

What are Bills of Exchange?
In an international trade to bind one party to pay a fixed sum of money to another party a written order is passed where in the sum of money is to be paid on demand or at a predetermined date, this is known as Bill of Exchange.
The checks and promissory notes are kind of the same, which can be drawn by the individuals or by the banks, also they are transferable by endorsements.
Key Notes -
A bill of exchange is a type of written order which is binding on one party for a fixed sum of money to be paid to another party on demand or in the future.
A bill of exchange consists of three parties—the drawee is the party who pays the sum, the payee is one who receives that sum, while the drawer is the one who obliges the drawee to pay the payee.
A bill of exchange is used in the international trade as it helps the importers and exporters to fulfil transactions.
The involved parties can use this bill to specify the terms of a transaction, like the credit terms and the rate of accrued interest.
Working of Bill of Exchange
Maximum of three parties are involved in the bill of exchange. The drawee is the party who pays the sum which is specified in the bill of exchange. The one who receives that sum is called the payee. The drawer on the other hand, is the party that obliges the drawee to pay the payee. The drawer and the payee are generally the same entity unless the drawer transfers this bill of exchange to a third-party who becomes the payee.
Classification of Bill of Exchange
1. On the Basis of Place
Bills are classified as inland bills and foreign bills. In Inland bill, the parties are from the same country. While, the other type of bill which is called the foreign bill, parties belong to different countries. Inland bill examples are trade bills or accommodation bills, while foreign bill examples can be a trade bill.
2. On the Basis of Purpose
On the basis of purpose, bills are to be classified as trade bills or accommodation bills. Trade bills arise from trade transactions. The accommodation bill is for raising funds among the parties and for discounting in the money market.
3. Documentary Bill
When bills are attached with trade documents, they are called the documentary bills. Bill not attached to any document is called a clean bill. Documentary bill is re-classified as documents against acceptance or the D/A bill and documents against payment bill or the D/P bill. When an exporter sends to an importer a D/A bill, the bill will be accompanied by the following documents:
Bill of lading
Consular invoice
Certificate of origin
Marine insurance policy or Air insurance policy
Invoice.
4. Parties or Payee
When a bill is payable to a specific person whose name is already appearing on the bill, this is called an order bill. This type of bill can be transferred only by endorsement and delivery method. Bearer bill, is another type of bill which is payable to any person who is in legal possession of the bill as on the date of maturity and this bill is to be made payment to the drawee.
5. Time Bill
A bill payable after a specified date or time is known as the time bill and a bill payable on demand is known as the demand bill. Time bill is also called an usance bill. Example for demand bill - cheque.
These were the different types of bill of exchange. In the trade, the bills are very popular, the bills facilitate the ease and smoothness in the same work.
FAQs on Types of Bills of Exchange: Explained
1. What is a bill of exchange and who are the main parties involved?
A bill of exchange is an unconditional written order signed by the maker, directing a certain person to pay a specific sum of money only to, or to the order of, a certain person or to the bearer of the instrument. The three primary parties are:
- The Drawer: The person who creates the bill of exchange (usually the seller or creditor).
- The Drawee: The person who is directed to pay the amount specified in the bill (usually the buyer or debtor).
- The Payee: The person who is entitled to receive the payment. The drawer can also be the payee.
2. What are the main types of bills of exchange based on purpose and geographical location?
Bills of exchange can be classified based on their purpose and the location of the parties involved:
- Based on Purpose: A Trade Bill is drawn by a seller on a buyer against a genuine trade transaction. An Accommodation Bill is drawn and accepted without any underlying trade transaction, purely for the purpose of mutual financial help or raising funds.
- Based on Location: An Inland Bill is a bill where both the drawer and the drawee are residents of the same country. A Foreign Bill is a bill where the parties (drawer and drawee) are located in different countries.
3. What is the difference between a time bill and a demand bill?
The key difference lies in the payment date. A time bill, also known as a usance bill, is payable after a specific period or on a particular future date mentioned in the bill. The drawee is given a certain period of credit. In contrast, a demand bill is payable immediately upon presentation to the drawee. A cheque is a classic example of a demand bill.
4. Can you provide a simple example of how a trade bill works in a transaction?
Certainly. Imagine 'Supplier A' sells goods worth ₹50,000 to 'Buyer B' on 30 days credit. To secure the payment, Supplier A (the drawer) writes a bill of exchange ordering Buyer B (the drawee) to pay ₹50,000 after 30 days. Buyer B accepts this by signing it, making it a legal document. Now, Supplier A (the payee) can either hold it for 30 days to receive payment from Buyer B or get it discounted from a bank for immediate cash.
5. How is a bill of exchange fundamentally different from a promissory note?
While both are negotiable instruments, they differ in key aspects. A bill of exchange is an order to pay, drawn by the creditor (drawer) on the debtor (drawee). It requires acceptance by the drawee to be valid. In contrast, a promissory note is a promise to pay, made by the debtor himself to the creditor. It does not require acceptance as it is created by the person who is liable to pay.
6. Why would anyone use an 'accommodation bill' if no goods or services are exchanged?
Accommodation bills are used purely for short-term financing. When one business has a better credit rating than another, it might accept a bill drawn by the other business. The business that drew the bill can then get it discounted with a bank to raise immediate funds. The proceeds are then shared between the two parties as per their agreement. It essentially allows a party with lower creditworthiness to raise funds using the reputation of a more credible party.
7. What is the practical importance of distinguishing between a 'clean bill' and a 'documentary bill' in trade?
This distinction is crucial for managing risk, especially in international trade. A clean bill is just the bill of exchange itself, without any supporting documents. A documentary bill, however, is accompanied by important trade documents like the bill of lading (title to goods), invoice, and insurance policy. This provides security to the exporter, as the importer (drawee) can only get these documents—and thus claim the goods—after either accepting the bill (D/A - Documents against Acceptance) or paying the bill (D/P - Documents against Payment).
8. How does 'endorsement' allow a bill of exchange to function as a tool for settling debts?
Endorsement is the act of the payee signing the back of the bill to transfer its ownership to another person. This makes the bill a negotiable instrument. For example, if 'A' holds a bill accepted by 'B', and 'A' owes money to 'C', 'A' can endorse the bill and give it to 'C'. Now, 'C' becomes the new payee and can claim the money from 'B' on the due date. This ability to be transferred multiple times allows a single bill to settle several debts before its maturity.

















