Preliminary

2. Chapter II – Nature of Limited Liability Partnership

3. Chapter III – Incorporation of Limited Liability Partnership and Matters Incidental Thereto

4. Chapter IV – Partners and Their Relations

5. Chapter V – Extent and Limitation of Liability of Limited Liability Partnership and Partners

6. Chapter VI – Contributions

7. Chapter VII – Financial Disclosures

8. Chapter VIII – Assignment and Transfer of Partnership Rights

9. Chapter IX – Investigation Chapter X Conversion Into Limited Liability Partnership

10. Chapter X – Conversion Into Limited Liability

11. Chapter XI – Foreign Limited Liability Partnership

12. Chapter XII – Compromise, Arrangement or Reconstruction of Limited Liability Partnerships

13. Chapter XIII – Winding up and Dissolution

14. Chapter XIV – Miscellaneous Sections 

Further, we will take up the important parts of this act and continue without discussion. Before that let us understand what an LLP business is?

A limited liability partnership also abbreviated as LLP is yet another type of partnership business where all or some partners have limited liabilities. This gives exposure to the business to include elements of both partners as well as a company form of business. In LLP, every partner is not responsible or liable for another partner’s misconduct or negligence.

This is a corporate business model which enables professionalism, entrepreneurial strategies, all these combine to operate in a flexible and innovative manner, which provides benefits of limited liability also allowing its members the flexibility to organize their internal structure as a partnership.

Important Definition of the LLP Under this Act

We discuss the definition of LLP from the first chapter of this Act as this is mandatory for the students to know the language of the Act. The exact words are taken from the Act to keep the legal effect, with further our explanation on the definition:

Limited Liability Partnership – “Limited liability partnership means a partnership formed and registered under this Act”.

The act makes it clear LLP is to be denoted ‘only’ to that partnership business which is formed under the rules stated in this Act, and registered in this Act itself. The definition is exhaustive, as it uses the word ‘means’, this signifies no other partnership model which is not formed or registered under this Act is to be called as Limited Liability Partnership.

Nature of Limited Liability Partnership

The nature of the Limited Liability Partnership is to be justified by the following points:

1. LLP is a separate legal entity apart from its Members.

2. LLP provides a benefit of limited liability to its Members.

3. They are to be taxed as a partnership business.

4. Their internal organisational flexibility is like that of a partnership.

5. Agreement between the Members governing the operation of the LLP is a private document which is confidential to the Members only.

6. They have at least two “designated” Members.

7. Their accounting and filing requirements are similar to those of a company form of business.

Incorporation of LLP

The Limited liability type of Partnership is formed by following the hereunder procedure:

1. User Need to be Registered

Users need to be registered in the official website of Ministry of Corporate Affairs, uploading their digital signatures.

2. Obtain the Designated Partners Identification Number

All LLPs must obtain Designated Partners Identification Number (DPIN)

3. Obtain Digital Signature Certificates

From any authorised certifying agency LLPs need to obtain Digital Signature Certificates (DSC).

4. Reserve the Name

Search and Reserve the name in the MCA portal.

5. Incorporation of LLP

After the name is reserved, the LLP needs to pay the prescribed registration fee. Also, the statements in the e-form need to be digitally signed by the designated members, and an advocate or a company secretary.

6. LLP Agreement

Within 30 days of incorporation LLP may file the agreement in forms 3 and 4.

LLP is a modern business setting, with all the advantages of a Partnership and Company form of business. We discussed a minor portion about the LLP structure, to know in detail information can always be researched in the official website.

The field of management is incredibly innovative and all-inclusive theoretical factors, easily applicable to real-time circumstances. Impressively, management is officially certified as an art as it covers almost every aspect necessary to be referred to as an art. Hence, here you will find out about the concept nature process and significance of management and why it is regarded as an art.

Nature of Management 

Management is a procedure which leads the inadequate human and material resources together and encourages people for the accomplishment of goals of the corporation. Management is not a single-time performance but an on-going sequence of interconnected activities. The sum total of these activities is called the management process. It includes a bunch of interconnected operations or functions required to accomplish the desired business goals. 

The nature and significance of management include the process as a systematic way of doing tasks. It is related to the conversion of inputs into outputs. An in-depth analysis of management can allow you to know the functions which managers perform on a daily basis. 

What is Art?

Everyone is familiar with the layman meaning of art and also notice numerous examples of art in their surroundings. However, there are a few standard features involved among the sectors which are a part of the broader set known as art. Hence, before trying to understand the nature & significance of management and how management is an art, it’s necessary to know the general meaning of art.

The field of art needs a particular person to employ his or her innovation and fully implement personal skills. It implies the application of skills and knowledge for trying to achieve desired results. Hence, once basic principles are understood, you need to take it a step forward and blend your creativity. 

