Bills of Exchange: ISC Class 11 Accounts Notes and Entries

What Bills of Exchange is about

Weightage: Bills of Exchange belongs to the unit Bills of Exchange, which CISCE weights at 7 of the 80 marks in the ISC Class XI Accountancy Paper I (Theory). Class XI is examined by the school, so your school sets the paper within this weightage.Source: CISCE ISC Accountancy syllabus, examination year 2028, Class XI unit weightage

Key concepts

Negotiable instruments: bill of exchange, promissory note and cheque

A negotiable instrument is a document that can be transferred by delivery (or endorsement and delivery), giving the transferee a good title. The Negotiable Instruments Act, 1881 recognises three: bills of exchange, promissory notes and cheques.

Bill of exchange (Section 5): an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or the bearer. It needs the drawee's acceptance.

Promissory note (Section 4): an instrument in writing containing an unconditional undertaking (promise), signed by the maker, to pay a certain sum of money to a certain person or to his order. It is made by the debtor and needs no acceptance.

Cheque: a bill of exchange drawn on a specified banker and payable on demand.

Basis	Bill of exchange	Promissory note
Nature	Order to pay	Promise to pay
Drawn by	Creditor (drawer)	Debtor (maker)
Parties	Three: drawer, drawee, payee (two may be the same)	Two: maker and payee
Acceptance	Needed	Not needed
Noting on dishonour	Needed for a foreign bill	Not needed

Worked example

Suppose Arun owes Bina ₹50,000. (a) Bina writes a document ordering Arun to pay ₹50,000 to her after three months, and Arun signs his acceptance across it. (b) Arun writes and signs 'I promise to pay Bina ₹50,000 three months after date'. Name each instrument and its parties. [2 marks]

Try it first, then show the solutionSolution

1. (a) An order by the creditor, accepted by the debtor: a bill of exchange. Drawer: Bina; drawee/acceptor: Arun; payee: Bina.
2. (b) A promise by the debtor: a promissory note. Maker: Arun; payee: Bina; no acceptance needed.

Answer: (a) Bill of exchange (drawer Bina, drawee Arun, payee Bina); (b) promissory note (maker Arun, payee Bina).

Specimen, features, advantages and disadvantages

Specimen of a bill (layout): amount in figures (top left) with stamp; place and date (top right); the order: 'Three months after date pay to me or my order the sum of rupees fifty thousand only, for value received'; addressed 'To Arun, Kolkata' (bottom left); drawer's signature (bottom right); across the face: 'Accepted, Arun' with date.

Specimen of a promissory note: amount with stamp; place and date; 'Three months after date I promise to pay Bina or order the sum of rupees fifty thousand only, for value received'; maker's signature.

Essential features of a bill: in writing; an order (not a request); unconditional; signed by the drawer; drawee certain; amount certain, in money only; payee certain; accepted by the drawee; stamped as required.

Advantages: legal evidence of the debt; known due date helps cash planning; can be discounted for immediate cash or endorsed to settle a debt; encourages credit trade; easy recovery (noting is proof of dishonour).

Disadvantages: risk of dishonour; stamp duty and noting costs; discount reduces the amount received; formalities make it slower than electronic payments.

Worked example

Is the following a valid bill? 'Pay Ravi ₹40,000 if the shipment reaches Mumbai safely.' Give a reason. [1 mark]

Try it first, then show the solutionSolution

1. A bill must contain an unconditional order; payment here depends on a condition (safe arrival).

Answer: No. The order is conditional, so it is not a valid bill of exchange.

Basic terms and the due date

• Drawer: the creditor who draws the bill. Drawee: the debtor on whom it is drawn; after accepting, the acceptor. Payee: the person to be paid (often the drawer). Holder: the person in possession of the bill. Endorser: the holder who transfers it by signing on the back; endorsee: the person to whom it is transferred.
• Bill on demand (at sight): payable when presented; no days of grace. Bill after date: the term runs from the date of drawing. Bill after sight: the term runs from the date of acceptance.
• Tenure (term): the period of credit.
• Days of grace: 3 days added to the nominal due date of a time bill.
• Due date (maturity) = date of drawing (or acceptance) + term + 3 days of grace.
• Term in months: same date in the later month (the last day of the month if that date does not exist), then + 3 days.
• Term in days: count the days excluding the date of drawing, then + 3 days.
• If the due date is a public holiday, the bill is due on the preceding business day; if it is an emergency holiday declared suddenly, the next business day.
• Dishonour: the acceptor fails to pay at maturity (or the drawee refuses to accept). Noting: a notary public records the fact of dishonour; his fee is noting charges, recoverable from the drawee.
• Renewal: cancelling the old bill and drawing a new one (usually with interest) when the drawee cannot pay. Retirement: payment before maturity, usually with a rebate (discount) allowed by the holder.

