Category: Financial Accounting

We all know about the economic objectives of the business, by these objectives business can not survive but Social Responsibilities of Business also play a very important role in the business. Business is a major part of society so it must try to build up society.

Concept of Social Responsibilities:

For contributing to the social well-being a businessman do voluntary efforts.

Definitions of social responsibilities:

“The idea of social responsibilities supposes that the corporation has not only economic and legal obligations but also certain responsibilities to society which extend beyond these obligations.”

– Joseph W. Mcguire

“Social Responsibilities of the business implies that the businessmen’s decisions and actions are taken for reasons at least partially beyond the firm’s direct economic or technical interest.”

-Keith Davis

“Social Responsibilities requires managers to consider whether their action is likely to promote the public good, to advance the basic beliefs of our society, to contribute to its stability, strength and harmony.”

-Peter F. Drucker

Reasons to perform social responsibilities:

1. Self-interest: 

Businessmen earn by performing social responsibilities. To survive and grow in society for a long period the business has to serve according to the expectations of the members of the society.

2. Good Environment for business:

Social responsibility creates a good environment for the business and improves the quality of life, the standard of living, so business will get good people to run the business. The better quality labour, better quality customers and society will be better so by this business will get better opportunities.

3. Contribution to social problems:

Businessmen must take initiative to resolve the problems arising in society. There are some social issues like pollution, creation of unsafe workplaces etc. so this is the duty and we can say the obligation of the businessmen to solve such kind of social problems.

4. Public image:

Businesses can improve their image by performing social responsibilities. If employees feel satisfied with their workplace, customers feel better to buy the product then it will give a big hike to the business which will give success to the business.

5. Avoidance of government interference:

Social responsibilities are very important for the business if there is any activity found related to black marketing, and businessmen avoid responsibilities towards social welfare. Then business could suffer from a huge loss and the government can impose fine or strict action against the business.

6. Resources used for moral justification:

The business has various resources such as money, expertise in technical work, finance. So the business can help society to solve the problems related to social differences by setting up industries in backward areas with employment opportunities.

There are some other main factors that have forced businessmen to consider their social responsibilities :

1. labour movements (trade unions, labour unionism) have forced the businessmen to take care of labour reward and welfare for their efficiency. Because now the labour force is well educated and having knowledge about the labour welfare laws etc.
2. All the customers, investors, employees are well educated and more sensitive towards social issues so, the businessmen cannot ignore the social responsibilities towards them.
3. Today’s business organisations are realised that they can survive in the market for the long term if they contribute to society by participating in welfare activities.
   For example, the generation of employment, to educate poor children, clean and green projects for the environment, plantation projects, shelters for homeless people etc.

 Some important social responsibilities     towards different groups:

1. Responsibilities of business towards consumers: Nowadays business firms have direct contact with their customers so business performs fair trade practices towards the customers to increase the satisfaction level of the customers. Because once the customer is retained it will give long term benefits to the business. So business performs social obligations towards the customers like to ensure regular supply of products, to handle consumer complaints quickly, being truthful in all transactions.
2. Responsibilities towards the government: Business performs social responsibilities towards the government in the following ways:

         a) Payment of taxes on time. b) Obeying rules and laws made by the government. c) cooperation with the government in planning and administrative activities.

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Profitability Ratios are used to know the profitability of the business. It covers five types of ratios which are discussed in this article.

Meaning of Profitability Ratios:

The meaning of the profitability ratios is cleared from its name itself. The ratios which are used to check out the profitability of the enterprises are known as profitability ratio. It gets to know to related parties the actual Profitability of the business.

Why do we need to Calculate Profitability Ratios?

Profitability Ratios are needed to check out the actual profitability of the business. These all ratios calculated in the form of a percentage. These all are benefited in the same way(except operating Ratio). It means if we got high percentage then these are better for business enterprise and vice versa. Operating Ratio is low in percentage is better for business and vice versa. 

The formula of Profitability Ratios:

To Check out the Profitability of the business we can use the following five formulas: 

1. Gross Profit Ratio:

The Gross Profit Ratio is used to know the relationship between the Revenue from Operation and Gross Profit during the year of the business. 