Features of Art Involved in Management

• Practical Knowledge: Art in every form needs practical knowledge; thus, learning of mere theory is not enough. It is essential to understand the practical application of theoretical principles to become an excellent painter. A person may not only be aware of different shades, colours, and brushes but also different dimensions, designs, techniques, situations etc. to employ them adequately. Similarly, a manager won’t be successful just by acquiring a degree or diploma in management, he or she must know how to apply numerous principles in real-time circumstances by operating in the ability of the manager. 

• Personal Skill & Authenticity: Even though the theoretical-centric base may be similar for all the artists, each of them has a personal style and approach towards their task. That’s why the level of success, achievement and quality of performance vary from one individual to another. Similarly, management is a personalized art. Each manager has his or her own ways of managing and directing tasks as per their knowledge, personality, skills and experience. That’s why he or she aims at generating something that has never been introduced before, which needs a mixture of intelligence and imagination. 

Most importantly, management is also creative in nature, similar to any other form of art. It practically blends human and nonhuman resources to acquire the desired results. It tries to generate soulful music by mixing chords efficiently. 

• Goal-Oriented: All these forms of art are result-oriented as it looks to acquire concrete results. Similarly, management is also managed towards the accomplishment of pre-decided goals. Managers employ multiple resources such as money, machinery, materials, men and methods to advertise the growth of a corporation. 

• Perfection Through Practice: There is an old saying ‘Practice makes a man perfect.’ Each artist becomes more and more accomplished through continuous practice. In a similar sense, managers learn through the art of trial and error at first but the application of management principles over the years makes them perfect in the task of managing. 

Hence, it is said that management is an art, so it needs the application of specific principles. It is an art of the highest order as it deals with shaping the attitude and behaviour of people at the workplace towards set goals. 

How is Management an Art?

A manager is someone who handles all the management procedures inside an organization with the assistance of acquiring knowledge and skills through the study and practice of theoretical concepts and principles of management. An ample amount of literature is present in multiple areas of management that act as guiding principles and significant knowledge for all managers. There are numerous management strategies and theories advanced by the fathers of management. These principles are utilized by a manager to manage different situations in their regular managerial lives. 

Also, suitable management practices, imagines, takes the initiative and be creative on these concepts. That’s why it is of utmost importance to know the nature and importance of management. Lastly, the creativity of a particular manager plays a vital part in the application of these principles in a distinctive way. Every manager has his or her personal style of management, even if the basics knowledge says more or less the same. Ultimately, authenticity is what makes management an art.

Mean, median and mode are some of the measures of central tendency. These are three different properties of data sets that can give us useful, easy to understand information about a data set to see the big picture and understand what the data means about the world in which we live.

Mean

“Mean” and “average” are just two different terms for the same property of a data set. It is also known as the arithmetic mean. The mean or average is beneficial to property and one of the most significant, easy and most used calculations out of all the three central tendencies. The mean is basically the summation of all the values in the set of data after it is divided by the total number of values in the set of the data. 

There are three methods of taking out averages – or mean in this case – and they are: direct method, assumed mean approach and step deviation method.

The above definition is of Arithmetic Mean, one of the many types of Mean. In detail, the types of mean are explained although most of them are out of scope for elementary Statistics

1. Arithmetic Mean 

Arithmetic Mean is the average of all the observations. Generally, if the mean is mentioned without any adjective, it is assumed to be Arithmetic Mean.

Example- We have a set of observations-x=1,3,5,7,91,3,5,7,91,3,5,7,9. The Arithmetic Mean is computed as (x/n) where n is the number of observations which is equal to 5 in this case. Thus x=25 in this case and n=5  so the mean comes out to be 5

2. Weighted Mean

Weighted mean is almost the same as Arithmetic Mean, the difference being that in weighted Mean, some values contribute more than the others. 2 Cases arise while calculating Weighted Mean. The weighted mean is useful in situations when one observation is more important than others.

Case 1- When the sum of weights is 1- Simply multiply each weight by its corresponding value and sum it all up.

Example- In the previous example, let us assume that w=0.2 for all the observations, then the weighted mean is- W_mean= (0.2*1)+(0.2*3)+(0.2*5)+(0.2*7)+(0.2*9)=5 which is the same as Arithmetic Mean but if we change the weights then the mean also changes.

Case 2- When the sum of weights is not equal to 1- In this case it is beneficial to make a table that shows each weight against each observation. Then calculate the product of each observation and its corresponding weight.

3. Harmonic Mean 

Harmonic Mean is calculated by dividing the total number of observations by the reciprocal of each observation. It is quite useful in Physics and has many other applications

(example- average speed when the duration of several trips is known). 

