The term and due date of a Bill of Exchange are important elements that determine when the amount specified in the Bill becomes due and payable. These elements establish the period within which the Drawee is required to make payment to the Payee.
A proper understanding of the term and due date is important for payment planning, management of cash flows, and effective trade transactions. The term specifies the period allowed for payment, whereas the due date identifies the actual date on which payment is required.
Term of a Bill of Exchange
The term of a Bill of Exchange refers to the duration or period between the relevant date of the Bill and the date on which payment becomes due. It represents the period available to the Drawee for making payment to the Payee.
The term is specified in the Bill and forms an important part of its terms and conditions. Depending on the nature of the Bill, payment may be required immediately on presentation or after a specified period.
On the basis of the payment term, Bills of Exchange may be classified as Sight Bills and Usance Bills.
Sight Bill
A Sight Bill is a Bill of Exchange under which payment becomes due when the Bill is presented to the Drawee.
There is no specified credit period for payment. The Drawee is required to make payment upon presentation of the Bill.
Therefore, a Sight Bill provides for immediate payment.
For examination purposes:
Sight Bill = Payment due on presentation
Since payment is required upon presentation, the date of presentation is also relevant for determining when payment becomes due.
Usance Bill
A Usance Bill is a Bill of Exchange under which payment becomes due after a specified period.
The period may be expressed in days, months, or another agreed period. The Drawee receives a specified period before the payment becomes payable.
Therefore, unlike a Sight Bill, a Usance Bill provides a credit period to the Drawee.
For example, if a Bill provides for payment after a specified number of days or months, the payment becomes due after completion of that period according to the terms of the Bill.
For examination purposes:
Usance Bill = Payment due after a specified period
Due Date of a Bill of Exchange
The due date of a Bill of Exchange is the specific date on which the Drawee is required to make payment of the amount specified in the Bill.
The due date is determined according to the term of the Bill and the relevant date of issuance, acceptance, or presentation.
It is important for the Payee because it indicates when payment is expected. It is equally important for the Drawee because it identifies the date by which the payment obligation must be fulfilled.
Thus, the due date establishes the payment timeline between the parties to the Bill.
Calculation of Due Date of a Sight Bill
In the case of a Sight Bill, payment is due upon presentation of the Bill to the Drawee.
Therefore, the due date is the same as the date on which the Bill is presented for payment.
There is no separate credit period to be added.
Thus:
Due Date of Sight Bill = Date of Presentation
The important point is that a Sight Bill becomes payable immediately when it is presented to the Drawee.
Calculation of Due Date of a Usance Bill
In the case of a Usance Bill, payment becomes due after the specified term of the Bill.
The due date is calculated by adding the specified period, expressed in days or months, to the relevant date of issuance or acceptance according to the terms of the Bill.
For example, if a Bill is payable after a specified number of days or months, the specified term is added to the relevant date to determine the due date.
Thus:
Due Date of Usance Bill = Relevant Date + Specified Term
The calculation of the due date is important because it determines when the payment obligation becomes payable.
Difference Between Term and Due Date
The term of a Bill represents the period allowed for payment, while the due date represents the specific date on which payment is required.
For example, if a Bill provides a payment period of a specified number of months, that period is the term of the Bill. The actual calendar date calculated after applying the term is the due date.
Therefore:
Term → Duration or period allowed for payment
Due Date → Actual date on which payment is payable
This distinction is important for examination purposes.
Importance of Term and Due Date
The term and due date of a Bill of Exchange determine the payment obligations of the parties and help in financial planning.
Payment Planning
The term and due date help the Payee determine when funds are expected to be received. This enables the Payee to plan future payments and manage cash flow.
The Drawee can also plan the availability of funds required for payment of the Bill.
Credit Period
The term of a Usance Bill provides a credit period to the Drawee.
During this period, the Drawee may use the goods or services received before making payment.
Therefore, a Usance Bill may facilitate credit-based trade transactions.
Interest Calculation
In Usance Bills, the term may influence the calculation of interest, particularly where delayed payment or other interest-related arrangements are involved.
The duration of the credit period is relevant in determining the period for which interest may be calculated.
Legal Obligation
The due date establishes the date on which the Drawee is legally required to make payment.
Failure to make payment by the due date may result in penalties or legal action according to the applicable terms and legal requirements.
Therefore, the due date is important in determining the payment obligation of the Drawee.
Negotiation and Endorsement of Usance Bills
The due date of a Usance Bill may influence negotiation and endorsement of the Bill.
The Payee may require funds before the due date. In such a situation, the Payee may negotiate or endorse the Bill in favour of a third party willing to provide funds before the Bill becomes due.
The third party may advance payment against the Bill and obtain rights relating to the instrument.
Thus, a Usance Bill may be transferred before maturity to enable the holder to receive funds earlier.
Accounting Treatment of the Bill
The term and due date are also relevant for accounting and payment planning.
The Payee records the Bill as a receivable on the date of issuance or acceptance. The due date is noted so that the expected receipt of payment can be properly planned.
The Drawee records the Bill as a liability upon acceptance. The Drawee is required to arrange payment on or before the due date.
Therefore:
Payee → Bill Receivable
Drawee → Bill Liability upon Acceptance
The due date helps both parties monitor the settlement of the Bill.
Regulatory Considerations
The term, due date, and payment of Bills of Exchange may be governed by the laws and regulations applicable in different jurisdictions.
Parties involved in Bill transactions should be aware of the legal requirements relating to the determination of the payment period and due date.
Compliance with applicable legal requirements is important for the proper operation and enforcement of the Bill.
Exam Focus
The term of a Bill of Exchange refers to the duration or period before payment becomes due, while the due date is the specific date on which payment must be made.
A Sight Bill is payable upon presentation to the Drawee. It does not provide a specified credit period.
Sight Bill = Payment due on presentation
A Usance Bill is payable after a specified period expressed in days, months, or another agreed timeframe.
Usance Bill = Payment due after a specified period
For a Sight Bill, the due date is the date of presentation.
For a Usance Bill, the due date is calculated by adding the specified term to the relevant date of issuance or acceptance.
The term provides a credit period to the Drawee, while the due date establishes the payment obligation.
The term and due date are important for payment planning, cash flow management, interest calculation, credit arrangements, negotiation of Bills, accounting treatment, and legal obligations.
The most important examination distinction is:
Term = Period allowed for payment
Due Date = Actual date on which payment becomes payable