Bills of Exchange is an important topic in Accounting for the UPSC EPFO EO/AO and APFC examinations. Understanding this financial instrument can help candidates answer questions related to business transactions, accounting entries, and negotiable instruments. The UPSC EPFO Bills of Exchange Practice Quiz helps candidates test their knowledge of key concepts through practice questions. Candidates can revise important definitions, types of bills, parties involved, accounting treatment, and the difference between a Bill of Exchange and a Promissory Note. They can also use the free PDF for revision and practice.
What is a Bill of Exchange in accounting?
A Bill of Exchange is a written and unconditional order directing a person to pay a fixed amount of money to another person. It is commonly used in business transactions, especially when goods are sold on credit. Section 5 of the Negotiable Instruments Act, 1881, defines a Bill of Exchange. It helps sellers secure payment and allows businesses to manage credit transactions. Candidates preparing for UPSC EPFO should understand its definition, features, and practical uses.
- Written document: It must be made in writing.
- Unconditional order: Payment must not depend on a condition.
- Signature: It must be signed by the drawer.
- Certain amount: The amount payable must be clearly stated.
- Identifiable parties: The person directed to pay and the person entitled to receive payment must be identifiable.
- Payment terms: The payment date must be specified or legally determinable.
- Stamp duty: It must comply with applicable stamp laws.
Download Bills of Exchange Practice Quiz PDF
The Bills of Exchange Practice Quiz PDF is useful for revising important concepts related to the definition, characteristics, types, parties, accounting entries, discounting, endorsement, and dishonour of Bills of Exchange.
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| Bills of Exchange Practice Quiz | Download Now |
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Attempt Bills of Exchange Practice Quiz
Test your preparation with the Bills of Exchange Practice Quiz and revise important concepts such as the drawer, drawee, payee, types of bills, days of grace, maturity date, discounting, endorsement, dishonour, and related accounting entries.
1. An instrument payable three months after date is drawn on 10 January. Ignoring holidays, and applying customary three days of grace, maturity is:
2. An endorsement of a bill by the holder does which of the following?
3. A bill expressly payable on demand ordinarily has how many days of grace?
4. Which instrument ordinarily requires the drawee’s acceptance to make the drawee liable as acceptor?
5. A bill of ₹24,000 is discounted for 2 months at 12% per annum on a simple time basis. Discount is:
6. A drawer discounts a bill and bank charges ₹450 discount. Entry in drawer books ordinarily includes:
7. A drawer discounts a bill with bank for ₹24,500, incurring discount of ₹500. Face value of bill was:
8. A bill held until maturity for ₹18,000 is paid by bank, and no charges arise. Amount credited to Bills Receivable is:
9. The person to whom the amount of a bill is payable is the:
10. A bill payable on demand is presented to the drawee. Which statement about maturity is correct?
11. What is the key difference between bills sent for collection and bills discounted?
12. A promissory note normally has which two principal parties?
13. Which of the following does NOT ordinarily cause dishonour by non-payment?
14. The drawer receives ₹19,600 on retirement of a bill of ₹20,000. Rebate allowed is:
15. When a holder endorses a bill to a supplier to settle ₹8,000 owed, the basic entry in holder’s books is:
16. Which condition is essential to a bill of exchange under the NI Act?
17. A bill for ₹15,000 is discounted for ₹14,700. Discount charged is:
18. The bill is held by the original seller until maturity. In the seller’s books it is generally a:
19. A ₹25,000 bill is renewed; interest of ₹500 is received separately in cash and no principal is paid. Amount of new bill is:
20. A bill for ₹18,000 is retired at ₹17,640. The rebate allowed to the acceptor is:
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Who are the parties to a Bill of Exchange?
A Bill of Exchange generally involves three parties: the drawer, the drawee, and the payee. Each party has a specific role in the transaction. Understanding these roles is important for answering questions related to Bills of Exchange in the UPSC EPFO examination. In some transactions, the drawer and the payee may be the same person. The drawee becomes primarily liable on the bill after accepting it.
| Party | Meaning | Role |
|---|---|---|
| Drawer | The person who draws the bill | Issues the order for payment, usually the seller or creditor |
| Drawee | The person directed to pay | Accepts the bill and becomes liable to pay the amount |
| Payee | The person entitled to receive payment | Receives the amount mentioned in the bill |
Example: A sells goods worth ₹10,000 to B on credit and draws a bill on B. A is the drawer and usually the payee, while B is the drawee. If B accepts the bill, B agrees to pay ₹10,000 according to its terms.
What are the different types of Bills of Exchange?
Bills of Exchange can be classified according to the place of the transaction, purpose, and payment terms. Each type serves a different purpose in business and financial transactions. Candidates should learn the meaning of each type and understand how it differs from the others. These classifications can help with questions on accounting and negotiable instruments. The following table covers the main types of Bills of Exchange.
| Type | Meaning |
|---|---|
| Inland Bill | A bill that is both drawn and payable in India, or that otherwise meets the legal conditions for an inland bill |
| Foreign Bill | A bill that does not qualify as an inland bill under the applicable law |
| Trade Bill | A bill drawn in connection with a genuine trade transaction, such as a credit sale |
| Accommodation Bill | A bill drawn or accepted to provide financial support to a party, rather than against a genuine sale of goods |
| Demand Bill | A bill payable on demand or upon presentation |
| Time Bill | A bill payable after a specified period or at a specified future date |
What are the important terms related to Bills of Exchange?
