JAIIB Paper 3 • Accounting & Financial Management for Bankers (AFM) ⭐⭐⭐⭐
Bills of Exchange
A cornerstone negotiable instrument that both finances trade and generates fee/discount income for banks. This guide covers Types of Instruments of Credit, Parties to a Bill, Term & Due Date, Days of Grace, Important Terms, Accounting Entries, Accommodation Bill, and Bill Books — with 50 exam-style MCQs with hidden answers.
📅 Updated: September 2026 • 24 min read
1 What is a Bill of Exchange?
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Definition — Section 5, NI Act, 1881
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."
In trade, a bill typically arises when a seller (creditor) draws a bill on the buyer (debtor) for the value of goods sold on credit — converting an ordinary book debt into a formal, legally enforceable, and negotiable instrument.
2 Types of Instruments of Credit
A Bill of Exchange is one of several negotiable instruments of credit recognised under the Negotiable Instruments Act, 1881:
Promissory Note
An unconditional promise by the maker to pay — only two parties (maker and payee).
Bill of Exchange
An unconditional order to pay — three parties (drawer, drawee, payee).
Cheque
A bill of exchange drawn specifically on a banker, payable on demand.
Hundi
An indigenous, traditional Indian negotiable instrument, governed by local custom/usage where the NI Act doesn't apply.
Within bills themselves, further classifications matter for JAIIB:
Trade Bill
Arises from a genuine sale of goods/services.
Accommodation Bill
Drawn purely to raise finance, with no underlying trade transaction.
Demand Bill
Payable "at sight" or "on demand" — no fixed maturity.
Usance / Time Bill
Payable after a fixed period or on a fixed future date.
Inland Bill
Drawn and payable within India, on a person resident in India.
Foreign Bill
Drawn in one country and payable in another.
Clean Bill
Not accompanied by any document of title to goods.
Documentary Bill (D/P, D/A)
Accompanied by shipping/title documents — released against Payment (D/P) or against Acceptance (D/A).
3 Parties to a Bill of Exchange
Party
Role
Drawer
The person who creates and signs the bill — typically the seller/creditor to whom money is owed.
Drawee
The person directed to pay — typically the buyer/debtor. Becomes the Acceptor once they sign their acceptance on the bill.
Payee
The person to whom payment is to be made — may be the drawer themself, or a third party.
Endorser / Endorsee
If the payee transfers the bill further by signing on the back (endorsing) it, they become the Endorser, and the new holder the Endorsee.
4 Term and Due Date of a Bill — Days of Grace
The term of a bill is the period after which it matures for payment. The nominal due date is calculated from the date of the bill (or acceptance), based on its stated tenure.
+3 DaysDays of Grace added to the nominal due date, per Section 22, NI Act
Under Section 22 of the NI Act, 1881, every usance (time) bill is entitled to 3 days of grace beyond its nominal due date — unless the bill is payable "on demand," "at sight," or expressly states "without grace."
JAIIB tip: If the calculated due date (including grace days) falls on a public holiday, the bill matures on the immediately preceding business day. But if the holiday is declared suddenly/unexpectedly after the due date was already fixed, the bill instead matures on the next succeeding business day.
5 Important Terms
Acceptance
The drawee's signed agreement, written on the bill, to pay it on maturity — this converts the drawee into the "Acceptor."
Endorsement
Signing on the back of a bill to transfer it (and the right to receive payment) to another person.
Discounting
A bank purchases the bill before maturity, crediting the customer with its present value (face value minus discount/interest).
Dishonour
Non-acceptance by the drawee, or non-payment by the acceptor on the due date.
Noting
A Notary Public formally records the fact and reason for dishonour on the bill itself.
Protesting
A formal certificate issued by the Notary certifying the dishonour — often compulsory for foreign bills.
Retirement of a Bill
The acceptor pays the bill before its due date, usually earning a small rebate for early payment.
Renewal of a Bill
The original bill is cancelled and a fresh bill (often for a longer tenure, sometimes with added interest) is drawn in its place.