Formula to Calculate Gross Profit Ratio:

Gross Profit Ratio	=	Gross Profit	X	100
		Revenue from Operation

We will get ratio in percentage. 

Now the question is how to calculate the Gross Profit:

= Total Revenue from an operation – Cost of Revenue from Operation

Now the question is how to calculate the Cost of Revenue from Operation: 

= Opening Inventory + Net Purchase + Direct Expenses – Closing Inventory

OR

Total Revenue from an operation – Gross Profit

Note: – Total Revenue from operation means Net Sales of the business. 

2. Operating Ratio:

The Operating Ratio is used to know the relationship between the Revenue from Operation and Operating cost during the year of the business.

Formula to Calculate Operating Ratio:

Operating Ratio	=	Operating Cost	X	100
		Revenue from Operation

We will get ratio in percentage. 

Now the question is how to calculate the Operating Cost:

= Opening Inventory + Net Purchase + Direct Expenses + operating expenses – Closing Inventory

OR

Total Revenue from an operation – Gross Profit

Note: – Operating expenses include the following expenses:

• Employees Benefit Expenses
• Depreciation and Amortisation expenses
• Other Expenses (Other than Non-operating Expenses)

3. Operating Profit Ratio:

The Operating Profit Ratio is used to know the relationship between the Revenue from Operation and Operating Profit during the year of the business.

Formula to Calculate Operating Profit Ratio:

Operating Profit Ratio	=	Operating Profit	X	100
		Revenue from Operation

We will get ratio in percentage.

Now the question is how to calculate the Operating Profit:

= Gross Profit + Other Operating Income – Other Operating Expenses

Or 

= Net Profit (Before Tax) + Non-Operating Expenses/Losses – Non-Operating Incomes

Or

= Revenue From Operation – Operating Cost 

Note: – Total Revenue from operation means Net Sales of the business. 

4. Net Profit Ratio:

The Net Profit Ratio is used to know the relationship between the Revenue from Operation and Net Profit during the year of the business.

Formula to Calculate Net Profit Ratio:

Net Profit Ratio	=	Net Profit	X	100
		Revenue from Operation

We will get ratio in percentage.

Now the question is how to calculate the Net Profit:

= Revenue from Operations – Cost of Revenue from Operations – Operating Expenses – Non-Operating Expenses + Non-operating Income – Tax

Or 

= Revenue From Operation – Total Cost of goods sold 

Note: – Total Revenue from operation means Net Sales of the business.

5. Return on Investment (ROI):

The Return on Investment is used to know the relationship between the Capital Employed and Net Profit before interest, tax and dividend during the year of the business.

Formula to Calculate Return on Investment (ROI):

Return on Investment	=	Net Profit before interest, tax and dividend	X	100
		Capital Employed

We will get ratio in percentage.

Now the question is how to calculate the Net Profit:

= Revenue from Operations – Cost of Revenue from Operations – Operating Expenses – Non-Operating Expenses(excluding interest) + Non-operating Income

Or 

= Revenue From Operation – Total Cost of goods sold 

Now the question is how to calculate the Capital Employed:

If the liabilities side approach is followed: 

= Shareholder Funds + Non-Current Liabilities

If the assets side approach is followed: 

= Non-Current Assets + Working Capital 

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Check out our Previous Topics on Accounting Ratio : 

• Accounting Ratios – Meaning and Definition
• What are Liquidity Ratios – Formulas and Examples
• What are Solvency Ratios – Formulas and Examples
• What are Activity Ratios – Formulas and Examples

References: –

1. Class +2 Accountancy by Sultan Chand & Sons (P) Ltd.

Insurance services are covered under the service sector which provides the services to the people with the agreement to provide financial compensation against the insured loss.

What are the Insurance services?

Insurance is the contract between the insured and the insurer in which the insurer agrees to pay for loss insured at the time of event happening in consideration of the regular payment by the insured.

Definitions of Insurance services:

“Insurance is a social device providing financial compensation for the effects by misfortune, the payment being made from the accumulated contribution of all parties in the scheme.”

-D.H.Hausell

“Insurance is a device for transfer of risks of individuals to an insurer, who agrees for a consideration(called the premium, to a specific extent, losses suffered by the insured.”

