Bills Of Exchange: Explained

Published on February 21, 2017


A bill of exchange is a written binding agreement containing an unconditional order that orders a certain party to pay a certain amount of money to another party at a predetermined date or to pay on demand.
Entities involved in bills of exchange-
1. Drawee: The person who is to pay
2. Drawer: The person who issues the bill, is paid by the drawee or the drawer can request the drawee to pay to a third party
3. Payee: Drawee pays the specified amount to the payee


  • An order is made in a form of bill of exchange to make payment
  • It is a negotiable instrument
  • It is a written agreement
  • Paid on expiry of a fixed interval of time or on demand
  • It is used in local or international trade and mostly in international trade
  • Date is mentioned and it is stamped 
  • The drawee may be a person or a financial institution
  • The maker signs it
  • It may be called a trade draft(issued by a person) or a bank draft(issued by a bank)
  • It is draft till it is accepted by the drawee
  • It comes under Negotiable Instruments Act 1881
  • It is different from a promissory note as it does not contain a promise
  • Bills of exchange cannot be cancelled
  • Companies prefer to use to bills of exchange as it offers a guarantee 
  • It is transferable
  • If there is an interest to be paid, it is stated on the bill of exchange
  • Different parties use different format of bill of exchange
  • The bill is said to be dishonoured if the drawee does not pay 


  • AMOUNT: written in words and in number
  • AS OF: The date on which the amount is to be paid
  • TITLE: Title is ‘bill of exchange’
  • PAYEE: Name of the payee


1. TIME BILL AND DEMAND BILL: Classification is time dependent, time bill is paid after a specific period of time and demand bill is paid on demand
2. ORDER BILL AND BEARER BILL: It is dependent on parties, when a specific person to whom the amount is to be paid appears on the bill then it is called order bill and if the amount is payable to any person who possesses the bill legally at that time is called bearer bill
3. According to place: It is of two types-
  • Inland bill- parties are within a country
  • Foreign bill- parties are of different countries
4. According to purpose: It is also of two types-
  • Trade bill- when trade transactions are done 
  • Accommodation bill- Fund are raised among parties
5. On basis of documents: When trade documents are present it is called a documentary bill but when they are not it is called a clean bill
Hence, a bill of exchange is when the first party (the drawer) issues an unconditional order to a second party (the drawee) for their payment to a third party (the payee)
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