Write short note on Promissory Note.

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 #ignou BCA second semester subject ECO 02 previous year question with answer

Write short note on Promissory Note.


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Answer.

A promissory note is a legal financial instrument that contains a written promise from one party, known as the issuer or maker, to pay a specified sum of money to another party, known as the payee or holder, at a predetermined future date or upon demand. Here are some important points to note about promissory notes for an exam paper answer:


1. Definition: A promissory note is a written document that serves as a legally binding promise to repay a debt. It is a formal acknowledgment of a debt obligation and outlines the terms and conditions of repayment.


2. Parties Involved: There are two parties involved in a promissory note: the issuer/maker and the payee/holder. The issuer is the individual or entity who promises to pay the debt, while the payee is the individual or entity who will receive the payment.


3. Key Elements: Promissory notes typically include several essential elements, such as the names and addresses of the parties involved, the principal amount of the debt, the interest rate (if applicable), the maturity date, the repayment terms, and any additional provisions or conditions.


4. Legal Enforceability: Promissory notes are legally enforceable documents, meaning that the holder can take legal action against the issuer in case of default or non-payment. They provide a legal recourse for the holder to seek repayment of the debt owed.


5. Negotiability: Promissory notes can be negotiable or non-negotiable. Negotiable promissory notes are transferable by endorsement, allowing the payee to transfer their rights to another party. Non-negotiable promissory notes cannot be transferred or assigned.


6. Types of Promissory Notes: There are different types of promissory notes based on their purpose and nature. Some common types include demand promissory notes, installment promissory notes, commercial promissory notes, and personal promissory notes.


7. Interest: Promissory notes may or may not include an interest component. If interest is specified, it represents the additional amount that the issuer must pay to the payee as compensation for the use of funds.


8. Usance: The term "usance" refers to the period or duration of time between the date of issuance and the maturity date of the promissory note. It represents the timeframe within which the issuer is obligated to repay the debt.


9. Negotiation and Discounting: Promissory notes can be negotiated or discounted before their maturity date. Negotiation involves transferring the rights and obligations of the note from the original payee to another party, whereas discounting involves selling the promissory note to a third party at a discounted price.


10. Recording and Presentation: Promissory notes should be recorded in the books of accounts as a financial liability for the issuer and a financial asset for the payee. In financial statements, promissory notes are disclosed as either short-term or long-term debt, depending on the maturity date.


In conclusion, a promissory note is a legally binding document that outlines the terms and conditions of a debt obligation. It serves as a formal promise to repay a specified amount of money at a predetermined future date or upon demand. Understanding the key elements, parties involved, legal enforceability, and different types of promissory notes is essential for exam preparation in accounting, finance, or legal courses.

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