-W.A.Dinsdale

Important Questions related to Insurance Services:

Who is the Insurer?

The Firm/individual who agrees to pay the compensation is called the Insurance company (Insurer).

Who is the Insured?

The individual who gets the compensation is called an insured.

What is the premium?

Premium means the amount which is paid by the insured person to an insurer for getting compensation at the time of loss.

The premium can be paid quarterly, half-yearly or annually.

Note: The loss is compensated only if it is due to the subject matter of the policy. For example in marine insurance, the loss is compensated only if it is due to marine risks covered under the insurance policy.

Principles of Insurance services:

There are six important principles of insurance which are as follows:

1. Principle of Utmost Good Faith:

Firstly, Faith means Trust, Confidence, belief. The insurance contracts totally based on faith. If the person wants to take the insurance policy he has to disclose all the material facts to the insurance company (insurer) and on the other side insurer also disclose the policy matters. Failure to make disclosure of the material facts by both the parties will make the contract voidable.

For example, If the owner of the business takes a fire insurance policy but not disclose the facts that the electricity board issued him a warning letter to get the factory’s wiring changed but the owner has not done these things before taking the insurance policy then it will be refused by the insurance company at the time of compensation paid against the mishappening of fire due to short circuit.

2. Principle of Insurable Interest:

Insured must have the insurable interest in the subject matter of insurance policy. The insured must suffer a financial loss if the subject matter is damaged to prove the interest or he must be the owner of the subject matter in which the policy is taken.

3.Principle of Indemnity:

Insurance is not a contract for making a profit. Compensation is paid according to the actual loss of the subject matter. For example, the owner insured his factory for Rs.4 lakh against fire but due to fire he suffered an actual loss of Rs. 2 lakh then the insurance company will compensate him only with Rs.2 lakh.

Note: the principle of indemnity is not applicable to life insurance because we cannot estimate the loss due to the death of a person.

4. Principle of subrogation:

Subrogation means replacement. According to this principle when the insured is compensated for the loss then the right of ownership of such property loss is transferred to the insurer.

For example, if the owner suffers a loss of Rs 1 lakh due to fire and he gets equal compensation then the remaining half-burnt goods soled by the insurance company for RS. 10,000 and will be kept by an insurance company not by insured because he has already got full compensation for the loss.

5. Mitigation of loss:

Mitigation means reduction. The insured must take care of his property. It does not mean that if the owner has taken the insurance policy then he is free from his responsibility regarding his subject matter. The insured should not be careless.

For example, if a person took fire insurance against his business property and when a fire breaks out then he should take all measures to stop the fire instead of looking at the fire because he will get compensation against loss.

6. Principle of Causa Proxima:

Causa Proxima means the nearest cause. According to this principle, the cause for the loss must be closely related to the subject matter which was disclosed in the insurance policy.

Types of Insurance services:

There are four types of insurance;

1. Life Insurance:

Life insurance is related to two types of risks:

1. Risk of dying too early
2. Risk of dying too late

Life insurance provides financial support to the family after the death of the insured person. Sometimes people take a life insurance policy to get financial independence during their old age. In both, the cases life insurance policy is very helpful.

In a life insurance policy, insured pay a fixed amount in the form of premium and get the compensation at the time of maturity or death whichever comes earlier.

2. Fire insurance:

The fire insurance policy provides protection against the loss by fire, explosion etc.

Fire insurance covers riot, foreign enemy, civil strife.

3.Marine insurance:

It is an agreement between the insurer and the insured against the marine losses. Marine insurance covers: perils of sea e.g. sinking of ship, storm, seizure etc. Insured is the owner of the ship or owner of the cargo. There are some marine insurance policies which are as follows: 

cargo insurance is related to cargo or goods in the ship and the personal belongings of the crew members.

Hull insurance covers the whole ship which includes: furniture, fitting, tools, machinery, fuel etc.

4. Health insurance:

This type of insurance is related to the health of the person and his family. It covers the medical expenses related to hospitalization, cost of illness, nursing home charges etc.

