Difference Between Bill of Exchange and Promissory Note (With Table)

Bill of Exchange vs Promissory Note

The key difference between “bill of exchange” and “promissory note” lies in the fact that the “bill of exchange” has to get accepted before any sort of payment happens, and the second one meaning “promissory note” does not require the acceptance of any kind.

The term “bill of exchange” is a written agreement that happens between two parties, which are the buyer and the seller. Also, they are used generally in international exchange.

This documentation indicates that a purchasing party has accepted the fact that they need to pay a selling party a certain amount at a fixed time for delivered materials.

The terms “promissory notes” are quite the same as bills of exchange in a way that they are a financial instrument that is a written promise by one party to pay another one.

They are also known as debt notes that support financing for either an individual or a company source aside from a traditional lender.


 

Comparison Table Between Bill of Exchange and Promissory Note (in Tabular Form)

Parameter of ComparisonBill of ExchangePromissory Note
DefinitionWhen debtors face a demand to pay the money within a required amount of time then we mention this sort of negotiable instrument as bills of exchange.When a debtor in a commercial written document promises to the creditor to pay the specified amount of money at a certain date then we mention this type of negotiable instrument as a promissory note. In other words, promise to pay a certain amount of money later.
Parties they haveIt has three parties, such as- drawer, drawee, and payee.It has two parties, such as- maker, and payee.
Who can draw them?The bill of exchange tends to get drawn by the creditor.The promissory note tends to only get drawn by the debtor.
AcceptanceTo be called valid, the bill of exchange has to get accepted by the debtors.There is no such thing in the promissory note.
Where they are used?In accounting, a bill of exchange is used in settlements of trading debts.In accounting, a promissory note is generally used to borrow money.

 

What is the Bill of Exchange?

A bill of exchange is a form of negotiable instrument which carries the statement of the buyer to the seller regarding the amount of money to be paid. Three parties who play a pivotal role in the process are payee, drawee, and the drawer.

In case of dishonor notice to all the parties involved should be given before due time. The drawer must sign and stamp the bill of exchange which carries the order to pay the amount to the carrier of the instrument.

It should be kept in mind that the order is not a command in this regard. The date is a must for this instrument. There should be no error otherwise it will lose validity. The bill must be accepted by the part who carries it.

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For collection, the drawee must show the document to the payee. The amount of money which should be paid must be certain and definite and is required to be included in the document.

The buyer in the process or the maker of the bill must sign the documents associated with the bill. To settle the debt between the parties’ usage of the Bill of Exchange is widely seen in practice.

Sample of Bill of Exchange
 

What is Promissory Note?

To put it simply in writing, a promissory note is an unconditional written document that carries a promise to make a payment with a certain amount of cash at a future date by the debtor to collect the fixed amount of money from the creditors.

The document must also be signed by the debtor and stamped to give it the validity required by the law before giving it to the creditor. To collect the cash in the future date the creditor must show the original note that was made.

There are only two parties in the process such as- payee and drawer. Market liability of the document is primary and absolute in terms of characteristics.

The future date on which the debtor will pay the money must be written in the document.

The amount of money must also be written and both parties in the process must have definite knowledge about it. When it comes to the term ‘legal contract’, a promissory note is very formal.

In usage to corporations or high-net-worth individuals, promissory notes have historically been narrowed in the United States, but currently, they have become more frequently used, usually in real estate transactions.

Sample of Promissory Note

Main Differences Between Bill of Exchange and Promissory Note

  1. In the bill of exchange, sometimes the drawer and payee might be the same person. Whereas, a promissory note is not allowed to make any payment to the maker himself.
  2. In a bill of exchange, according to the drawer’s direction, there is an unconditional order that is there for the drawee to make the payment. On the other hand, a promissory note carries an unconditional promise by the maker to pay to the payee.
  3. The bill of exchange has three parties, named as-drawer, drawee and payee. Although there is a chance that the two out of the three parties may be portrayed by one and the same individual. And in a promissory note, there are only two parties, such as the maker or the debtor and the payee or the creditor.
  4. A bill of exchange is payable after its appearance has to be accepted by the drawee on his behalf before it can be displayed for payment. Diversly, a promissory note is given to make a payment without any earlier acceptance by the maker.
  5. If a bill of exchange is dishonored, an unpaid notice of dishonor has to be presented by the holder to the drawer and the immediate indorsers. For promissory note, there is no such notice need be given in the case of any dishonoring events.
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How to Remember the Difference Between Bill of Exchange and Promissory Note

