Bill of exchange is the term used in the context of purchase and sale of goods on credit. It refers to unconditional order by the maker to pay definite sum of money to the holder of the instrument; it is signed by the maker of the instrument and it should be accepted by the drawee. Since many people get confused by the terms of bill of exchange it is better to clear the doubts regarding the parties which are there in bill of exchange and what are the functions or responsibility of each party. Let’s look at the various parties which are there in bill of exchange
- Drawer – It is the person who has sold the goods on credit to the buyer of goods and for receiving the payment from the buyer he draws a bill of exchange. It is the drawer who starts the whole process of bill of exchange because it is the drawer who requires funds. He is also called maker of bill of exchange. For example if A sells goods to B on credit then A will be called drawer of bill of exchange.
- Drawee – It is the person on whom the bill of exchange is drawn and he has to make the payment to the supplier of goods or if the suppler has discounted the bill with some other party then buyer has to make payment to that party. So in above example B would be called drawee since he has to pay for the goods purchased by him or her on credit to A.
- Payee – Payee refers to the person to whom the payment has to be made. Payee is usually the person who draws the bill; in above example A would be payee of bill of exchange. However if the payee has discounted the bill with bank or some other third person then in that case payee will be bank or third party and drawee has to make payment accordingly. After the drawee has made the payment to the payee the whole process of bill of exchange comes to an end.