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Accommodation Bills


Usually, bills of exchange or promissory notes are drawn to finance the actual transactions in goods, i.e., an acceptance is made to settle a trade debt owing to the drawer by the drawee in case of a bill of exchange and the bill is called a trade bill. As it originates from genuine trade transaction it is for value received and is enforceable. But, apart from financing transaction in goods, bills of exchange and promissory notes may also be used for raising funds temporarily. Such a bill is called an 'accommodation bill' as it is accepted by the drawee to accommodate the drawer. Hence, the drawee is called the 'accommodating party' and the drawer is called the 'accommodation party'.

 

Problem#7
Raj draws upon Pal a bill for Rs.10, 000 on April 01, 2006 for three months and the latter accepts the same to accommodate Raj. Raj discounts it with his bank at 6% per annum on the same date. Raj remitted the amount one day before the maturity of the bill to Pal. Pal met the bill on the date of its maturity.

The journal entries in the books of Raj and Pal will be recorded as follows:

 

Solution
Books of Raj- Journal

Date

Particulars

L.F.

Debit

Amount

Rs.

Credit

Amount

Rs.

2006

Apr 01

 

 

Apr. 01

 

 

 

 


Jul. 03

 

 

Bills Receivable A/c Dr.

To Pal's A/c

(Received Pal's acceptance)

Bank A/c Dr.

Discount A/c Dr.

To Bills Receivables A/c

(Discount Pal acceptance)

Pal's A/c Dr.

To Bank A/c

(Remittance to Pal for paying off accommodation bill)

 

10,000

 

 

9,850

 

 

 

10,000

 

 

 

10,000

 

 

150

10,000

 

 

10,010

 

 

Books of Pal- Journal

Date

Particulars

L.F.

Debit

Amount

Rs.

Credit

Amount

Rs.

2006

Apr 01

 

 


Jul 03

 

 

 

Jul. 03

 

 

Raj's A/c Dr.

To Bill Payable A/c

(Acceptance of accommodation bill drawn by Raj)

Bank A/c Dr.

To Raj's A/c

(Received Raj's remittance)

Bill Payable A/c Dr.

To Bank A/c 10,000

(Discharge of accommodation)

Bills Receivable A/c Dr.

To Pal's A/c

(Received Pal's acceptance)

 

10,000

 

 


10,000

 



10,000

 

 

 

 

10,000

 

 


10,000

 

 

10,000

 

 

 

At times, the accommodation parties agree to raise the funds through an accommodation bill for mutual benefits.
It can be done in any of the following two ways:
  1. The drawer and the drawee share the proceeds in an agreed ratio
  2. Each draws a bill and each accepts a bill
In the case (a) the discounting changes are shared by drawer and drawee in the ratio in which they share the proceeds.

But in the case (b) the discount is not shared as each party retains the entire proceeds of the bill drawn and discounted by him.

On maturity, each party meets his acceptance out of his own resources if everyone draws and accepts bills of the same denomination and tenure. But where they share the proceeds of the same bill, the drawer should remit, just before maturity, the balance due to the drawee, so that the latter could duly meet his acceptance. Thus an accommodation bill helps both the parties to the instrument to temporarily raise the necessary funds from discounting institutions.

 

Key Terms Introduced in the Chapter
  1. Drawer
  2. Drawee
  3. Payee
  4. Bill Receivable
  5. Bill Payable
  6. Drawing of a Bill
  7. Acceptance of a Bill
  8. Payment of a bill




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