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The Common-Size Statements show the percentage to a common base of all individual accounts of the financial statements of the two or more years together i.e. balance sheet and profit/loss account.

What are Common-Size statements?

The Common-Size statement is that statement which shows the percentage to a common base of all accounts of the financial statement of the business for the period of more than two years. The components of the two or more years are shown side by side in vertical order on the same page and then calculate the percentage on the common base of net sales of both years of all the elements. It is the tools for the analysis of the financial statements of the business. 

Statements included in the Common-size statement: 

The two types of financial statements are included in the process of the comparison of the financial statements under the method of Common-Size Statements. These both are explained as follows:

1. Balance Sheet:

The Balance Sheet is the statement showing the position of the assets and liabilities of the business in a particular accounting period. It is a list of balances of ledger account of assets, capital, and liabilities. The value of assets showing which we can realize from the market and The value of Liabilities shows which we have to pay in the future. Capital shows the amount invested by the owner into the business entity. 

The format of Common-Size balance sheet:

The format of the balance sheet shown as follows with an explanation of each column:

Common-Size statement of Balance Sheet
Particulars	Note No.	Absolute Amounts		Percentage of Balance Sheet total
		Figures as at the end of Previous Year  (Rs)	Figures as at the end of Current Year  (Rs)	Figures as at the end of Previous Year  (Rs)	Figures as at the end of Current Year  (Rs)
(1)	(2)	(3)	(4)	(5)	(6)
I. Equity and Liabilities
1. Shareholders’ Funds
(a) Share Capital
(b) Reserves and Surplus
(c) Money Received against Share Warrants
2. Share Application Money Pending Allotment
3. Non-Current Liabilities
(a) Long-term borrowings
(b) Deferred Tax Liabilities (net)
(c) Other long-term liabilities
(d) long-term Provision
4. Current Liabilities
(a) Short-term Borrowings
(b) Trade Payables
(c) Other current Liabilities
(d) Short-term Provision
Total
II. Assets
1.Non-Current Assets
(a) Fixed Assets:
(i) Tangible Assets
(ii) Intangible Assets
(iii) Capital Work-in-progress
(iv) Intangible Assets under development
(b) Non-Current Investment
(c) Deferred Tax Assets (net)
(d) Long-term loans and advances
(e) Other Non-Current Assets
2. Current Assets
(a)Current Investment
(b)Inventories
(c) Trade receivable
(d) Cash and Cash equivalents
(e) Short-term loans and advances
(f) Other current Assets
Total

2. Profit and Loss Account: 

Profit and loss account is the statement which shows all indirect expenses incurred and indirect revenue earned during the particular period. It is prepared to find out the Net Profit/loss of the business for the particular accounting period. It is calculated by deducting indirect expenses from the Gross Profit/Loss. and adding indirect income/revenue int the Gross Profit/Loss.

Net Profit/Loss =  Gross Profit/Loss + Indirect Income – Indirect Expenses

• Indirect Income = Other incomes which are earned from Business other than the main operation of the business.
• Indirect Expense = All business expenses other than direct expenses.

The format of Common-Size Profit/Loss Account:

The format of the balance sheet shown as follows with an explanation of each column:

Common-Size statement of Profit and Loss Account
Particulars	Note No.	Absolute Amounts		Percentage of Balance Sheet total
		Figures as at the end of Previous Year  (Rs)	Figures as at the end of Current Year  (Rs)	Figures as at the end of Previous Year  (Rs)	Figures as at the end of Current Year  (Rs)
(1)	(2)	(3)	(4)	(5)	(6)
I. Revenue from Operation (Net Sales)
II. Other Income
III. Total Revenue (I+II)
IV. Expenses
(a) Cost of Material Consumed
(b) Purchases of Stock-in-trade
(c) Changes in Inventories of Finished Goods, Work-in-Progress and Stock-In-Trade
(d)Employees Benefit Expenses
(e) Finance Costs
(f) Depreciation and Amortisation Expenses
(g) Other Expenses
Total Expenses
V. Profit Before Tax (III-IV)
VI. Less: Income Tax
VII. Profit after Tax

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The Comparative  Statements is the group account wise comparative study of the financial statements of the two or more years together i.e. balance sheet and profit and loss account. 

