hi frds i want to give some more additional information to
the answer 1 given by sridhar.
Mr sridhar explained abt BOE. But why we need to go for
bills of exchange?
Generally we will go for bills of exchange for getting loan
from bank. it is also one form of getting loan from the
bank. we will keep bills with the bank and we will get loan
from the bank. the loan value(varies from 80-95% of bills
amount) depends on various things like maturity date, risk,
interest etc. Bank will recover the amt against the customer
Bank will charge some thing for bills of exchange, so banks
get benefit from it and company will get liquidity so
company can able to do more turnover.
Bills of exchange may be defined as a commitment subscribed
by your customer to pay a certain amount on a given date
upon presentation of the bill of exchange. They can be used
to materialize installment payments.
For example, you have accepted that your customer pays the
invoice amount in 3 monthly installments of 1000 USD each.
You will issue 3 bills of exhange of 1000 usd each and
maturing in month in month m, m+1 and m+2. The bills of
exchange will be sent to your customer for
acceptance(customer signs them).
Once accepted they will be returned to you. You will have to
post accounting entries. But note that even though the
accepted bills of exchange can be considered as payment, you
cannot clear the outstanding customer invoice until the
bills are effectively paid at maturity date. You then have
to post the bills of exchange as a special GL transaction.
Again once you have received the bills of exchange you may
decide to discount them right away with your bank and this
is done with or without recourse. Depending on the option
choosen, accounting entries are different. by discounting
the bills you receive payment of the bill and this can be
used to clear the outstanding customer invoice.
But note that until the bill is finally paid by the customer
at maturity date you remain liable. You account for this
liability by making postings which will show the discounted
bills of exchange as a contingent liability. They do not
show in the balance sheet itself but appear in an appendix
of the balance sheet.
Bill of exchange is an unconditonal order signed by the
maker to pay cetain sum of money only to the ordered or
it is a chance given by the saler to the purchaser to pay
money in the future date.it also helps the saler to get
discount by the bank and easy money.
a "bill of exchange" or a "Hundi" is a kind of legal
negotiable instrument used to settle a payment at a future
date. It is drawn by a drawer on a drawee wherein drawee
accepts the payment liability at a date stated in the
instrument. The Drawer of the Bill of Exchange draw the
bill on the drawee and send it to him for his acceptance.
Once accepted by the drawee, it becomes a legitimate
negotiable instrument in the financial market and a debt
against the drawee. The drawer may, on acceptance, have the
Bill of Exchange discounted from his bank for immediate
payment to have his working capital funds. On due date, the
bill is again presented to the drawee for the payment
accepted by him, as stated therein the bill.