Definition of Drawee
A drawee is the individual, company, or financial institution upon whom a bill of exchange, cheque, or draft is drawn and who is responsible for making the payment. In simple terms, the drawee is the party expected to honor the payment order written by the drawer.
Meaning of Drawee in Detail
In financial transactions, particularly in banking and trade, three main parties are often involved:
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Drawer: The person who creates the bill of exchange or cheque and gives the payment order.
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Drawee: The person or institution directed to pay.
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Payee: The person who will receive the payment.
For example, when you write a cheque to your friend, you (the account holder) are the drawer, the drawee is your bank, and your friend is the payee. The drawee ensures the order is executed by releasing funds as instructed, provided there are sufficient funds and the instrument is valid.
Components of Drawee
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Legal Responsibility: Drawee is bound by law to honor the instrument upon acceptance.
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Involvement in Negotiable Instruments: Found in cheques, bills of exchange, and promissory notes.
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Conditional Payment: Payment is subject to availability of funds and compliance with legal terms.
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Banking & Trade Use: Common in international trade, credit systems, and domestic transactions.
Formula or Equation of Drawee
While the drawee concept does not have a fixed mathematical formula, the transactional relationship can be expressed as:
Drawer → Drawee → Payee
This simple flow captures the financial obligation where the drawee acts as the central executor of payment.
Example Calculation
Imagine a bill of exchange:
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Drawer: Mr. A (Seller)
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Drawee: Mr. B (Buyer)
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Payee: Mr. A (or another party nominated by him)
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Amount: ₹1,00,000
If Mr. A sells goods worth ₹1,00,000 to Mr. B and draws a bill payable in 60 days, Mr. B (drawee) must pay ₹1,00,000 on the due date.
Journal Entry (Accounting Treatment)
When a bill is accepted by the drawee, accounting entries are made:
In the books of Drawer (Seller):
In the books of Drawee (Buyer):
Illustration with Calculation
Mr. A sells goods worth ₹50,000 to Mr. B on credit. Mr. A draws a bill of exchange for 3 months. Mr. B accepts the bill.
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In Mr. A’s books (Drawer):
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Bills Receivable recorded as an asset of ₹50,000.
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In Mr. B’s books (Drawee):
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Bills Payable recorded as a liability of ₹50,000.
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On maturity, if Mr. B honors the bill:
Mr. A’s books:
Mr. B’s books:
Key Features of Drawee
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Party responsible for payment.
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Can be a bank, individual, or company.
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Legally bound upon acceptance of the instrument.
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Exists in negotiable instruments (cheques, drafts, bills).
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Provides credibility to financial transactions.
Importance of Drawee in Business
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Facilitates Credit Transactions: Allows sellers to give buyers credit while ensuring payment security.
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Ensures Smooth Banking Operations: Banks as drawees process millions of cheques daily.
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Enhances Trust: Buyers and sellers rely on drawees’ credibility.
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Legal Accountability: Provides enforceability in disputes.
Advantages and Disadvantages of Drawee
Advantages:
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Provides assurance of payment.
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Increases trust between parties.
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Essential in domestic and international trade.
Disadvantages:
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Risk of dishonor if drawee lacks funds.
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Legal disputes may arise.
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Delay in payments can affect business liquidity.
Usage of Drawee
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In cheques: Banks act as drawees.
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In bills of exchange: Buyer acts as drawee.
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In drafts: Financial institutions act as drawees.
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In international trade: Used for securing export-import transactions.
Case Studies
Case 1: Banking Sector
In India, banks like SBI, HDFC, and ICICI act as drawees daily while clearing cheques. For instance, in FY 2023, the cheque clearing system in India processed over 2 billion cheques, each involving banks as drawees.
Case 2: International Trade
An Indian exporter sells textiles worth $1 million to a US importer. A bill of exchange is drawn on the US importer (drawee). The importer accepts, giving legal assurance of payment after 90 days. This ensures the exporter can even discount the bill with a bank for immediate cash.
Practical Example
You write a cheque of ₹10,000 to pay rent.
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You: Drawer
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Your Bank: Drawee
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Landlord: Payee
Your bank (drawee) releases ₹10,000 to the landlord if sufficient funds exist.
Common Mistakes or Misunderstandings
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Confusing Drawee with Drawer: The drawer is the one who creates the instrument, not the drawee.
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Assuming Drawee Is Always a Bank: In bills of exchange, the drawee can be an individual or company.
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Ignoring Legal Obligation: Once accepted, the drawee is legally liable to pay.
Real-Life Applications of Drawee
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Cheque Transactions: Everyday banking payments.
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Bills in Trade Credit: Extensively used in export-import business.
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Promissory Notes: Commercial contracts involving drawees.
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Court Enforcements: Dishonor of bills can lead to lawsuits, emphasizing the legal role of drawee.
FAQs
Q1. Who is the drawee in a cheque?
The bank on which the cheque is drawn.
Q2. Can the drawee refuse payment?
Yes, if funds are insufficient or if there are legal restrictions.
Q3. Is the drawee and payer the same?
Yes, in practice the drawee is the payer obligated to make the payment.
Q4. What is the liability of the drawee?
The drawee is legally responsible to pay once the bill or cheque is accepted.
Q5. Can a person be both drawer and drawee?
Yes, in rare cases such as self-drawn cheques in the same bank account.
Expert Tip from Learn with Manika
👉 Always verify the credibility of a drawee before entering into financial agreements. In trade and banking, the reliability of the drawee ensures smooth transactions and protects against dishonor.
Related Terms
- Drawer
- Payee
- Bills of Exchange
- Cheque
- Bills Receivable
- Bills Payable
- Negotiable Instruments