Worked example

Find the due dates: (a) a bill dated 15th January 2026 payable 3 months after date; (b) a bill dated 30th November 2025 payable 3 months after date; (c) a bill dated 10th March 2026 payable 60 days after date. [3 marks]

Try it first, then show the solutionSolution

1. (a) 15th April 2026 + 3 days of grace = 18th April 2026.
2. (b) 30th February does not exist, so the nominal date is 28th February 2026; + 3 days = 3rd March 2026.
3. (c) Days after 10th March: March 21 (11th-31st) + April 30 = 51; 9 more in May → 9th May; + 3 days = 12th May 2026.

Answer: (a) 18th April 2026; (b) 3rd March 2026; (c) 12th May 2026.

Options for the drawer and the entries in his books

The drawer records the bill as Bills Receivable (B/R) (an asset); the drawee as Bills Payable (B/P) (a liability).

Event	Drawer's books	Drawee's books
Bill drawn and accepted	B/R A/c Dr; To Drawee	Drawer Dr; To B/P A/c
(a) Retained, met at maturity	Bank/Cash Dr; To B/R	B/P Dr; To Bank/Cash
(b) Discounted with bank	Bank Dr; Discount on Bills Dr; To B/R	No entry
(c) Endorsed to a creditor	Creditor (endorsee) Dr; To B/R	No entry
(d) Sent to bank for collection	Bills Sent for Collection A/c Dr; To B/R; on payment Bank Dr; To Bills Sent for Collection (bank charges debited)	No entry

The drawee's books change only on events that involve him: acceptance, payment, dishonour, renewal, retirement, insolvency. Discounting, endorsement and collection are the holder's own arrangements.

Discount on discounting = Amount × Rate × Unexpired period ÷ 12 (months), an expense for the drawer.

Worked example

Suppose Asha draws on Bimal a bill of ₹80,000 for 3 months on 1st January 2026, which Bimal accepts. On 4th January Asha discounts it with her bank at 12% p.a. Pass the entries in Asha's books. [3 marks]

Try it first, then show the solutionSolution

1. 1 Jan: Bimal Dr 80,000 To Sales 80,000 (if not already recorded); B/R A/c Dr 80,000 To Bimal 80,000.
2. Discount = 80,000 × 12% × 3/12 = ₹2,400.
3. 4 Jan: Bank A/c Dr 77,600; Discount on Bills A/c Dr 2,400; To B/R A/c 80,000.

Answer: Bank receives ₹77,600; discount ₹2,400 is an expense; B/R cleared.

Dishonour and noting charges

On dishonour, the drawee's liability on the bill revives as an ordinary debt, increased by any noting charges, and the debit always goes to the drawee in the drawer's books, whoever holds the bill.

Bill was	Drawer's entry on dishonour
Retained	Drawee Dr (amount + noting); To B/R; To Cash (noting paid)
Discounted	Drawee Dr (amount + noting); To Bank (the bank recovers from the drawer)
Endorsed	Drawee Dr (amount + noting); To Endorsee
Sent for collection	Drawee Dr (amount + noting); To Bills Sent for Collection; To Bank/Cash (noting)

Drawee's books: B/P A/c Dr; Noting Charges A/c Dr; To Drawer.

Endorsee's books (when the endorsed bill is dishonoured): Endorser Dr (amount + noting); To B/R; To Cash (noting paid). The endorsee claims from his endorser, not from the drawee.

Insolvency of the drawee: amount received (the 'paise in the rupee') is debited to Cash, the rest to Bad Debts, and the drawee's account is credited.

Worked example

Suppose a bill of ₹30,000 received by Hema from Ravi was endorsed by Hema to Kunal. On maturity it is dishonoured and Kunal pays noting charges of ₹150. Pass the entries in Kunal's books and in Hema's books. [3 marks]

Try it first, then show the solutionSolution

1. Kunal (endorsee): Hema Dr 30,150; To B/R 30,000; To Cash 150.
2. Hema (drawer): Ravi Dr 30,150; To Kunal 30,150.

Answer: Kunal debits Hema ₹30,150; Hema debits Ravi ₹30,150 and credits Kunal.

Renewal, retirement and insolvency

Renewal (drawee cannot pay at maturity): the old bill is cancelled and a new one drawn, usually with interest for the extended period, which the drawee pays in cash or includes in the new bill.

Step	Drawer	Drawee
Cancel old bill	Drawee Dr; To B/R	B/P Dr; To Drawer
Interest	Drawee Dr; To Interest	Interest Dr; To Drawer
Part cash received	Cash Dr; To Drawee	Drawer Dr; To Cash
New bill	B/R Dr; To Drawee	Drawer Dr; To B/P

Interest = Amount renewed × Rate × Period ÷ 12.

Retirement (drawee pays before maturity): the holder allows a rebate for the unexpired period.