What are Comparative statements?

The comparative statements are that statement which shows the comparison between the component of the financial statement of the business for the period of more the two years. The components of the two or more years are shown side by side on the same page and then calculate the change from the base year of all the elements. It is the tools for the analysis of the financial statements of the business. 

Type of the comparative statements: 

There can be two types of comparative statements which are shown as follows: 

1. Intra-Firm Comparision:

When the comparative statement is prepared from the financial statements of the single firm for the period of two or more years then it is known as an intra-firm comparison of financial statements. 

2. Inter-Firm Comparision:

When the comparative statement is prepared from the financial statements of the two of more firms for the same period then it is known as an inter-firm comparison of financial statements. 

Statements included in the comparative statement: 

 The two types of financial statements are included in the process of the comparison of the financial statements. These both are explained as follows:

1. Balance Sheet:

The Balance Sheet is the statement showing the position of the assets and liabilities of the business in a particular accounting period. It is a list of balances of ledger account of assets, capital, and liabilities. The value of assets showing which we can realize from the market and The value of Liabilities shows which we have to pay in the future. Capital shows the amount invested by the owner into the business entity. 

Balance Sheet: Meaning, Format & Examples

2. Profit and Loss Account: 

Profit and loss account is the statement which shows all indirect expenses incurred and indirect revenue earned during the particular period. It is prepared to find out the Net Profit/loss of the business for the particular accounting period. It is calculated by deducting indirect expenses from the Gross Profit/Loss. and adding indirect income/revenue int the Gross Profit/Loss.

Net Profit/Loss =  Gross Profit/Loss + Indirect Income – Indirect Expenses

• Indirect Income = Other incomes which are earned from Business other than the main operation of the business.
• Indirect Expense = All business expenses other than direct expenses.

Profit and Loss Account: Meaning, Format & Examples

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The basic difference between debenture and equity share is of type. A debenture is a type of loan but equity share is the type of capital. To know the difference between these two, we must clear the meaning of these terms and explained as follows: –

Meaning of Debenture:

The Debenture is the type of loan or debt instrument which is issued in the market to subscribe to the public. It is not taken from any individual institution. It is issued like equity or preference shares in the market for purchase and sale to the number of subscribers. Like every type of loan, it also has a fixed rate of interest which will be paid by the company to the subscriber of these debentures. The subscriber of the debenture is known as the Debenture holder. 

Definition of Debenture: 

“Debenture includes debentured stock, bonds, and any other instrument of the company evidencing a debt, whether constituting a charge on the assets of the company or not.”

– Section 2(30) of the Companies Act, 2013

“A debenture is a document given by a company as evidence of a debt to the holder usually arising out of a loan and most commonly secured by a charge.”

-Topham

Meaning of Equity Shares:

The shares capital which are carrying voting rights, rights to dividends, and ownership known as Equity shares. The Equity share has all rights on the balance of profit after payment of interest and preference dividend. The dividend of the equity shareholders is paid after the payment of dividends to Preference shares.

“(a) equity share capital—
(i) with voting rights; or
(ii) with differential rights as to dividend, voting, or otherwise in accordance with such rules as may be prescribed;”

– Section 43 subsection (a) for the Indian Companies Act, 2013

Chart of Difference between debenture and Equity Share: –

Basis of Difference	Debenture	Equity Share
Meaning	The Debenture is the type of loan or debt instrument which is issued in the market to subscribe to the public.	The shares capital which are carrying voting rights, rights to dividends, and ownership known as Equity shares.
Types	It is a type of loan.	It is a type of Capital.
Rate of Return	It has a fixed rate of Return which is known as Interest.	It has a fluctuating rate of return depends on the profit of the year and which is known as a Dividend.
Secured	It may or may not be secured against the assets.	it is not secured
Voting Rights	It does not have voting rights.	It does have voting rights.
Convertibility	It can be convertible after maturity into an Equity share.	It can not be convertible.
Risk	Debenture holders are relatively safe.	Shareholders are at a greater risk.
Repayment	will be repaid after a specific period.	it will not be repaid through the whole life of the business.
Priority as to Repayment	In the case of winding up of the company the payment made to debenture holders before the payment of made to equity shareholders.	In the case of winding up of the company the payment of made to equity shareholders at the end.