6 Accounting Entries for Bills of Exchange
The double-entry treatment of a bill differs at each stage of its life, and mirrors in both the drawer's and the drawee's (acceptor's) books:
Event
In Drawer's Books
In Drawee's (Acceptor's) Books
Bill drawn & accepted
Debit Bills Receivable A/c, Credit Debtor's A/c
Debit Creditor's A/c, Credit Bills Payable A/c
Bill discounted with bank
Debit Bank A/c, Debit Discount A/c, Credit Bills Receivable A/c
No entry (drawee is unaffected by discounting)
Bill honoured on maturity
No entry if already discounted; otherwise Debit Bank/Cash, Credit Bills Receivable A/c
Debit Bills Payable A/c, Credit Bank/Cash A/c
Bill dishonoured
Debit Debtor's A/c (restoring the debt, plus noting charges), Credit Bills Receivable A/c (or Bank, if it had been discounted)
JAIIB tip: Once a bill is discounted with a bank, the drawer has already received cash and removed it from their books. If that discounted bill is later dishonoured, the drawer must reverse the transaction by crediting Bank (not Bills Receivable, since the asset was already removed) and debiting the Debtor's account, along with any noting charges.
7 Accommodation Bill
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Definition
An Accommodation Bill is a bill drawn, accepted and endorsed without any genuine underlying sale of goods — purely to help one or both parties raise finance by discounting it with a bank. It rests entirely on mutual trust and accommodation between the parties, who typically share the discount cost and repayment liability by prior agreement.
This contrasts directly with a Trade Bill, which always arises from a real underlying commercial transaction. Because there is no genuine trade behind it, an accommodation bill carries higher credit risk from a bank's perspective if discounted unknowingly.
8 Bill Books
Businesses dealing regularly in bills maintain dedicated subsidiary registers to track and control them:
Bills Receivable Book
Records all bills drawn/received by the business — an asset, tracked until collection or discounting.
Bills Payable Book
Records all bills accepted by the business — a liability, tracked until payment on maturity.
These registers help management monitor maturity dates, follow up on collections, and plan cash flow around upcoming bill obligations.
✓ Key Takeaways
A Bill of Exchange is an unconditional order to pay (Section 5, NI Act, 1881) — involving a Drawer, Drawee (who becomes Acceptor) and Payee.
Every usance bill gets 3 days of grace beyond its nominal due date (Section 22), unless payable on demand/at sight or "without grace."
Discounting lets a bank buy a bill before maturity at its present value; Noting and Protesting formally record a dishonour.
A Trade Bill arises from a genuine sale; an Accommodation Bill is drawn purely to raise finance, with no real trade behind it.
Accounting entries differ sharply once a bill is discounted — a subsequent dishonour is reversed via the Bank account, not Bills Receivable.
Bills Receivable Book and Bills Payable Book are the subsidiary registers used to track and control bills.
📝 Top 50 JAIIB-Style MCQs on Bills of Exchange
Test your understanding with these 50 practice MCQs, closely modelled on the pattern expected in the JAIIB AFM exam — including combination-answer questions. Each question has 5 options — the correct answer is hidden by default; tap "Show Answer" to reveal it along with a short explanation.
📜 What is a Bill of Exchange?
1 A Bill of Exchange is defined under which Section of the Negotiable Instruments Act, 1881?
A. Section 4
B. Section 5
C. Section 6
D. Section 22
E. Section 138
Answer: B. Section 5 of the NI Act, 1881 defines a Bill of Exchange.
2 A Bill of Exchange contains a/an:
A. Conditional promise to pay
B. Unconditional order to pay
C. Unconditional promise to pay
D. Conditional order to pay
E. Guarantee to pay on demand only
Answer: B. A Bill of Exchange contains an unconditional order.
3 A bill of exchange typically arises in trade when:
A. A buyer pays cash immediately
B. A seller draws a bill on the buyer for goods sold on credit
C. A bank issues a Letter of Credit
D. A company issues equity shares
E. A depositor opens a fixed deposit
Answer: B. Bills typically arise from credit sales.
4 A bill of exchange converts an ordinary book debt into:
A. A share of equity
B. A formal, legally enforceable, negotiable instrument
C. A fixed deposit receipt
D. A government security
E. A mutual fund unit
Answer: B. It formalises a book debt as a negotiable instrument.
5 The instrument must be signed by:
A. The payee only
B. The maker (drawer)
C. The endorsee only
D. A Notary Public
E. A witness unrelated to the transaction
Answer: B. The maker/drawer must sign the bill.
🧾 Types of Instruments of Credit
6 A Promissory Note differs from a Bill of Exchange in that it involves:
A. Three parties instead of two
B. Two parties (maker and payee) instead of three
C. No signature requirement
D. Only government entities
E. No maturity date ever
Answer: B. A Promissory Note has only two parties.