It is given by the formula- [H.M= frac{ n}{(1/x1)+(1/x2)+(1/x3)+…..(1/xn)}]

4. Geometric Mean

The Geometric Mean indicates the central tendency using the product of the observations rather than their sum(which is used in calculating Arithmetic Mean). It is used in the field of finance and social sciences. In finance, it is used to calculate the average growth rates. The Geometric Mean is most useful when the observations are dependent on each other or they have large fluctuations. It is given by(INSERT EQUATION) 

Solved Example of Mean 

1. Find the mean for the following frequency table:

Solution :

Arithmetic mean  =  [Sigma frac{fx}{N}]  

Arithmetic mean  =  [Sigma frac{fx}{N}]  =  1165 / 40

  =  29.125

Hence the required arithmetic mean for the given data is 29.125.

Median

As the name suggests, the median is nothing but the middle – or “mid” – of all the values presented in the data set. This shows what the middle of the data is. For example: in a data set of 5, 10, 15, 20, 25, 15 is the median. 

There are two different methods of finding out the mean. They are the odd number of values and even numbers of values. 

Solved Example of Median

1. Find the median for the following frequency table:

Solution:

Here, the total frequency, N = [Sigma f] = 40

N/2  =  40 / 2  =  20

The median is (N/2)th value = 20th value.

Now, the 20th value happens in the cumulative frequency 22, whose corresponding x value is 25.

Hence, the median = 25.

Mode

is defined as the value that is found mostly in a data set. When the frequencies in the data keep repeating, the mode takes place. This is mainly used for taking out most of the averages. For example, if you want to calculate the average of how many students scored the most, you might want to use the mode. 

Solved Example of Mode

1. Find the mode for the following frequency table:

By observing the given data set, the number 40 occurs more often. That is 10 times.

Hence the mode is 40.

Mean  =  29.125

Mode  =  25 and

Mode  =  40.

When dealing with monetary issues, there are many instruments of exchange that we maintain for official reasons. One such tool for administering money transfer matters is a Bill of Exchange. Since these matters act as official documentation, we have rules and regulations for these. For the governance of bills of exchange, we have the Negotiable Instruments Act of 1881. You can see the meaning of the Bill of Exchange or the definition in Section 5 of the Act. The Bill of Exchange definition states that it is a document in writing that contains an unconditional order signed by the issuer, and this order directs a person to pay an amount of money only to the order of that person or to the one who bears the Bill of Exchange. We have a valid Bill of Exchange when a person accepts an order in writing. This article will speak about the features of bills of exchange. 

 

Meaning of Bill of Exchange 

A Bill of Exchange is a document in writing which instructs a person to pay another party a certain amount of money by a specified period. A Bill of Exchange only becomes valuable when the person who is going to pay accepts it with a signature or stamp. For example, A draws a Bill of Exchange against an amount of 5000 rupees against B. B agrees with this by signing it. Generally, the sellers often provide a credit period to the purchaser when it comes to goods or services. However, at times the seller is not in a position to give this window of time, and the purchaser isn’t in a place to pay right away. In such a condition, a Bill of Exchange is crucial as it is a written promise that the party in debt will pay the mentioned amount by a specific time. These bills can often become instruments of credit, and banks will also accept these and pay the person in advance. One can also pass these bills to another party. 

 

Features of Bills of Exchange 

The following are some features of bills of exchange that one must keep in mind:

• It is a piece of writing and an instrument of monetary negotiation 

• The person drawing and signing the bill is known as the drawer 

• The person on whom the drawer drafts the bill, asking for a specific amount is known as the drawee

• The bill is an unconditional order for the drawee 

• For the bill to be an instrument of value, the drawee needs to accept it

• The drawee shall pay the amount mentioned to the person specified in the bill or to his/her order or the drawer 

• The bill cites the date by which the drawee must carry out the transaction 

• The payment is valid only in the legal currency of the nation 

• A Bill of Exchange must have a proper stamp and a revenue stamp 

Solved Examples 

Q. Mention the Uses of the Bill of Exchange

Answer: A Bill of Exchange is essentially a document that instructs one party to pay a certain amount of money to another at a specified time or when the latter demands. The uses of a Bill of Exchange are as follows:

• It helps draw up an official agreement between three bodies in general. We have the drawer, i.e., the person who is issuing the Bill of Exchange. Then we have the payee who receives a certain amount of money and the drawee, who has to pay the money to the payee by order of the drawer or when demanded. 

• A Bill of Exchange is often used in international markets and trade to assist the groups of importers and exporters in completing their payments. 

• Although a Bill of Exchange is not a contract, it can still help in composing the terms and conditions of a transaction.