Types and Classification of Bill of Exchange:

Types of Bill of Exchange on the Basis of Period: On the basis of period bills are of two types: Demand bills Term bills Demand Bills of Exchange: There is no fixed date for the payment of such bill. They become payable at ay time, when they are presented before payee by the holder. Tem Bills of Exchange: These bills are payable after specified period of time. The period after which these bill become due for payment is called tenor. Types of Bill of Exchange on the Basis of Object: On the basis of purpose of writing the bills, the bills can be classified as: Trade Bills Accommodation Bills Trade Bills: These bills are drawn and accepted against the sale and purchase of goods on credit. These are drawn by the seller (creditor) and accepted by the buyer (debtor). Accommodation Bills: Such bills do not involve any sale and purchase of goods, rather they are drawn without any consideration. The purpose of such bills is to help one party or both the parties financially. Classification of Bills of Exchange: The bills can be classified into two classes given as under: Inland Bill: These bills are drawn in a country upon person living in the same country or made payable in the same country. Both drawer and the drawee reside in the same country. Foreign Bills: These bills are drawn in one country and accepted and payable in another country, e.g. a bill drawn in England and accepted and payable in India. Accounting Treatment of Bill of Exchange: In business concerns, numerous bills of exchange are drawn and accepted. Special journals are used to record bills of exchange, called bill receivable journal and bill payable journal. From these two journals the totals are posted to bills receivable account and bills payable account respectively. Every bill has two different aspects. To the drawer who has sold goods and wants to be paid for them, it is a bill receivable, he hopes to receive money on the due date. Such bills are recorded in the bills receivable journal. It is a sort of asset for the drawer and as good as money. To the acceptor of the bill, who has bought goods on credit and has agreed to honor the bill on the due date, it is a bill payable. The acceptor must arrange in due course the funds available to honor the bill when it falls due. Such bills are recorded in the bills payable journal. Explanation with an Example: We can understand the accounting of bills of exchange with the help of an example. Let us suppose, Mr X is a manufacturer of shoes and Mr. Y is a retail trader of shoes. Mr. Y (the buyer) wishes to buy shoes from the manufacturer but has no money. He is agreed to accept a bill of exchange for 90 days, if goods are sold to him on credit basis. So both the parties agreed. Mr. X supplies goods to Mr. Y worth $10,000 for a 90 days credit and draws upon him a bill for the full value of goods for 90 days on 1st Jan. 2005. The illustration given above can be summarized below:

here are three transactions which have taken place: Mr. X sold goods to Mr. Y worth $10,000 on credit basis. Mr. X drew a bill of exchange on Mr. Y for 90 days for $10,000. On the due date the bill was presented to Mr. Y and he honored the bill (met his obligation on the due date) Journal Entries: Now we shall see how these transactions are recorded in journal of Mr. X and Mr. Y. Mr. X's Journal Transaction No.1 Mr. X sold goods to Mr. Y for $10,000 on credit. The journal entry is: 1st Jan. 2005 Y A/c Dr. Sales A/c (Goods sold on credit) 10,000 10,000 Transaction No. 2 Mr. Y drew a bill on Mr. X for 90 days. The journal entry is: 1st Jan. 2005 Bill receivable A/c Dr. Y A/c (Acceptance received from Mr. Y) 10,000 10,000 Transaction No. 3 On the due date acceptor honors the bill. The journal entry is: 4 April. 2005 Cash/Bank A/c Dr. Bill receivable A/c (Received cash on presentation of bill) 10,000 10,000 Mr. Y's Journal Transaction No.1 Bought goods from Mr. X for $ 10,000. The journal entry is: 1st Jan. 2005 Purchases A/c Dr. X A/c (Goods purchased on credit) 10,000 10,000 Transaction No. 2 Acceptance given to Mr. X instead of paying him cash. The journal entry is: 1st Jan. 2005 X A/c Dr. Bill payable A/c (Acceptance given to Mr. X) 10,000 10,000 Transaction No. 3 Acceptance is met (paid of due date). The journal entry is: 4 April. 2005 Bill payable A/c Dr. Cash A/c (Acceptance is paid in cash) 10,000 10,000 Different Uses of a Bill of Exchange: In the above illustration, we just discussed only one use of a bill of exchange i.e., the drawer retained the bill with himself till due date and then presented to the acceptor, who honored the bill (paid cash to the drawer). Every drawer or receiver of a bill has three options for him. He can retain the bill till the due date. (As discussed above). He can send the bill to his bank for collection. Bank will present the bill before drawee on due date and will collect the amount for drawer. View accounting treatment for this option on "Bill of Exchange Sent to Bank for Collection" page He can endorse the bill to one of his creditors in settlement of his own debts. View accounting treatment for this option on "Endorsement of Bill of Exchange" page He can discount it with his bank if he is in need of money and cannot wait till the due date. View accounting treatment for this option on "Discounting of a Bill of Exchange" page In the same way every acceptor has four possibilities. He may pay the amount of bill on presentation. (As discussed above). He may refuse to honor the bill. It is called dishonor of a bill of exchange. Read Dishonor of Bill of Exchange He may request the drawer to renew the bill (extending the period of payment). Read Renewal of Bill of Exchange He may get the bill retired. (paying his obligation before the due date). Read Retiring a Bill of Exchange Under Rebate.