Accommodation Bill

What is Accommodation Bill? – Definition

Accommodation bill is That which is drawn and accepted without any consideration. In fact, these bills are drawn for the financial assistance of one or both the parties in bill of exchange.

Explanation

Bill of exchange comes into existence due to the same trading activities. A creditor draws a bill on his debtor for the consideration of goods sold. Bills drawn for consideration are called “Trade Bills”.

Informal Name of Accommodation Bill

The informal name of accommodation bill is “Kite Bill”, Discounting of accommodation bill is called kite-flying or kiting because it is in the hands of the drawer, whether the bill will be met or dishonored on due date. If the drawer will remit the required amount to drawee then the bill will be honored otherwise will be dishonored.

Legal Status of Accommodation Bill

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Accommodation bills are not legally enforceable because these are drawn and accepted without any consideration. From a legal point of view, accommodation bills are not bills, yet they are, in practice, treated like ordinary bills. Although there is no legal liability for accommodation bills, but a strong moral understanding exists between the concerned parties.

Working of Accommodation bill

Since the accommodation bill is drawn for financial help of one or both the parties, but the questions
is how? What actually happens is that one party draws the bill and the other party accepts it. Then the
bill is got discounted by the drawer and cash is received. The discounted amount is utilized by the
drawer or both the drawer and drawee. Before due date, the drawer sends the amount utilized by
him to the drawee to enable him to pay the bill. On the due date, drawee honors the bill.

Difference between trade bill and accommodation bill

Trade Bill Accommodation Bill
1. Trade bills are drawn and accepted for same consideration. 1. These bills are drawn and accepted without any consideration.
2. These bills are legally enforceable. 2. These bills are not legally enforceable.
3. Trade bills are the acknowledgment of the debt. 3. Accommodation bills are not the acknowledgment of debt.
4. The drawer can sue if bill is dishonored. 4. Drawer cannot sue if bill is dishonored.
5. Loss by way of discounting the bill is borne by drawer only. 5. Loss by way of discounting the bill is shared by drawer and drawee in the ratio of their sharing in the proceeds of the bill.

Accounting Treatment of Accommodation Bill – Journal Entries

Accounting for accommodation bills is same as we did in case of ordinary bills.

Different ways of using accommodation Bill

i) For the Accommodation of Drawer Only:

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If a person is in need of money, he draws a bill on his friend and gets it discounted from the bank. The whole proceeds of the bill are utilized by the drawer only. Before the due date of the bill drawer sends the amount of the bill to the drawee who honors the bill.

Example

[Accomngodation Bill, Drawn for the Accommodation of Drawer only, Bill Met]

A for his own accommodation drew on B a bill for $10,000 for three months. A got the bill discounted on the same date @ 12% p.a. Before due date A sent the amount to B who honored the bill on the due date.

Required: Pass necessary journal entries in the books of A and B.

Solution:

Accounting for Accommodation Bill

Accommodation Bill Journal Entries

Discount Amount

ii) For Mutual Accommodation of Drawer and Drawee; Bill Drawn by One Party:

Sometimes two parties are in need of money. They are not in a position to get money from any other source. To fulfill their need for money, one of the parties draws a bill on the other. Eventually, the bill is got discounted and proceed are shared in an agreed proportion. Amount of discount is also shared in the same proportion. On the due date, the drawer remits his share of proceeds to drawee. Drawee arranges his share of proceeds and meets the bills.

Example

[Accommodation Bill, Drawn for the Accommodation of Drawer and Drawee, Bill Met]

For mutual accommodations of S and R, S draws a three months bill on R on 1st January 2019 for the amount of $3,000. S gets the bill discounted for $2,700 and remits 1/3 of the proceeds to R. On due date S remits the amount due to R, to enable him to meet the bill. On the due date, the bill id duly met by R.

Required: Pass journal entries in the books of S and R.

Solution:

Journal of S

W-1:

Discount proceed to R

W-2:

Shared By R

Journal of R

iii) For mutual accommodation of Drawer and drawee, Bill drawn by both parties on Each other:

It is another way of using bills by drawing bills on each other and getting them discounted from their respective bankers. The proceeds of the bills and discounting charges are shared in agreed proportion. On the due date, each party remits the required amount to other party for enabling each other to meet the bill.

Bill of same amount and term

Sometimes accommodation bills of same amount and term are drawn and accepted by the parties, so that there would be no need of sharing proceeds and remitting the balance. Each party gets his bills discounted and pays his acceptance.

Example

[Mutual Accommodation, Bill Drawn by Both Parties, Bill Met]

A for mutual accommodation of himself and of B draws a bill for $15,000 on B on 15th March 2019 for three months. B on the same date for the same purpose and for the similar amount draws a three months bill on A. Both the bills are discounted @ 12% p.a. on the same date. On the due date, both the parties met their acceptance.

Required: Give journal entries in the book of both the parties.

Mutual Accommodation Bill Journal Entries

Accounting for Mutual Accommodation Bill

W-1:

Mutual Working Note

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