Bills of Exchange: Definition, Types, Features, and Advantages

What is a Bill of Exchange?

Bills of Exchange

A bill of exchange is an unconditional order issued by an individual or business directing the recipient to pay a certain sum of money to a third party at a future date. This future date could be fixed or negotiable. A bill of exchange must be written, signed and dated. It‘s also known as a draft.

Parties to a Bill of Exchange 

The Drawer: the person giving the order to pay. This is the creditor who draws up the bill of exchange. 

The Drawee: the party who has been ordered to pay. This is the debtor to whom the bill is drawn. 

The Payee: the party to be paid. This is the person who holds the bill until maturity and to whom the payment would be made by the debtor. 

Types Of Bills Of Exchange 

The types of Bills of Exchange are the following: 

i. Inland Bills: This is a bill of exchange drawn and payable in Nigeria. 

ii. Foreign Bills: This is a bill drawn in Nigeria and payable in another country. 

iii. Accommodation Bills: An accommodation bill is a bill of exchange which has been accepted, drawn or endorsed by a person, known as accommodation party, not for valuable consideration but for the sole purpose of lending his name/reputation to another person, known as accommodated party, so that the accommodated party can enjoy some benefits which he could not have enjoyed otherwise. Such benefits, of course, depend on the exact nature of the accommodation bill. 

Uses/Advantages of Bills of Exchanges    

1. It is a means of setting foreign debts & the financing of exports. 

2. It allows a debtor to defer payment until maturity. 

3. It is evidence of indebtedness. 

4. It enables the holder to sue in his/her own name & ?free from equities?. 

5. It fulfills, to a certain extent, the function of money. 

Features of Bills Of Exchange  Thus, a bill of exchange has the following features: 

1. It must be in writing. 

2. It must contain an order. 

3. It is made by the creditor. 

4. It must be signed by the maker of the instruments. 

5. It must be for a specified amount & specified period. 

6. It should be duly accepted by the debtor. 

7. The order must be unconditional. 

Example: Kunle commenced trade on 1st of January 2015. The following records were extracted from his books: 

1/1/2015   Bought goods from Onuh #25,000 

2/1/2015   Sent cheque for #12,000 to Onuh & accepted a bill drawn on him payable on 1/2/2015    for #10,000. 

8/1/2015   Sold goods to Onyeka for #12,000. 

9/1/2015   Drew two bills on Onyeka for #10,000 & #2,000 payable on 8/2/2015 and 8/3/2015 respectively. 

14/1/2015 bought goods from Efe for #7,000 & paid #4,000 on account. 

23/1/2015 sold goods to Okoh for #5,000 & received cheque for #2,000 & a bill for the balance payable on 22/2/2015.  

26/1/2015 endorsed Okoh‘s bill to Onuh in settlement of the balance due to the latter.  

4/2/2015   Onuh agreed that the bill of #10,000 be withdrawn after which Kunle paid cheque for #6,000 & accepted another bill payable on 3/3/2015. 

11/2/2015   Onyeka‘s bill for #10,000 was returned dishonored. 

20/2/2015   Agreed with Onyeka that he should return goods invoiced to him for #5,000 against a credit to Him of #4,000.   

22/2/2015   Okoh‘s bill was duly honored.    

You are required to prepare

a) The ledger accounts (excluding bank account) to record these transactions in the books of  Kunle up to 28th February 2015, and 

b) The statement of profit or loss (extract) for the two months ended 28th February  2015 & statement of financial position (extract) at the same date.