• Drawer (holder): Cash Dr; Rebate on Bills Dr; To B/R.
• Drawee: B/P Dr; To Cash; To Rebate on Bills.

Insolvency of the drawee: the bill is first treated as dishonoured (drawee debited, B/R or the holder credited). Then the amount received from his estate is debited to Cash and the balance to Bad Debts, crediting the drawee's account.

Worked example

Suppose a bill of ₹40,000 accepted by Dev is due today; Dev asks for renewal for 3 months with interest at 12% p.a. paid in cash. Pass the entries in the drawer's books. [3 marks]

Try it first, then show the solutionSolution

1. Cancel: Dev Dr 40,000 To B/R 40,000.
2. Interest = 40,000 × 12% × 3/12 = ₹1,200: Dev Dr 1,200 To Interest 1,200; Cash Dr 1,200 To Dev 1,200.
3. New bill: B/R Dr 40,000 To Dev 40,000.

Answer: Old bill cancelled; interest ₹1,200 charged and received; new bill ₹40,000.

Bills of Exchange in real life

Each concept, met in an everyday situation. Read the situation, answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Topics in this chapter

• Dishonour, Noting, Renewal, Retirement and Insolvency of a Bill
• Bills of Exchange: Features, Due Date and Entries till Maturity

Bills of Exchange: key facts

Due date

Due date = Date of drawing (after date) or acceptance (after sight) + Term + 3 days of grace

Discount on discounting

Discount = Bill amount × Rate × Unexpired months ÷ 12

Interest on renewal

Interest = Amount renewed × Rate × Extended months ÷ 12

Rebate on retirement

Rebate = Bill amount × Rate × Unexpired months ÷ 12

Insolvency

Bad debt = Amount due × (1 − rupee rate received)

Bills of Exchange: diagrams to practise

Practise each one on paper: draw it from the checklist, then tick off every label.

How the school exam asks Bills of Exchange

The question patterns to expect, and the method that works for each.

Tricks to remember Bills of Exchange

Short memory aids. Say each one aloud once, then use it on a question the same day.

• Order vs promise

  Bill: creditor ORDERS (three parties, acceptance needed). Note: debtor PROMISES (two parties, no acceptance).

  Use it when: Distinctions.

• Grace is three

  Every time bill gets 3 days of grace; demand bills get none.

  Use it when: Due dates.

• Dishonour always debits the acceptor

  Whatever the drawer did with the bill, on dishonour he debits the drawee (amount + noting) and credits whoever held it.

  Use it when: Dishonour entries.

Bills of Exchange: exam-level solved questions

Ordered from exam level to HOTS. Cover the solution, write your own, then compare step by step.

Case-study practice (Section A style)

Read the situation, then answer every part. In a school exam set on the board pattern this is a 7-mark question split into 1 + 2 + 3 + 1 marks.

Where the marks are

How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.

Where students lose marks in Bills of Exchange

The slips examiners see most often, and what to write instead.

• ✗Mistake: Passing an entry in the drawee's books for discounting or endorsement

  These are the holder's arrangements; the drawee's liability is unchanged.

  ✓Do this: Write 'No entry' explicitly in the drawee's books against those dates.

  Usually costs: 1 mark.

• ✗Mistake: Crediting B/R on dishonour of a discounted or endorsed bill

  B/R was already credited when the bill was discounted or endorsed; on dishonour the credit goes to the bank or the endorsee.

  ✓Do this: Ask: who holds the bill now? Credit that person.

  Usually costs: 1 mark per entry.

• ✗Mistake: Forgetting days of grace or counting the date of drawing

  Time bills carry 3 days of grace; in day-counting the date of drawing is excluded.

  ✓Do this: Write the counting step by step and add '+ 3 days' last.

  Usually costs: 1 mark and the dates of later entries.

• ✗Mistake: Leaving noting charges out of the claim

  Noting charges are paid because of the drawee's default, so they are recoverable from him.

  ✓Do this: Drawee is always debited with amount + noting.

  Usually costs: ½-1 mark.

• ✗Mistake: Computing renewal interest on the old bill instead of the amount renewed

  Interest is for the extended credit only, on the balance after any cash paid.

  ✓Do this: Amount renewed = old bill (+ noting) − cash paid; interest on that.

  Usually costs: 1-2 marks.

Practice questions on Bills of Exchange

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

1. Q1 · 1 mark · MCQExam level

   The person who accepts a bill is called the:
   (a) drawer
   (b) payee
   (c) drawee
   (d) endorsee

   Hint

   The debtor.

   Answer

   (c) drawee (the acceptor).

2. Q2 · 3 marks · Short answerExam level

   Give three differences between a bill of exchange and a promissory note.

   Hint

   Order/promise, parties, acceptance.

