Terms used in bills of exchange MCQs Quiz | Class 10

Understanding Bills of Exchange: Key Terms Explained

A Bill of Exchange is a written unconditional order by one person to another, to pay a certain sum of money to a specified person or to the bearer of the instrument. It is a vital instrument in commercial transactions, especially for credit sales, providing security and a clear payment schedule. To fully grasp its functioning, it’s essential to understand the various parties and terms involved.

Key Parties in a Bill of Exchange:

• Drawer: The person who writes or ‘draws’ the bill. This is usually the creditor (seller) who is owed money. The drawer orders the drawee to pay a certain sum.
• Drawee: The person on whom the bill is drawn. This is usually the debtor (buyer) who owes money. The drawee is ordered by the drawer to pay. Once the drawee signs the bill signifying acceptance, they become the ‘Acceptor’.
• Payee: The person to whom the payment is to be made. The payee can be the drawer themselves, or a third party (e.g., a bank or another creditor of the drawer).
• Acceptor: The drawee becomes the acceptor once they sign their assent to the bill, thereby undertaking to pay the amount on the due date. The acceptance makes the bill a legally binding instrument.
• Endorser: When the payee (or any subsequent holder) transfers the bill to another person by signing on its back, that person is called the endorser. Endorsement is a way of transferring the ownership of the bill.
• Endorsee: The person to whom the bill is endorsed or transferred. The endorsee becomes the new holder of the bill and is entitled to receive payment.

Other Important Terms:

• Term (Period of Bill): This refers to the duration for which the bill is drawn, i.e., the time between the date of drawing the bill and its due date for payment. It can be expressed in days or months (e.g., 30 days after sight, 2 months after date).
• Maturity (Due Date): This is the date on which the payment of the bill becomes due. It is calculated by adding the term of the bill and three ‘days of grace’ to the date of drawing or acceptance, depending on how the term is specified. The days of grace are a traditional allowance for payment.

Summary Table of Roles:

Quick Revision Points:

• A Bill of Exchange involves at least three parties initially: Drawer, Drawee, Payee.
• The Drawee becomes the Acceptor upon signing the bill.
• Endorsement allows the transfer of ownership of the bill.
• Maturity date is crucial for timely payment.

Practice Questions (For Further Study):