7 A Cheque is best described as:
A. A promissory note payable after 90 days
B. A bill of exchange drawn on a banker, payable on demand
C. An indigenous instrument governed only by custom
D. A documentary bill only
E. An accommodation bill
Answer: B. A cheque is a bill of exchange drawn on a banker, payable on demand.
8 A bill payable "at sight" is also known as a:
A. Usance Bill
B. Demand Bill
C. Documentary Bill
D. Accommodation Bill
E. Foreign Bill only
Answer: B. "At sight" bills are Demand Bills.
9 Under a D/A (Documents against Acceptance) bill, shipping documents are released to the buyer:
A. Only after full payment
B. On the buyer's acceptance of the bill, before actual payment
C. Never, until the goods are resold
D. Only with RBI approval
E. Only if the bill is dishonoured
Answer: B. D/A releases documents on acceptance, before payment.
10 A Hundi is:
A. A modern electronic payment instrument
B. An indigenous negotiable instrument governed by local custom/usage
C. A type of derivative contract
D. A form of equity share
E. A government bond
Answer: B. A Hundi is an indigenous, custom-governed instrument.
👥 Parties to a Bill of Exchange
11 The person who creates and signs a bill of exchange is the:
A. Drawee
B. Drawer
C. Endorsee
D. Notary
E. Acceptor only
Answer: B. The Drawer creates and signs the bill.
12 The Drawee becomes the "Acceptor" once they:
A. Endorse the bill to a third party
B. Sign their acceptance on the bill
C. Discount the bill with a bank
D. Note the bill with a Notary
E. Retire the bill early
Answer: B. Signing acceptance converts the drawee to acceptor.
13 The Payee of a bill can be:
A. Only the drawer themself
B. The drawer or a named third party
C. Only a bank
D. Only the Notary Public
E. Only the government
Answer: B. The Payee may be the drawer or a third party.
14 When a payee transfers a bill by signing on its back, they become the:
A. Drawer
B. Endorser
C. Acceptor
D. Notary
E. Drawee
Answer: B. The transferring party becomes the Endorser.
15 In a typical trade bill, the Drawer is usually the:
A. Buyer/debtor
B. Seller/creditor
C. Notary Public
D. Bank discounting the bill
E. Government authority
Answer: B. The seller/creditor is typically the Drawer.
📅 Term and Due Date — Days of Grace
16 Under Section 22 of the NI Act, a usance bill is entitled to how many days of grace?
A. 1 day
B. 2 days
C. 3 days
D. 5 days
E. 7 days
Answer: C. Section 22 grants 3 days of grace.
17 Days of grace do NOT apply to a bill that is:
A. A usance bill for 90 days
B. Payable "on demand" or "at sight"
C. A foreign bill
D. A documentary bill
E. An inland bill
Answer: B. Demand/at-sight bills do not get days of grace.
18 If the due date (with grace) falls on a public holiday declared well in advance, the bill matures on:
A. The immediately preceding business day
B. The immediately succeeding business day
C. Exactly one week later
D. The bill lapses automatically
E. The first day of the next month
Answer: A. It matures on the preceding business day for a known holiday.
19 If an emergency/sudden holiday is declared after the due date is already fixed, the bill instead matures on:
A. The immediately preceding business day
B. The immediately succeeding business day
C. It is automatically dishonoured
D. Exactly 3 days later, regardless
E. The date is unaffected by any holiday
Answer: B. A sudden/emergency holiday pushes maturity to the next business day.
20 A bill's "term" refers to:
A. The name of the drawer
B. The period after which the bill matures for payment
C. The rate of discount charged by the bank
D. The Notary's fee
E. The face value of the bill
Answer: B. The term is the period until maturity.
🔑 Important Terms
21 "Acceptance" of a bill refers to:
A. The payee endorsing the bill
B. The drawee's signed agreement to pay the bill on maturity
C. The Notary certifying dishonour
D. The bank discounting the bill
E. The drawer cancelling the bill
Answer: B. Acceptance is the drawee's signed agreement to pay.
22 "Discounting" a bill means:
A. The bank refuses to purchase the bill
B. A bank purchases the bill before maturity, crediting its present value
C. The bill is cancelled and destroyed
D. The drawee pays in full only after maturity
E. The Notary charges a protest fee
Answer: B. Discounting is a bank's early purchase of a bill at present value.
23 "Noting" of a dishonoured bill is done by:
A. The drawer alone
B. A Notary Public
C. The RBI
D. The acceptor's employer
E. The government
Answer: B. Noting is done by a Notary Public.