   Answer

   A bill is an order; a note is a promise. A bill is drawn by the creditor and has three parties; a note is made by the debtor and has two. A bill needs acceptance; a note does not.

3. Q3 · 2 marks · Short answerExam level

   Define noting charges and say who finally bears them.

   Hint

   Notary public.

   Answer

   The fee paid to a notary public for recording (noting) the dishonour of a bill as legal evidence. They are recovered from the drawee/acceptor, whose default caused them.

4. Q4 · 1 mark · Very short answerHarder exam level

   Find the due date of a bill dated 31st January 2026 payable 1 month after date.

   Hint

   February has no 31st.

   Answer

   Nominal due date 28th February 2026; + 3 days of grace = 3rd March 2026.

5. Q5 · 2 marks · Short answerHarder exam level

   Suppose a bill of ₹60,000 for 4 months is discounted 1 month after drawing at 15% p.a. Find the discount and the amount credited by the bank.

   Hint

   3 months unexpired.

   Answer

   Discount = 60,000 × 15% × 3/12 = ₹2,250; bank credits ₹57,750.

6. Q6 · 3 marks · Short answerHarder exam level

   Suppose a bill of ₹45,000 sent to the bank for collection is dishonoured on maturity; the bank pays noting charges of ₹180. Pass the drawer's entries from sending the bill to dishonour.

   Hint

   Bills Sent for Collection A/c.

   Answer

   Bills Sent for Collection A/c Dr 45,000 To B/R 45,000. On dishonour: Drawee Dr 45,180; To Bills Sent for Collection 45,000; To Bank 180.

7. Q7 · 3 marks · Short answerHarder exam level

   Suppose Tara's acceptance of ₹25,000 falls due today. She pays ₹10,000 in cash and accepts a new 2-month bill for the rest with interest at 18% p.a. Find the new bill's amount and pass the drawer's entries.

   Hint

   Interest only on the renewed part.

   Answer

   Renewed = ₹15,000; interest = 15,000 × 18% × 2/12 = ₹450; new bill = ₹15,450. Entries: Tara Dr 25,000 To B/R; Cash Dr 10,000 To Tara; Tara Dr 450 To Interest; B/R Dr 15,450 To Tara.

8. Q8 · 2 marks · Short answerHOTS / competency

   A drawer endorsed a bill to his creditor. On maturity the acceptor paid. A student debited the acceptor and credited the endorsee in the drawer's books on the due date. Is this correct?

   Hint

   What did the drawer do on endorsement?

   Answer

   No. On endorsement the drawer already debited the endorsee (creditor) and credited B/R; when the bill is met, the transaction is complete and the drawer passes no entry. An entry is needed only if the bill is dishonoured.

9. Q9 · 2 marks · Short answerHOTS / competency

   Why can a bank discount a bill but refuse to discount a promissory note made by an unknown person, though both are negotiable instruments?

   Hint

   Who is liable?

   Answer

   A discounted bill carries two liable parties: the acceptor and the drawer who discounts it (the bank can recover from either on dishonour). A note by an unknown maker carries only the maker's promise, so the bank's security is weaker; negotiability alone does not guarantee payment.

10. Q10 · 3 marks · Short answerHOTS / competency

    Suppose a drawee accepted a ₹36,000 bill. Before maturity he became insolvent and paid 55 paise in the rupee. Pass the drawer's entry if the bill was still with the drawer, and say what happens to the bill.

    Hint

    Treat it as dishonoured first.

    Answer

    The bill is treated as dishonoured: Drawee Dr 36,000 To B/R 36,000. Then Cash Dr 19,800; Bad Debts Dr 16,200; To Drawee 36,000 (55% of 36,000 = ₹19,800).

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1. 1.Days of grace on a time bill?Show answer

   Three.

2. 2.Who draws a promissory note?Show answer

   The debtor (maker).

3. 3.Entry in the drawee's books on discounting?Show answer

   None.

4. 4.Rebate is allowed on?Show answer

   Retirement of a bill before maturity.

5. 5.Bill after sight: term runs from?Show answer

   The date of acceptance.

6. 6.Are accommodation bills in the ISC Class 11 syllabus?Show answer

   No.

Quick revision checklist

The night before the exam: can you do each of these without looking?

• ☐Bill = order by creditor, accepted by debtor; note = promise by debtor.
• ☐Due date = date + term + 3 days; demand bills: no grace.
• ☐Holiday: preceding business day; emergency holiday: next business day.
• ☐Drawer: B/R; drawee: B/P.
• ☐Discounting/endorsement/collection: no entry in drawee's books.
• ☐Dishonour: debit drawee (amount + noting); credit the current holder.
• ☐Renewal: cancel, interest, new bill; retirement: rebate.
• ☐Accommodation bills and bank's books: not required.

Bills of Exchange: frequently asked questions