Definition of Drawer
A Drawer is the person or entity that creates, writes, or signs a negotiable instrument such as a bill of exchange, cheque, or promissory note, instructing another party (the drawee) to pay a specified sum to a payee.
Meaning of Drawer in Finance and Accounting
In the world of finance, business, and banking, the Drawer plays a central role in facilitating transactions through negotiable instruments. Whenever a cheque or bill of exchange is issued, the drawer is essentially giving an order to another party (usually a bank or debtor) to make a payment.
For example:
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In the case of a cheque, the account holder who signs and issues the cheque is the drawer.
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In the case of a bill of exchange, the seller (creditor) who draws the bill is the drawer, while the buyer (debtor) becomes the drawee.
This makes the drawer a vital part of commercial transactions, ensuring smooth functioning of credit and banking systems.
Breakdown of the Concept
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Negotiable Instruments: Cheques, Bills of Exchange, and Promissory Notes.
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Parties Involved: Drawer, Drawee, and Payee.
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Drawer’s Responsibility: To create, sign, and ensure sufficient funds for payment.
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Legal Standing: The drawer is legally bound to honor the payment if the drawee defaults.
Formula or Calculation (if applicable)
While the drawer does not have a direct formula, the accounting treatment can be expressed as:
Drawer’s Account = Total Bills Drawn – Bills Honored – Bills Dishonored
Example Calculation
Suppose Company A sells goods worth ₹50,000 to Company B and draws a bill of exchange payable after 3 months.
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Drawer = Company A (seller)
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Drawee = Company B (buyer)
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Payee = Company A (if self-payee) or a third party (if endorsed)
When Company B accepts the bill, it creates a legally enforceable obligation to pay ₹50,000.
Journal Entry with Example (Accounting Term)
When the bill is drawn and accepted:
In the Books of Drawer (Seller):
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Bills Receivable A/c Dr. ₹50,000
To Debtor (Company B) A/c ₹50,000
When the bill is honored on due date:
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Bank A/c Dr. ₹50,000
To Bills Receivable A/c ₹50,000
If the bill is dishonored:
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Debtor (Company B) A/c Dr. ₹50,000
To Bills Receivable A/c ₹50,000
Detailed Illustration
Company A sold goods to Company B for ₹80,000 on credit. Company A draws a bill of exchange for 3 months, which Company B accepts. At maturity, Company B fails to pay.
Entries in Drawer’s Books:
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On drawing the bill:
Bills Receivable A/c Dr. ₹80,000
To Company B A/c ₹80,000 -
On dishonor:
Company B A/c Dr. ₹80,000
To Bills Receivable A/c ₹80,000
This shows how the drawer records transactions depending on the drawee’s payment behavior.
Key Features of a Drawer
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The drawer initiates the financial instrument.
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Responsible for ensuring funds availability (especially in cheques).
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Legally bound to settle the payment if drawee defaults.
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Can endorse bills to third parties.
Importance / Role in Business
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Enables credit sales in business.
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Provides legal evidence of debt.
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Strengthens trust and credibility between buyer and seller.
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Simplifies banking transactions through cheques.
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Enhances liquidity in financial markets.
Advantages and Disadvantages
Advantages:
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Facilitates credit transactions.
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Provides legal backing in case of non-payment.
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Helps in smooth fund transfers.
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Encourages business relationships.
Disadvantages:
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Risk of dishonor leading to financial loss.
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Legal disputes may arise.
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Dependence on drawee’s financial stability.
Usage of Drawer in Different Contexts
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Banking: Account holders issuing cheques.
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Trade Credit: Sellers drawing bills on buyers.
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Finance: Endorsing negotiable instruments to third parties.
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Business Transactions: Ensuring smooth settlements without immediate cash.
Case Studies
Case Study 1: Cheque Bounce in India
In 2022, many small businesses faced losses due to cheque bounces by customers. Legally, drawers were held responsible under the Negotiable Instruments Act, 1881, and courts enforced penalties.
Case Study 2: Bill of Exchange in International Trade
Exporters often act as drawers when sending bills of exchange to importers abroad. This system reduces the risk of non-payment and provides international trade security.
Practical Example
A freelance consultant issues a bill of exchange of ₹25,000 to a client for services rendered. Here, the consultant is the drawer, the client is the drawee, and if the bill is endorsed to a bank for discounting, the bank becomes the payee.
Common Mistakes or Misunderstandings
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Confusing the Drawer with the Drawee.
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Assuming drawer is always the payee (not always true).
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Believing drawers have no liability once the instrument is signed (they are legally bound).
Real-Life Applications and Legal Implications
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Banking Sector: Every cheque issued has a drawer.
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Business Financing: Bills of exchange help secure working capital.
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Legal Framework: Under Indian Negotiable Instruments Act, Section 30, the drawer is liable if a bill is dishonored.
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Corporate Use: Companies issue post-dated cheques to suppliers, where they act as drawers.
FAQs
Q1. Who is called a Drawer in banking?
The account holder who issues a cheque is the drawer.
Q2. Is the drawer and payee the same?
Not always. The drawer may also be the payee, but in many cases, the payee is a third party.
Q3. What happens if a drawer’s cheque bounces?
The drawer is legally liable and may face penalties or imprisonment under the Negotiable Instruments Act.
Q4. What is the liability of the drawer?
The drawer is liable to compensate the payee if the drawee defaults.
Q5. Can a drawer stop payment of a cheque?
Yes, by instructing the bank, but legal consequences may arise if done dishonestly.
Expert Tip from Learn with Manika
Always ensure sufficient funds before issuing cheques or drawing bills. Maintaining credibility as a drawer builds long-term trust in both banking and business transactions.
Related Terms
- Drawee
- Payee
- Negotiable Instruments
- Bills of Exchange
- Cheque Bounce
- Endorsement