A bill of exchange is an instrument drawn by the seller on the buyer to pay a specified amount of money on a particular date. When goods are sold on credit the supplier will draw a bill of exchange upon the buyer who would accept the same. The term of the bill may range form three to six months. Besides three days of grace are allowed to the acceptor of the bill to make payment. Instead of holding the bill till maturity, the supplier may get it discounted with his banked and use that may so received for his business.

Discounting of bill of exchange refers to the act of selling the bill to the bank before its maturity. The bank would charge discount in terms of interest for the unexpired term of the bill. The net proceeds of the bill would be credited to the account of the supplier. On the date of maturity, the bank would present the bill before the acceptor of the bill and get the full amount of the bill. If the payment is not made by the acceptor, the bill would be treated as dishonored. The dishonored bill would be set to the supplier (who got the bill discounted with the bank) and his account would be debited with the amount of the bill.

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