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College Financial-Mgmt-Accounting 9
College Financial-Mgmt-Accounting 9
DISCUSSION
Introduction
But on the other side, credit transaction brings a lot of risks to the trader. In a credit transaction, goods
are sold and transferred in return of a promise to pay the price of the goods at some future date or on
demand. This promise can be either be by word of mouth or in writing. It is possible that the oral
promise of making the payment in future may not be fulfilled by the purchaser causing a loss to the
seller of goods.
Therefore, in order to avoid a such a situation, it is always better to take an undertaking in writing for the
payment of the price of goods. This written undertaking may be in the form of “Bills of Exchange” or
“Promissory Note” or “Cheques”. These are the undertakings in writing by the debtors to pay an amount
of money on a definite or determinable date. These documents are known as “Negotiable Instruments.”
A negotiable instrument means promissory note, bill of exchange or cheque payable either on order or
to bearer”. The word “Negotiable” means transfer by
delivery and the word “Instrument” mean a written
document by which a right is created in favor of some
person.
BAGUIO COLLEGE OF
TECHNOLOGY Baguio City, Philippines
2. It should contain an order by the seller to the purchaser to make the payment in future. A mere
request by the seller to the purchaser to make the payment in future does not amount to a bill
of exchange.
3. The order contained in the bill should be unconditional. A bill of exchange with a conditional
order cannot be made payable.
4. The maker of the bill or the seller is known as “drawer” and the bill must be signed by him,
otherwise it will be invalid.
5. The purchaser upon whom the bill is drawn is known as “drawee” and he must be a certain
person.
6. Amount ordered to be paid by the drawer in a bill must be certain and it should be in money
alone and not in goods.
7. The person to whom payment of the bill is to be made is known as “payee” and he must be a
certain person or the bearer of the bill.
Classification of Bill of Exchange
1. On the basis of place.
2. On the basis of purpose.
3. On the basis of time.
Promissory Note
1. It must be in writing.
2. It must contain express promise to pay. Mere acknowledgment of debt is not sufficient to make
a promissory note.
3. The promise to pay must be unconditional. It should not depend upon contingencies which may
or may not happen, because uncertainty affects the business.
4. It should be signed by the maker. The person who promises to pay must sign the instrument
even though it might have been written by the promissory himself.
5. The maker of the promissory note must be certain. The promissory note itself must show clearly
who is the person agreeing to undertake the liability to pay the amount.
6. The payee must be certain. The instrument must point out with certainty the person to whom
the promise has been made. The payee may be ascertained by name or by designation. 7. The
amount payable must be certain. There must be a certainty as to the amount promised to be paid
as promissory note. In case the payment is not certain, the promissory note is not valid. 8. The
promise should be to pay money and money only. Money means legal tender money and not old
and rare coins.
9. A promissory note may be payable on demand or after a definite period of time. 10. The
other formalities regarding number, place, date, consideration are not essential to be
incorporated in the promissory note, but it must be properly stamped.
Difference Between a Bill of Exchange and a Promissory Note
1. A bill of exchange is an unconditional order to pay whereas a
promissory note is an unconditional promise to pay.
BAGUIO COLLEGE OF
TECHNOLOGY Baguio City, Philippines
2. A bill of exchange is drawn by the creditor and he makes an order on the debtor to make the
payment whereas a promissory note is written by the debtor wherein he promises to make the
payment in future.
3. A bill of exchange has usually three parties namely, the drawer, the drawee and the payee
whereas a promissory note has only two parties, i.e. the maker and the payee.
4. A bill of exchange is required to be accepted by the drawee (i.e., debtor) if it is to be a legal
document, whereas a promissory note needs no acceptance because the debtor himself makes
the promise to make the payment.
5. Bills of exchange payable on demand do not require any stamp duty whereas promissory notes
payable on demand require advalorem stamp duty.
6. The liability of the drawer of the bill of exchange is secondary because he is required to make the
payment only when the drawee of the bill fails to make the payment. On the other hand, the
liability of the maker of the promissory note is primary and absolute because a promissory note
is written by him.
7. Foreign bills are usually drawn in a set of three whereas foreign promissory notes are drawn in
one set only.
8. Foreign bills must be noted and protested on their being dishonored but foreign promissory
notes do not need any noting and protesting on their dishonor.
EVALUATION/ASSESSMENT/PERFORMANCE TASK:
REFERENCES:
Prepared by:
Engr. Lorena G. Dayrit
Instructor