Several accounting terms are used when a Bill of Exchange is drawn, accepted, transferred, or paid. Candidates should understand these terms to solve questions on the due date, maturity date, discounting, and dishonour of bills. These concepts also help explain how a bill moves through a business transaction. The table below summarises the important terms for UPSC EPFO preparation.
| Term | Meaning |
|---|---|
| Date of Bill | The date on which the bill is drawn |
| Term of Bill | The period after which payment becomes due |
| Due Date | The date calculated according to the bill’s payment terms and applicable rules |
| Days of Grace | Three additional days generally allowed for payment of a time bill, where applicable |
| Maturity Date | The final date on which the bill becomes payable after adding days of grace, where applicable |
| Acceptance | The drawee’s agreement to pay the bill according to its terms |
| Endorsement | The transfer of rights in a negotiable instrument by signing it as required by law |
| Discounting | Receiving payment from a bank before the bill’s maturity date after deducting the discount |
| Dishonour | Failure to make payment or accept the bill when required |
| Noting Charges | Charges paid to a notary public for formally recording the dishonour of a bill |
How is the accounting treatment of Bills of Exchange recorded?
Accounting entries for Bills of Exchange depend on the transaction and the stage of the bill. When a bill is accepted, the drawer records a Bills Receivable account, while the drawee records a Bills Payable account. If the bill is discounted, endorsed, or dishonoured, additional entries are passed in the relevant books. Candidates should understand why each account is debited or credited instead of memorising the entries alone. The following table covers common entries in the books of the drawer.
| Transaction | Journal entry in the drawer’s books |
|---|---|
| Bill accepted by the drawee | Bills Receivable A/c Dr. To Drawee’s A/c |
| Bill discounted with a bank | Bank A/c Dr.; Discount A/c Dr. To Bills Receivable A/c |
| Bill endorsed to a creditor | Creditor’s A/c Dr. To Bills Receivable A/c |
| Bill dishonoured | Drawee’s A/c Dr. To Bills Receivable A/c |
Important points to remember:
- Bills Receivable represents the amount the drawer is entitled to receive.
- Bills Payable represents the amount the drawee is required to pay under an accepted bill.
- Discounting allows the drawer to receive money before the bill’s maturity date.
- Endorsement allows the drawer to transfer the bill to a creditor to settle a debt.
- On dishonour, the amount becomes recoverable from the party liable under the transaction, and noting charges may also need to be recorded.
What is the difference between a Bill of Exchange and a Promissory Note?
A Bill of Exchange and a Promissory Note are both negotiable instruments under the Negotiable Instruments Act, 1881. However, they differ in their nature, parties, and liability. A Bill of Exchange contains an order to pay, whereas a Promissory Note contains a written promise to pay. Understanding these differences can help candidates answer questions related to commercial law and accounting. The following table highlights the main differences.
| Basis | Bill of Exchange | Promissory Note |
|---|---|---|
| Number of parties | Generally three: drawer, drawee, and payee | Generally two: maker and payee |
| Nature | Contains an order to pay | Contains a promise to pay |
| Acceptance | Generally requires acceptance by the drawee for a time bill | Does not require acceptance by a drawee |
| Created by | Usually drawn by a creditor | Usually made by a debtor |
| Liability | The acceptor is primarily liable after acceptance; the drawer may be secondarily liable | The maker is primarily liable |
| Common use | Often used in trade and credit transactions | Often used to record a promise to repay a debt |
Why is a Bill of Exchange important in business transactions?
A Bill of Exchange supports business transactions by providing a written payment order and helping parties manage credit. It gives the seller a financial instrument that may be transferred or discounted, subject to applicable rules. It also records the payment obligation and helps businesses maintain proper accounting records. These features make it useful for trade and financial management. Its main benefits include the following:
- Security of payment: It provides written evidence of the payment obligation.
- Credit facilities: It supports transactions where payment is made at a later date.
- Immediate funds: Discounting can help the holder obtain money before maturity.
- Transfer of rights: Endorsement can be used to transfer the bill to another party.
- Accounting records: It helps businesses record receivables and payables systematically.
- Legal support: It provides a recognised negotiable instrument governed by applicable law.
FAQs
A1: It is a written, unconditional order directing a person to pay a specific amount to another person or to the bearer.
A2: the three parties to a Bill of Exchange are- Drawer, Drawee, and Payee.
A3: An Inland Bill is drawn and payable within the same country, whereas a Foreign Bill involves two different countries.
A4: The drawee fails to pay, and the amount is reversed in the drawer’s books. The drawer may recover it with noting charges.
A5: Three additional days allowed beyond the due date for the drawee to make payment.
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