Accommodation Bills of Exchange

Accommodation Accommodation Bills of Exchange: An accommodation bill of exchange is a bill of exchange which has been drawn for the mutual financial accommodation of the parties involved. Generally it is drawn not for value received. r eceived. In order to oblige friends, many times bills are drawn, accepted and endorsed by businessmen without any consideration. By accepting such a bill the acceptor is able to lend his name, and the other party (drawer) taking advantages of the reputation of the acceptor gets it discounted with his bank. After meeting his aim with this temporary finance, he (drawer) sends back money to the acceptor thus making it possible for him to meet the bill on the due date. Since such bills are accepted without consideration, therefore, there is no liability of the acceptor to the drawer but since the third party takes such a bill for value, therefore, the acceptor is liable to the third party.

Difference Between Trade Bill and Accommodation Bill: Following is the distinction between a trade bill of exchange and an accommodation bill of exchange. Trade Bill

Accommodation Bill

1

Tra Tr ade bills are dra raw wn for tra rad de purp rpo os e s .

1

2

These Thes e are are dra drawn wn aga again inst st pro prope perr consideration. These bills are proof of debt If dis discou counte nted d full full sum ret retain ains s with with hol holder der of  the bill

2

3 4

5

3 4

For obta For obtain inin ing g the the debt debt fro from m draw drawee, ee, dr drawe awerr can resort to legal action.

5

Acc cco ommodation bills ar are dra raw wn and acc cce epted for financial assistance Thes Th ese e are are dr drawn awn in ab absen sence ce of an any y consideration These are not a proof of debt If dis discou count nted ed the the amo amoun untt may may be div divid ided ed between drawer and acceptor in predetermined ratio. Legal Leg al acti action on can cannot not be reso resorted rted for reco recover very y of amount against these bills by the immediate parties.

The bookkeeping entries in connection with accommodation bills are made in the same way as a s for genuine bills. Generally there are three methods of raising money on accommodation bills. They are as under: 1.

When accommodation bill is written for the accommodation of the drawer . 2. When accommodation bill is written for the mutual accommodation of the drawer and the drawee.. drawee other . 3. When the drawer and the drawee write accommodation bills on each other. All these bills have been discussed below:

Accommodation of the drawer: When a bill is written for the accommodation of the drawer then the drawee of the bill accepts the bill without any consideration and returns the bill to the drawer. The drawer gets the bill discounted with his bank and uses the amount in his business. On the due date he remits the amount to the acceptor or the bill to enable him to honour the bill on the due date.

Example (Accommodation of the Drawer): A accepts a bill drawn by B for his accommodation ac commodation on 1st January, 1991 for $500 at 3 months. The bill is discounted $ 490 on 4th January. On due date B sends a cheque to A to meet the bill. A duly honours his acceptance. Pass journal Pass  journal entries in the books of both the parties.

Solution: Journal Entries in the books of B 1991

500

Jan. 1 Bills receivable account

500

To A (Bills drawn on A)

Jan. 4 Bank account

490

Discount account

10

To Bill receivable account

500

(Bill discounted)

April 4 A

500

To Bank account

500

(Cheque sent to A)

Journal Entries in the books of A 1991 Jan. 1 B

500

To Bill payable account

500

(Acceptance given)

April 4 Cash account

500

To B

500

(Cheque received)

April 4 Bills payable account To Cash account

500 500

(Acceptance met)

Accommodation of the Drawer and the Drawee:

When a bill is drawn by one party for the mutual accommodation then the draw ee after accepting the bill returns to the drawer. The drawer gets the bill discounted with his banker and after retaining the agreed portion of the proceeds of the bill remits rest of the proceeds to the acceptor of the bill. On the date of maturity the drawer of the bill remits rest to the acceptor the amount retained by him earlier to enable the acceptor to honour the bill. The expenses of discount are shared by the parties.

Example (Accommodation of the Drawer and the Drawee): For mutual convenience of X and Y, X draws a bill for $1,000 on Y at three months on 1at January, 1991. The bill is discounted on 4th January by X at 6 per cent per annum with his bank: half the proceeds being handed over to Y. On the bill falling due date, X r emits $500 by cheque to Y who then pays the bill. Pass journal entries in the books of X and Y.

Solution: Journal Entries in the Books of X 1991 Jan. 1

Bills receivable account

1,000

To Y

1,000

(Bill drawn on Y)

Jan. 4

Bank account

985

Discount account

15

To Bills receivable account

1,000

(Bill discounted)

April 4 Y

500

To Cash account

492.5

To Discount account

7.5

(Half the proceeds remitted)

April 4 Y

500

To Cash account (Cheque sent to him)

Journal Entries in the Books of X

500

1991 Jan. 1

X

1,000

To Bills payable account

1,000

(Acceptance given)

Jan. 4

Cash account Discount account

492.5 7.5

To X

500

(Half the proceeds received)

April 4 Cash account

500

To X

500

(Cheque received from him)

April 4 Bills payable account

1,000

To Cash account

1,000

(Acceptance given)

Accommodation Bills Written on Each Other: In this case both the parties draw bills on each other and get them discounted from their bankers. On the due date each meets his own bill. The expenses of discount is to be paid by each on other's bill.

Example (Accommodation bills written on Each Other): On 1st January 1991 P draws a bill on Q at four months for $500 and Q draws on P for similar amount and term. Both the bills are accepted and discounted respectively at 6 per cent. At maturity both the parties meet their respectively acceptances. Show the journal entries in the books of both the parties.

Solution: Journal Entries in the Books of P Jan. 1

Bills receivable account

500

To Q

500

(Bill drawn on Q)

Q To Bill payable account

500 500

(Acceptance given)

Bank account

490

Discount account

10

To Bill receivable account

500

(Bill discounted)

May 4

Bill payable account

500

To Cash account

500

(Acceptance met)

Journal Entries in the Books of Q Jan 1

P

500

To Bill payable account

500

(Acceptance given)

Bill receivable account

500

To P

500

(Acceptance received)

Bank account Discount account

490 10

To bill receivable account

500

(Bill discounted)

May 4

Bill payable account To Cash account (Acceptance met)

500 500