A bill of exchange is a written, legal and unconditional order stating that one party agrees to pay the other party a certain sum of money at either a specific date or on demand. A bill of exchange may be either used to adjust debt or get money from a bank through discounting.
Let’s say there are two companies named XYZ ltd and YPR ltd. YPR ltd buys appliances from XYZ ltd, becoming the payee in this case. Here, the bill of exchange specifies that YPR will pay ₹15,000 for their purchases to XYZ ltd in 90 days. XYZ ltd becomes the drawee and accepts the bill of exchange and the goods are shipped. In 90 days, XYZ ltd will present the bills of exchange to YPR ltd for payment. The bill of exchange was an acknowledgment created by XYZ ltd, which was also the creditor in this situation, to show the indebtedness of YPR ltd, the debtor.