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Conclusion:

Thus, both terms have the only main difference between the type and repayment of terms. But these both terms are related to the generation of funds for the expansion of the business. 

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The cheque is an instrument in writing which contains an unconditional instruction to a banker (by a person who has already deposit the amount with a banker), to pay a specific amount to a certain person or to the order of the certain person or to the bearer of the instrument only on the demand.

The cheque is the most used type of negotiable instrument. It is simple and easy to use. It is the piece of paper on which the same of the payer is already mention and he will write the name of the receiver of the payment and amount to be paid and signed it. The receiver will receive cash from the cheque by encashing it from the bank.

“A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.”

-Section 6 of India’s Negotiable Instruments Act, 1881

The feature of Cheque: 

1. It should be in writing.
2. The instruction to the banker to make a payment on the specific date on demand by the receiver.
3. An unconditional order of payment, it does not contain any condition of payment.
4. A certain amount should be described in it.
5. It must be signed by Drawer (maker).
6. The amount must be payable to either a certain person or on his/her behalf.
7. It should be paid on the date of demand.

Parties involved in cheques:

There are three parties are involved, shown as follows:-

1. Drawer
2. Drawee
3. Payee

1. Who is the Drawer? 

The drawer is the person who issues the cheque to his/her creditor and holds a bank account.  The purchase of goods and services is also known as a drawer (expect some cases).

2. Who is the Drawee?

The person who is directed to make payment of some specific/mentioned amount to the already mentioned person on it.

3. Who is the Payee?

The drawee is the person who will receive the payment from the banker against the sale of goods and services and whose name is mention on it.

Type of Cheques: –

The format of all cheque almost the same with each other. It may vary from bank to bank like colour difference, size of cheques. The types of cheques are only changed at the time of issuing it to someone. The different type of cheques are shown as following: –

1. Bearer Cheques
2. Account payee Cheques
3. Back Dated Cheques
4. Post Dated Cheques
5. Stale Cheques

1. Bearer Cheques: 

At the time of issuing a cheque if we did not cancel the word bearer on cheque then it will be known as bearer cheque. it can be encashed by any person from the bank counter. This type is very risky because when this type of cheques lost and who will found it, he can get cash against it from the bank.

2. Account payee Cheques: 

At the time of issuing a cheque if the drawer marks two lines on the left side upper corner, centre at the top or right side upper corner of the cheque then it will be known as account payee cheque. it can be encashed by only in the account of that person whose name is mention on it. This is the safer way of issuing.

3. Back Dated Cheques: 

At the time of issuing the cheques if the drawer writes an earlier date form today on them then these are known as backdated cheques or anti dated cheques.

4. Post Dated Cheques: 

At the time of issuing the cheques if the drawer writes a next date form today on them then these are known as backdated cheques or post-dated cheques.

5. Stale Cheques:

Those cheques which are expired without encashing it from the bank.

Some Old images of Cheques:

1. Thomas Jefferson as payee and payor from 1809
2. from 1905
3. from 1933
4. An English crossed cheque from 1956 having a bank clerk’s red mark verifying the signature, a two-pence stamp duty, and holes punched by hand to cancel it. This is disallowing transfer of payment to another account.

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A Negotiable Instrument is a document that contains a promise by one person to pay a specific amount to another certain person. In simple words, It is a written promise to pay a certain amount by the borrower to the lender of money or services. When the seller sold goods on credit to another person, he has a fear of non-payment of his due, in this case, negotiable instruments provide the guarantee to the seller for receipt of payment.

Type of Negotiable Instrument: –

There are following three types of Negotiable Instruments

1. Promissory Note
2. Bill of Exchange
3. Cheque

1. Promissory Note: –

A promissory note is an instrument that contains the written and signed promise by the maker(the debtor) to pay a certain amount to the creditor on the specific date or on-demand.

“A Promissory Note is writing (not being a banknote or currency note), containing an unconditional undertaking, signed by the maker to pay a certain sum of money only to or to the order of a certain person or the bearer of the instrument”.