Time Needed : 2 minutes

Remembering the differences is very simple, just follow our mind mapping guide given below:

  1. Associate the first word with a thing or item which you see daily

    For e.g.: Middle line in letter H for Horizontal.

  2. Associate the second word with a thing or item which you see daily

    For e.g.: The two lines in letter V for Vertical.

  3. Recall the two words daily two times

    During morning and evening bring up the two words in front of you and then recall the things that you had associated with each word.

  4. Repeat for 7 days

    Repeating this process for a week will help you remember the difference between words for a long time.


 

Frequently Asked Questions (FAQ) About Bill of Exchange and Promissory Note

  1. What are the parties to a Promissory Note a Bill of Exchange and a Cheque?

    Promissory note is a written document that has to be duly signed by the maker which includes an unconditional promise to pay the debt to another person either on-demand or on a specified date.

    Parties to a promissory note include drawer, drawee, and payee. The one who has to pay the debt is known as the drawer. The one who lends money is known as drawee. To whom the payment has to be done is the payee.

    A bill of exchange is issued by the creditor and has to be validated by the debtor in order to make it acceptable. Here, the drawer is the one who lends money.

    Drawee is the buyer, who has to pay the debt while the amount has to be paid to the payee.

    The parties to a cheque also include a drawer, drawee and payee. The person who signs the cheque is the drawer, here.

    Whoever pays the sum written on cheque becomes drawee. And the amount has to be paid to the payee.

  2. Is a Bill of Exchange a Cheque?

    No, they have a lot of differences. A bill of exchange has to be validated by the person who is supposed to pay the debt whereas a cheque is the amount of money which the bearer of the cheque can demand at any time.

    A drawee is needed to make a bill of exchange acceptable. However, a cheque doesn’t need such acceptance can be signed by the drawer at any time.

  3. Is DD a Bill of Exchange?

    A demand draft is somewhat similar to a bill of exchange. A demand draft is issued to a drawer (or client), in which a bank has to pay a certain amount, which is considered to be drawee and the amount gets paid to the payee.

    Demand drafts are payable only to the specified party mentioned on it. However, a cheque is also payable to the bearer of it.

  4. What is the difference between a Promissory Note and Cheque?

    A promissory note is a written document which states a promise of paying the debt to another person.

    This payment might be in installments or in full at a specified date. However, a cheque is not a promise but a onetime payment signed by the drawer.

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Infographic

Bill of Exchange vs Promissory Note

 

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Conclusion

To sum it up, a bill of exchange is a binding agreement that has been made by one party to pay a fixed amount of cash to another one on a specific date or on-demand.

And a promissory note is a written promise that has been made to pay a number at a future date or on-demand to a specific party.

The main differences are with respect to liability and the parties involved in the transaction of both bills of exchange and promissory note.


 

Word Cloud for Difference Between Bill of Exchange and Promissory Note

The following is a collection of the most used terms in this article on the Bill of Exchange and Promissory Note. This should help in recalling related terms as used in this article at a later stage for you.

Word Cloud for Bill of Exchange and Promissory Note

 

References

  1. https://www.tutorialspoint.com/financial_accounting/financial_accounting_bills_of_exchange_and_promissory_notes.htm
  2. https://www.accountingtools.com/articles/what-is-a-bill-of-exchange.html
  3. https://www.toppr.com/guides/fundamentals-of-accounting/bills-of-exchange/meaning-and-features-of-bills-of-exchange/
  4. https://www.bankbazaar.com/personal-loan/promissory-notes.html
  5. https://www.lawdepot.com/in/financial/promissory-note-form/

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