24 A "Protest" is generally compulsory for:
A. Inland bills only
B. Foreign bills
C. All cheques without exception
D. Only accommodation bills
E. Only bills below ₹1,000
Answer: B. Protest is typically required for foreign bills.
25 "Retirement" of a bill refers to:
A. Payment of the bill before its due date, often with a rebate
B. Cancelling the bill permanently
C. Dishonour of the bill
D. Transferring the bill to a new drawer
E. Extending the bill's tenure indefinitely
Answer: A. Retirement means early payment, usually with a rebate.
📒 Accounting Entries
26 In the drawer's books, when a bill is drawn and accepted, the entry is:
A. Debit Bills Payable, Credit Debtor
B. Debit Bills Receivable, Credit Debtor's A/c
C. Debit Creditor, Credit Bills Payable
D. Debit Bank, Credit Bills Receivable
E. No entry is required
Answer: B. The drawer debits Bills Receivable and credits the Debtor.
27 In the drawee's (acceptor's) books, when a bill is accepted, the entry is:
A. Debit Creditor's A/c, Credit Bills Payable A/c
B. Debit Bills Receivable, Credit Creditor
C. Debit Bank, Credit Bills Payable
D. Debit Bills Payable, Credit Debtor
E. No entry is required
Answer: A. The drawee debits the Creditor and credits Bills Payable.
28 When the drawer discounts a bill with a bank, the entry in the drawer's books is:
A. Debit Bank and Discount A/c, Credit Bills Receivable A/c
B. Debit Bills Receivable, Credit Bank
C. Debit Creditor, Credit Bank
D. No entry until maturity
E. Debit Bills Payable, Credit Bank
Answer: A. Discounting debits Bank and Discount, credits Bills Receivable.
29 If a discounted bill is later dishonoured, the drawer's books are corrected by:
A. Debiting Debtor's A/c and crediting Bills Receivable A/c
B. Debiting Debtor's A/c and crediting Bank A/c
C. No correcting entry is needed
D. Debiting Bank and crediting Debtor
E. Debiting Bills Payable and crediting Debtor
Answer: B. Since the bill was already removed from books at discounting, the reversal credits Bank, not Bills Receivable.
30 When a bill is honoured on maturity, the acceptor's books show:
A. Debit Bills Payable A/c, Credit Bank/Cash A/c
B. Debit Bank, Credit Bills Payable
C. Debit Creditor, Credit Bills Receivable
D. No entry is passed
E. Debit Discount A/c, Credit Bills Payable
Answer: A. Honouring debits Bills Payable and credits Bank/Cash.
🤝 Accommodation Bill
31 An Accommodation Bill is drawn:
A. Against a genuine sale of goods
B. Purely to raise finance, with no underlying trade transaction
C. Only by government departments
D. Only for import transactions
E. Only when a Letter of Credit is unavailable
Answer: B. Accommodation bills raise finance without a genuine trade transaction.
32 An Accommodation Bill primarily rests on:
A. Mutual trust and accommodation between the parties
B. A registered mortgage
C. Government guarantee
D. RBI's direct approval
E. A pledge of gold ornaments
Answer: A. It rests on mutual trust between the parties.
33 Compared to a Trade Bill, an Accommodation Bill discounted by a bank unknowingly carries:
A. Lower credit risk
B. Higher credit risk, since there is no real trade behind it
C. Identical risk in every case
D. No risk at all
E. Risk only for the drawee, never the bank
Answer: B. Lack of real trade means higher credit risk.
34 In an Accommodation Bill arrangement, the discount proceeds/liability are usually:
A. Borne entirely by the bank
B. Shared between the parties, as per prior agreement
C. Written off automatically
D. Paid entirely by the Notary
E. Never shared under any circumstances
Answer: B. Parties typically share the discount cost/liability by agreement.
35 A Trade Bill differs from an Accommodation Bill mainly because it:
A. Has a longer tenure always
B. Arises from a genuine underlying sale of goods
C. Cannot be discounted
D. Is only used for foreign trade
E. Requires RBI's prior permission
Answer: B. A Trade Bill arises from a genuine sale.
📚 Bill Books
36 The Bills Receivable Book records bills that are:
A. Accepted by the business (a liability)
B. Drawn/received by the business (an asset)
C. Dishonoured only
D. Discounted with the RBI only
E. Issued by the government
Answer: B. Bills Receivable represents bills drawn/received — an asset.
37 The Bills Payable Book records bills that are:
A. Accepted by the business (a liability)
B. Drawn by the business on customers (an asset)
C. Only foreign bills
D. Only accommodation bills
E. Only bills below ₹10,000
Answer: A. Bills Payable represents bills accepted — a liability.
