BILL OF EXCHANGE

How a Bill of Exchange Functions: In order to fully grasp the transactions relating to bill of exchange we thoroughly learn the procedure. The following example will make it clear. Suppose A sells goods to the value of $500 to B. The most ready means of closing the transaction will be cash payment by B to A. But payment of this nature are not many in actual practice. The greatest volume of business is done on credit. That being the case A will have to wait for some time to receive payment from B. A, merchant can hardly afford to be out of funds for long. Moreover, to sell goods on credit is rather a risky job. Therefore as soon as A sells goods to B, he will draw a bill for $500 on B and forward the same to him together with the goods with instructions to B to accept the bill and return the same to A. Upon receipt of the bill, B would write on the face of the bill "accepted" and put his signature below. It means that B approves the bill and also binds himself to pay the amount thereof when due. The bill is thus complete and comes back to A to remain in his possession till maturity or can be endorsed or discounted by him. On the due date the holder of the bill presents it before the acceptor and receives payment of the bill from the acceptor. Thus the bill of exchange is the instrument, rather the mechanism which finances the major portion of all commercial transactions these days and it helps both the debtor and the creditor alike.

 If the holder of a bill is need of money before the due date of the bill he may sell it to the bank. The bank (buyer) will give cash for it in consideration of a small charge. This is called discounting the bill. The amount deducted by bank of the bill from the face value of the bill is called "discount". The discount is usually calculated at a certain rate per annum on the amount of the bill.