Bills of Exchange: Promissory Note, Bill Discounting, Endorsement and Noting & Protest (Basics) Questions

Question 1

Define bill of exchange.

Accepted Answer

A **bill of exchange** is a written instrument containing an **unconditional order** to pay a certain sum of money to a certain person or to his order/bearer.

Question 2

Define promissory note.

Accepted Answer

A **promissory note** is a written instrument containing an **unconditional promise** by the maker to pay a certain sum of money to a certain person or to his order/bearer.

Question 3

What is endorsement of a bill?

Accepted Answer

**Endorsement** means signing on the back of the bill to **transfer** it to another person (endorsee).

Question 4

What is discounting of a bill?

Accepted Answer

**Discounting** is obtaining cash from the bank before maturity of the bill, after deducting **discount** (bank charges).

Question 5

What is noting?

Accepted Answer

**Noting** is recording the details of dishonour (date, reason, charges) of a bill by a **Notary Public**.

Question 6

What is protest?

Accepted Answer

**Protest** is a formal certificate issued by a **Notary Public** as legal evidence that a bill has been dishonoured.

Question 7

Differentiate promissory note and bill of exchange (any three points) with a table.

Accepted Answer

### **Promissory Note vs Bill of Exchange**

- Promissory note is an unconditional **promise** to pay; bill of exchange is an unconditional **order** to pay.
- Promissory note has **two parties** (maker, payee); bill of exchange generally has **three parties** (drawer, drawee, payee).
- Promissory note does not require acceptance; bill of exchange generally requires **acceptance** by drawee.

Table:

| Basis | **Promissory Note** | **Bill of Exchange** |
|---|---|---|
| Nature | promise | order |
| Parties | 2 | 3 |
| Acceptance | not required | required |

Thus, both are negotiable instruments but differ in nature and parties.

Question 8

Explain parties to a bill of exchange (any three) and their roles with a mini table.

Accepted Answer

Main parties and roles:

- **Drawer**: person who draws the bill (usually seller/creditor).
- **Drawee**: person on whom bill is drawn (usually buyer/debtor); after acceptance becomes **acceptor**.
- **Payee**: person who receives payment (often the drawer).

Mini table:

| Party | Role |
|---|---|
| Drawer | orders payment |
| Drawee/Acceptor | accepts and pays |
| Payee | receives payment |

Hence, bill of exchange formalizes credit sale legally.

Question 9

Explain endorsement: meaning and types (any three points) with examples.

Accepted Answer

Endorsement means transfer of a bill by signing on its back.

Types (any three points):
- **Blank endorsement**: only signature; bill becomes payable to **bearer**.
- **Full endorsement**: specifies endorsee’s name; payable to that person/order.
- Endorsement helps settle debts by transferring the bill to a creditor.

Example:
- A endorses the bill to B to settle B’s claim; B becomes **endorsee** and holder of the bill.

Thus, endorsement transfers ownership and rights in the bill.

Question 10

Explain bill discounting (any three points) and show the basic effect with a flow.

Accepted Answer

Bill discounting means obtaining cash from bank before maturity.

Key points:
- Holder receives **cash immediately**.
- Bank deducts **discount** (income/charge).
- Bill is then collected by bank on maturity.

Flow:

```text
Holder has bill → goes to bank → bank pays cash (less discount) → bank collects from acceptor on due date
```

Thus, discounting converts future receivable into present cash with a cost (discount).

Question 11

Explain dishonour of a bill and treatment of noting charges (any three points) with a mini table.

Accepted Answer

Dishonour means non-payment of the bill on **due date** (or non-acceptance, when acceptance is required).

Key points:
- On dishonour, bill liability is restored: acceptor again becomes **debtor**.
- Holder may get the bill **noted** by a notary public.
- **Noting charges** are usually recoverable from the acceptor, so they are added to the amount due.

Mini table:

| Item | Meaning |
|---|---|
| Dishonour | bill not paid/accepted |
| Noting charges | notary fees for noting |
| Recoverability | generally from acceptor |

Thus, dishonour leads to reversal/adjustment entries and recovery of charges from the liable party.

Question 12

Differentiate bills receivable and bills payable (any three points) with a table.

Accepted Answer

Bills represent written promises/orders for future payment.

- **Bills Receivable (BR)** are bills received/held by the business and are **assets** (amount to be received).
- **Bills Payable (BP)** are bills accepted by the business in favour of creditors and are **liabilities** (amount to be paid).
- BR arises from **credit sales**; BP arises from **credit purchases**.

Table:

| Basis | **Bills Receivable** | **Bills Payable** |
|---|---|---|
| Nature | **Asset** | **Liability** |
| Arises from | credit sales | credit purchases |
| Who accepts | customer/debtor | business itself |

Thus, BR increases receivables in instrument form, while BP creates a future payment obligation.

Question 13

Explain the life cycle of a bill of exchange (exam-style) and show it as a flowchart.

Accepted Answer

### **Life Cycle of a Bill of Exchange — Exam-Style**

A bill of exchange generally passes through the following stages:

- **Drawing of bill**: seller (drawer) draws bill on buyer (drawee) for a fixed amount.
- **Acceptance**: drawee accepts; he becomes **acceptor** and becomes primarily liable.
- **Holding/negotiation**: holder may keep the bill till due date, or **endorse** it to a creditor.
- **Discounting**: holder may discount the bill with bank to get early cash (bank charges **discount**).
- **Maturity**: on due date, bill is presented for payment.
- **Payment or dishonour**: if paid, bill is settled; if dishonoured, it may be **noted/protested** and debtor-creditor relationship is restored.

Flowchart:

```text
Credit sale → Bill drawn → Acceptance → (Hold / Endorse / Discount) → Maturity → Payment OR Dishonour → Noting/Protest
```

**Conclusion:** A bill converts credit sale into a legally enforceable instrument and provides flexibility through endorsement and discounting.

Question 14

Differentiate bill at sight, bill after date and bill after sight (exam-style) with a table and points.

Accepted Answer

### **Bill at Sight vs After Date vs After Sight — Exam-Style**

- **Bill at sight (on demand)**: payable immediately on presentation.
- **Bill after date**: payable after a fixed period from the **date of bill**.
- **Bill after sight**: payable after a fixed period from the **date of acceptance**.

Table:

| Type of bill | Time is counted from | Payment time |
|---|---|---|
| At sight | presentation | immediately |
| After date | date of bill | after stated period |
| After sight | date of acceptance | after stated period |

**Conclusion:** “After date” uses bill date as base, while “after sight” uses acceptance date as base; sight bills are payable on demand.

Question 15

Explain noting and protest (exam-style): meaning, importance and difference with a table.

Accepted Answer

### **Noting and Protest — Exam-Style**

When a bill is dishonoured, the holder may approach a **Notary Public**.

- **Noting**: the notary records the fact of dishonour (date, reason, charges) on the bill/register.
- **Protest**: a formal certificate issued by notary as **legal evidence** of dishonour.

Importance:
- provides strong legal proof in court.
- helps recover amount and **noting charges** from the liable party.

Table:

| Basis | Noting | Protest |
|---|---|---|
| Nature | record of dishonour | formal certificate |
| Purpose | evidence + details | legal proof |
| Document | note/register | protest certificate |

**Conclusion:** Noting is the preliminary record; protest is the formal legal document supporting dishonour.

Bills of Exchange: Promissory Note, Bill Discounting, Endorsement and Noting & Protest (Basics)

Promissory Note vs Bill of Exchange

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