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A promissory note is a type of negotiable tool which contains a written promise of full payment. These are duly signed and stamped by its drawers, declaring to pay a certain sum of money to the holder at a specific date or on-demand. Used by debtors to borrow from creditors, promissory notes may not be accepted by a creditor after being drawn by a debtor. They have the following features.
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Written notes promising to repay a creditor.
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Must be signed by drawer or promisor.
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The date of payment is predetermined.
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Agreed upon by both promisor and promisee for payment of an agreed sum of money.
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The legal currency of the relevant country is used for settlement.
It Involves the Following Two Parties:
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Drawer/Maker: This is the debtor who promises to pay a specific sum to its creditor.
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Drawee: This is the creditor who is promised a certain sum of money on a specific date.
What is a Bill of Exchange?
A bill of exchange is also a negotiable tool, which is a written note legally bound, and duly stamped and signed by its drawer. It instructs payment of a certain sum of money to the holder of this instrument on demand, or within a specific time frame. Requiring to be accepted by a debtor to be valid, these are usually the payment for goods and services. It has these features mentioned below.
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It must be appropriately dated.
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Contains an order of payment.
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The signature of the drawer/maker is mandatory.
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Bill must be accepted by a drawee.
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Order of payment and its amount should be defined.
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It must be delivered to the relevant payee.
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It involves the following three parties:
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Drawer: An issuer of this instrument who receives the payment.
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Drawee: An individual who has to pay the relevant amount.
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Payee: This is an individual who receives payment, and in most circumstances, is the same as the drawer.
How are Promissory Notes Different from Bills of Exchange?
While promissory notes, bill of exchange, and cheque have some similarities among themselves, these are distinctly different from each other. Despite being financial instruments with a written promise for payment, these have different features and purposes, which every commerce student must understand.
Every distinguishing feature about a bill of exchange vs promissory note is listed below in detail.
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Point of Comparison |
Promissory Notes |
Bills of Exchange |
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Basic Definition |
It is a negotiable financial instrument, which is issued by a debtor. It is a written promise for the payment of a specific sum on demand by its creditor or by a predetermined date mentioned on this agreement. Essentially, it is a promise of payment. |
A negotiable financial instrument issued by a creditor directs a debtor for payment. These payments must be made when it is demanded by its creditor or by a predetermined date. Essentially, it is an order of payment. |
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Section |
It is mentioned in the Negotiable Instruments Act of 1881 under Section 4. |
It is mentioned under Section 5 of the Negotiable Instruments Act of 1881. |
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Issuance |
These are issued by debtors and contain their stamp and signature along with a predetermined date for payment and a fixed amount. |
These are issued by creditors and contain their stamp and signature along with a predetermined date for payment and a fixed amount. |
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Involved Parties |
It involves only two parties which are the drawer/maker and a payee. |
It might involve three parties, which are drawer/maker, drawee, and payee. Often, payee and drawer are the same under specific circumstances. |
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Acceptance and Legality |
These negotiable financial tools need not be accepted by a drawee to be valid and legally binding. |
These negotiable financial tools must be accepted by a drawer before paying for them to be valid and legally binding. |
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Liability |
In the case of promissory notes, the liability of its drawer is primary and absolute. |
In the case of bills of exchange, the liability of its drawer is only secondary and conditional. |
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Event of Dishonouring |
When a drawer dishonors a promissory note, no notice is served to this individual. |
When a drawer dishonors a bill of exchange, notice is served to every party involved in the relevant transaction. |
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Availability of Copies |
These financial instruments do not allow any copies of it. |
These financial instruments allow copies and do not have any specified limit. |
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Payable Entity |
The same individual as its drawer cannot also be the entity that is a payee for a promissory note. |
While a bill of exchange can have different entities as its drawer, drawee, and payee; it can also have one entity serving as its drawee and payee. |
While this table above describes fundamental differences between promissory notes and bills of exchange, students should also learn their differences to that of a cheque – another financial instrument.
Similar to the difference between promissory notes and bill of exchange, there are numerous crucial topics in the standard 10 + 2 curricula for commerce students. Subsequently, offers detailed study materials on all these topics written by expert teachers to help students in their studies. Additionally, students can also attend live classes offered by to clear any doubt they might have.
Key Differences between Promissory Note and Bill of Exchange
As you know now, there are several differences between bills of exchange and promissory notes. Here are some of the most notable differences between them:
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A bill of exchange is a negotiable instrument that is issued when the debtor is ordered to pay the due amount to the creditor within a certain length of time. A promissory note, on the other hand, is a written agreement between the drawer and the drawee in which the drawer agrees to pay a specific sum within a given time frame.
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Drawer, drawee, and payee are the parties engaged in a Bill of Exchange. Drawer and payee/drawee are the persons involved in a promissory note.
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In the event of a bill of exchange, the debtor must accept it in order for it to be considered valid. There is no requirement for the drawee’s acceptance in the event of a promissory note.
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A notice is sent to all parties concerned if the Bill of Exchange is not respected. In the event of a promissory note, no notice of dishonor is sent to the promissory note’s “maker.”
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There is no asset held as security in the case of a bill of exchange. In some situations, such as with promissory notes, an asset can be held as collateral for a loan.
In business, bills of exchange and promissory notes are just as significant as cheques. However, these concepts, which are essential for commercial transactions and financing reasons, are rarely discussed. When a debtor acquires items on credit, bills of exchange are one of the most important negotiable documents. The creditor sends a bill of exchange to the debtor, instructing him to pay the amount within the specified time frame.
The promissory note is similar, but it is issued by the debtor and states that he will pay the requisite amount within a certain time frame. These principles will help you understand business from a practical standpoint, and you will be able to use them in your own business or employment.