Difference between Bills of Exchange and Promissory Note

Bills of Exchange and Promissory Notes are two different concepts of accountancy.

What is Bills of Exchange?

Bills of Exchange is a written document that binds one party to pay a certain amount to another party on demand or on the expiry of a fixed period of time. There are three parties to the bills of exchange, namely:

1. Drawer: The drawer is the seller of the goods who draws the bill and is entitled to receive the amount of the bill.
2. Drawee: The drawee is the purchaser of the goods on whose name the bill is being drawn, and is liable to pay the amount of the bill.
3. Payee: The payee is the person to whom the payment is to be made. The payee can be the drawer himself if he holds the bill on the day of maturity, or the Bank in case the bill has been discounted from the bank or the third party (endorsee) to whom the bill has been endorsed by the drawer.

“A Bills of Exchange is an instrument in writing, an unconditional order signed by the maker directing to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.” – The Indian Negotiable Instruments Act, 1881

Characteristics of Bills of Exchange:

According to the above definition, the following are the characteristics of a Bills of Exchange:

• A Bills of Exchange must be in writing.
• It is an order to make payment, not a request. 
• The order must be unconditional.
• The amount of a bill is pre-defined.
• A bill has a fixed maturity date.
• A bill must be signed by the drawer and the drawee. A bill, before being accepted and signed by the drawee, is called a draft.
• A bill amount is payable either on-demand or on the expiry of a fixed period of time.
• A bill is payable either to a specified person or to the bearer of the bill.
• A bill is either drafted on a stamped paper or bears a stamp.

What is a Promissory Note?

A Promissory Note is a financial instrument in writings issued by the purchaser of the goods (the debtor) as a promise to pay a certain fixed amount to the seller either on-demand or on expiry of a certain fixed period. There are only two parties to a Promissory Note:

1. Drawer: A person who draws a note and signs it to make a promise to pay the fixed amount to the seller.
2. Payee: A person to whom the amount is payable.

Definition

“A Promissory Note is an instrument in writing containing an unconditional undertaking signed by the maker to pay a certain sum of money to, or to the order of, a certain person.” – The Indian Negotiable Instruments Act, 1881

Characteristics of a  Promissory Note:

The following are the characteristics of a promissory note: 

• A Promissory Note must be written.
• The note must be unconditional.
• There must be a promise to pay the fixed amount.
• The amount of a bill is pre-defined.
• It must be signed by the maker.
• The Promissory Note cannot be made payable to the bearer.
• It must bear a stamp as per the value.

Difference between Bills of Exchange and Promissory Note:

Basis	Bills of Exchange	Promissory Note
Meaning	Bills of Exchange is a written document that binds one party to pay a certain amount to another party on demand or on the expiry of a fixed period of time.	A Promissory Note is a financial instrument in writings issued by the purchaser of the goods (the debtor) as a promise to pay a certain fixed amount to the seller either on demand or on expiry of a certain fixed period.
Parties	There are three parties to the bills of exchange, namely the Drawer, the Drawee, and the Payee.	There are only two parties to a Promissory Note, namely The Drawer and the Payee.
Drawer	It is drawn by the seller or the creditor.	It is drawn by the purchaser or the debtor.
Nature	It is an order to pay.	It is a promise to pay.
Acceptance	It must be accepted and signed by the drawee.	No acceptance is needed as such.
Liability of the Drawer	The liability of the drawer is secondary. He is liable only when the drawee does not pay the amount.	The liability of the drawer is primary.
A drawer as a Payee	The Drawer can be the payee if he retains the bill till the date of maturity.	The Drawer cannot be the Payee as he is the person liable to pay the amount.
Copies	In the case of foreign trading, three copies are made, otherwise, one copy is made.	Always one copy is made.
Stamps	No stamping is needed in case of bills payable “on-demand”.	A promissory note must bear a stamp always.