38 Maintaining Bill Books primarily helps a business:
A. Avoid preparing a Trial Balance
B. Monitor maturity dates and plan cash flow around bill obligations
C. Eliminate the need for a Cash Book
D. Replace the Ledger entirely
E. Avoid statutory audit
Answer: B. Bill Books help track maturity and manage cash flow.
39 Bill Books are best classified as:
A. Principal books of account
B. Subsidiary registers
C. Statutory returns
D. Final accounts
E. Audit reports
Answer: B. Bill Books are subsidiary registers.
40 A business dealing regularly in bills would maintain: (i) Bills Receivable Book (ii) Bills Payable Book (iii) Suspense Account Register
A. (i) only
B. (i) and (ii) only
C. (iii) only
D. All of (i), (ii) and (iii)
E. None of these
Answer: B. Bills Receivable and Bills Payable Books are the standard registers.
🔁 Comprehensive Review
41 Which of the following are types of usance bills based on documents? (i) D/P (ii) D/A (iii) Clean Bill
A. (i) only
B. (i) and (ii) only
C. (iii) only
D. All of (i), (ii) and (iii)
E. None of these
Answer: D. D/P, D/A and Clean Bill are all bill classifications by documentation.
42 An Inland Bill is one that is:
A. Drawn and payable in two different countries
B. Drawn and payable within India, on a resident
C. Payable only in foreign currency
D. Always an accommodation bill
E. Never subject to days of grace
Answer: B. An Inland Bill is drawn and payable within India.
43 Renewal of a bill involves:
A. Cancelling the original bill and drawing a fresh one, often with added interest
B. Immediate dishonour of the bill
C. Discounting the bill twice
D. Transferring the bill to the RBI
E. Converting the bill into equity shares
Answer: A. Renewal cancels and replaces the original bill.
44 A Foreign Bill is typically drawn in:
A. Multiple originals (a "set" of bills) to guard against loss in transit
B. A single copy only, like an inland bill
C. Digital form only
D. Government-approved format only
E. Perpetuity, with no maturity date
Answer: A. Foreign bills are often drawn in a "set" (e.g., first and second of exchange).
45 Dishonour of a bill can occur by:
A. Non-acceptance only
B. Non-payment only
C. Either non-acceptance or non-payment
D. Endorsement only
E. Discounting only
Answer: C. Dishonour can be by non-acceptance or non-payment.
46 A bill discounted with a bank, if honoured on maturity, requires which entry in the drawer's books?
A. No entry, since the asset was already removed at discounting
B. Debit Bank, Credit Bills Receivable
C. Debit Bills Receivable, Credit Bank
D. Debit Creditor, Credit Bank
E. Debit Discount, Credit Bills Payable
Answer: A. No further entry is needed by the drawer once the bill is honoured, since it was removed from the books upon discounting.
47 "Noting charges" on a dishonoured bill are ultimately recoverable from the:
A. Notary Public
B. Party responsible for the dishonour (usually the acceptor)
C. Bank that discounted the bill
D. Government
E. No one; they are always written off
Answer: B. Noting charges are recoverable from the party at fault.
48 A key distinguishing feature of a negotiable instrument, including a bill of exchange, is:
A. It cannot be transferred to another person
B. Title passes freely by delivery or endorsement, and a bona fide holder gets good title
C. It must always be registered with the RBI
D. It has no legal enforceability
E. Only banks may hold it
Answer: B. Free transferability with good title to a bona fide holder defines negotiability.
49 Discounting income for a bank on a bill is recognised as:
A. A capital receipt
B. Interest/discount income over the remaining tenure of the bill
C. A contingent liability only
D. Not recognised as income at all
E. Recorded only at the bill's dishonour
Answer: B. Discount is effectively interest income earned over the bill's remaining tenure.
50 For JAIIB purposes, the single most important distinction between a Trade Bill and an Accommodation Bill is:
A. The currency in which it is denominated
B. Whether a genuine underlying trade transaction exists
C. The number of days of grace allowed
D. Whether it can be endorsed
E. The identity of the Notary Public
Answer: B. Presence or absence of a genuine trade transaction is the key distinction.
Disclaimer: This article is prepared for educational and exam-preparation purposes only. Content reflects the Negotiable Instruments Act, 1881 and established banking practice, as of September 2026. Candidates should cross-check the latest official IIBF syllabus and current notifications before the exam.