-Section 4 of India’s Negotiable Instruments Act, 1881

The feature of the Promissory Note: –

1. It is in writing.
2. An unconditional promise to pay a certain sum of an amount.
3. An amount should be described in it.
4. It must be signed by the maker or issuer.
5. The document must be dated and properly stamped.
6. The amount must be payable to either a certain person or on his/her behalf.
7. It clearly mentions the date of payment.

2. Bills of Exchange: –

A bill of exchange is an instrument that contains a promise to pay some amount of money to a certain person after a certain period of time. It is generally drawn by the creditor(maker or drawer) on his debtor(acceptor or drawee) and the debtor gives the acceptance to that he will pay the money to the maker(drawer) after a certain period or a specific date. It should be accepted by the person to whom it is created or by another person on his/her behalf. Without acceptance, this document doesn’t have any value.

Definition: –

“A bill of exchange is 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 to the bearer of the instrument.”

-Section 5 of India’s Negotiable Instruments Act, 1881

The feature of the Bill of Exchange: –

1. It should be in writing.
2. In order to make a payment on the specific date or after a certain period.
3. An unconditional order of payment, it does not contain any condition of payment.
4. A certain amount should be described in it.
5. It must be signed by both parties Drawer (maker) and Drawee.
6. The amount must be payable to either a certain person or on his/her behalf.
7. It should be paid on the date of maturity or on-demand or on mutual understanding.

Cheque: – 

The cheque is an instrument in writing which contains an unconditional instruction to a banker (by a person who has already deposit the amount with a banker), to pay a specific amount to a certain person or to the order of the certain person or to the bearer of the instrument only on the demand.

The cheque is the most used type of negotiable instrument. It is simple and easy to use. It is the piece of paper on which the same of the payer is already mention and he will write the name of the receiver of the payment and the amount to be paid and signed it. The receiver will receive cash from the cheque by encashing it from the bank.

“A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.”

-Section 6 of India’s Negotiable Instruments Act, 1881

Promissory Note:

A promissory note is an instrument that contains the written and signed promise by the maker(the debtor) to pay a certain amount to the creditor at the specific date or on-demand.

“A Promissory Note is writing (not being a banknote or currency note), containing an unconditional undertaking, signed by the maker to pay a certain sum of money only to or to the order of a certain person or the bearer of the instrument”.

-Section 4 of India’s Negotiable Instruments Act, 1881

The feature of the Promissory Note: –

1. It is in writing.
2. An unconditional promise to pay a certain sum of an amount.
3. An amount should be described in it.
4. It must be signed by the maker or issuer.
5. The document must be dated and properly stamped.
6. The amount must be payable to either a certain person or on his/her behalf.
7. It clearly mentions the date of payment.

The Parties Involved in the PO:-

There are three parties are involved, shown as follows:-

1. Maker
2. Payee

1. Drawer: – 

The maker is the person who writes the promissory note or who promise in writing to the payee(receiver) to pay a certain amount on a specific date or on the demand.

2. Payee: –

The person to whom the payment is made is known as the payee.

Contents of Promissory Note: –

Bills of Exchange include the following contents: –

1. Title of note : –

The title “Promissory Note” will be mention on the face of the document.

2. Date of drawn: –

The date of drawn a bill should be written on it.

3. Amount to be paid: –

The certain amount payable will be described on it in the figures and also in words.

4. Date of payment or Term: –

The specific date or the term of the note will be mention on it. The term means for 2 months or 3 months etc. The term is the tenure of the bill and runs from the date of the bill. There will be a grace period of 3 days in addition to the total term of the bill.

5. Unique Identification Number: –

Every note has a unique identification number. it will be mention on it.

6. Name of Maker(issuer or Borrower): –

The name of the maker must be mention on it.

7. Signature of Maker(issuer or Borrower): –

The bill is also signed by the maker.

The format of Promissory Note: –

The following image shows the specimen of the Promissory Note:

These following are the some oldest original document of the Promissory Note.

A 1926 Note from the Imperial Bank of India, Rangoon, Burma for 20,000 rupees plus interest

A note issued by the Second Bank of the United States, December 15, 1840, for the amount of $1,000

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