There are three parties to a bill of Exchange, in every country, of which Kenya is no exception. However, educareguide believes that is a document that plays a major role in financial settlements in businesses. Before we go to the details, let’s look at some brief background information on the topic.
First of all let’s consider the meaning of a Bill of Exchange. A Bill of Exchange is an unconditional order order from one party (drawer) to another party (drawee), instructing the later to pay a specific sum of money to another party (the payee), at a specific date in the future. As a result you can identify from the definition that the parties to a bill of exchange are the drawer, the drawee and the payee. What then are the Features of a bill of exchange? Find some of the Characteristics of a bill of exchange below:
Features Of A Bill Of Exchange
Notably, the following is the nature of a bill of exchange:
- Firstly, it must be in writing.
- Secondly, the order must be unconditional. This mean that the debtor does not any option but to pay the amount stated on the bill of exchange.
Now, let’s look at the people involved in a bill of exchange are:
Parties Involved In A Bill Of Exchange
The following are the participants involved in a Bill of Exchange. You might as well refer to them as the parties or terms used in bill of exchange.
The drawer is the person who writes the bill. In essence, it could be understood that the drawer is the creditor. A creditor is a person to whom an amount of money is owed. When a creditor sells goods to a customer, he may order that the customer pays the sum of money through a bill of exchange. He will then design the bill and send it to the debtor, who in this case is the debtor.
The drawee is the person to whom the bill is sent. The drawee receives the bill with all details written on it. The details includes, the amount of money to be paid, the date to pay, and the person to pay to (the payee). Here the drawee is the debtor who might have bought goods on credit from the creditor. It might be understood that in some other scenario, the drawee may be the bank of the drawer. This is true because, when you deposit money at a bank, you become the creditor and the bank becomes your debtor because the bank owes you that sum of money.
The Payee is person to whom the money is paid. He assumes the state of a beneficiary in the contract between the Drawer and the Drawee. Why is the payee the beneficiary of the bill of exchange transaction. This is because the drawee pays the money to the payee because the drawer is obligated to the payee. Obligated means that the drawer owes the payee, at the same time the drawee owes the drawer. The payee is the one who receives the amount that was ordered by the drawee to be paid by the drawee.
Importance Of A Bill Of Exchange
The following are the advantages and benefits of a bill of exchange:
- Bill of exchange is that it aids international trade.
- Also, Bill of exchange helps in the easy settlement of debt.
Specimen Of Bill Of Bill Of Exchange
We have a format of a bill of exchange here for you. Please a picture or an image of a Bill Of Exchange Below:
Bills Of Exchange In Accounting
Bill of exchange comes out in many accounting topics. In fact, due to the usage of bills of exchange for financial transactions, an accountant cannot stay away from the use of a bill of exchange. Really, bill of exchange is a integral part of the settlement process in accounting.
For instance, it recognized as a payment from debtors for the settlement of the debts. Therefore, in the debtors control account, bill of exchange is treated as a credit entry. On the other hand, in the Total Creditors control account, bill of exchange is treated as debit entry, thereby reducing the your company’s indebtedness to creditors.
Other Facts About Bill Of That Is Well Noting
- Bill of exchange is mostly used in international trade to settle payments for goods and services.
- Format of a bill of exchange: – From the above, it could be realized that the very format of a bill of exchange is depicted by by its function and the parties involved.
- Surely, a bill of exchange is used for both inland trade and international trade. Thus, we have inland bill of exchange and international bill of exchange. All these types of bill of exchange exist for use in business.
- Bill of Exchange is different from a Promissory Note. This is because a bill of exchange has three parties (drawer, drawee and payee), whiles a promissory note has only two parties (drawer and payee).
- A bill of exchange is different from a cheque. Though a bill of exchange plays a similar role as a cheque, a bill of exchange is different from a cheque. It is different because it is a written document of how much a debtor owes a creditor.
- Checkout investopedia’s definition of Bill of exchange here
- Find out more information about about bill of exchange from our other post.
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