ACCOMMODATION BILLS

Hey! Welcome back. Till now in bill of exchange lesson we learned  treating trade bills which can be honoured on the due date or dishonoured or can be renewed by cancelling old bill or retiring the bill under rebate before due date and lastly we also learned about insolvency of acceptor. Today we are going to learn about “Accommodation Bill”.

Usually a bill of exchange is drawn to settle a trade debt owing to the drawer by the drawee because the last words in the body of a bill of exchange are “for value received”. These words represent that the drawer has drawn a bill for the goods or services he has to settle trade debts. So these bills are known as trade bill.

“Friend in need is a friend indeed”. This phrase is perfect for explaining Accommodation Bill.

Well, what do we mean by Accommodation Bills?

Some times a bill of exchange can be accepted without any consideration just to help a friend who is temporarily is in need of money. Such bill is then discounted at the bank and cash is utilized by the friend in need (i.e. drawer) for the period of the bill and then the drawer will give  the amount of the bill on the due date to the acceptor/drawee to enable him to meet the bill on the due date. Such bill is called accommodation bill because the object of this bill is to accommodate a certain person with financial assistance for the period of the bill.

Definition:

An Accommodation bill may be defined as “A bill which is drawn, accepted or endorsed without consideration but simply to oblige a friend and help to raise money by discounting or negotiating it”. Such bills are also known as “Kite Bills”.

Difference between Trade Bill and Accommodation Bill

Basis	Trade Bills	Accommodation Bills
1.     Purpose	These are drawn to settle business transactions.	These are drawn to meet the financial needs of different parties. i.e., drawer, drawee or both.
2.     Consideration	These are accepted for a consideration.	There is no consideration in such.
3.     Role	These act as evidence of indebtedness.	These are a source of finance.
4.     Sharing of proceeds of the bill	Proceeds remain with the holder on discounting such bills.	Proceeds may be shared by drawer and drawee in agreed proportion on discounting such bills.
5.     Recovery in case of dishnonour	The drawer can file a suit against the drawee on dishonour of such bills.	The drawer cannot file suit against the drawee on dishonour of such bills.

The entries made for an accommodation bill are the same as for a trade bill except the re-imbursement of the accommodating party by the accommodated party on the due date of the bill.

 These bills can be drawn in three different ways as follows:

1. When it is drawn for the accommodation of the Drawer only.

2. When the bill is drawn for the accommodation of the drawer and the drawee.

3. When two persons draw on each other for equal amounts for their own accommodation.

Let us analyze above three ways for accommodation one by one, of course with examples for better understanding:

1. When the bill is drawn for the accommodation of the drawer only

In this case, a person who is need of money draws a bill on his friend who accepts the bill and returns it to him. After acceptance, the bill is discounted with the bank and the total cash proceeds of the bill are used by the drawer alone for the period of the bill. On the due date of the bill, the drawer remits the amount of the bill to the acceptor who in turn makes repayment to the bank. 

We can notice here that drawee is not an actual paying the bill, drawer will send cash to drawee which in turn makes the repayment to the bank. 

Now let’s see an example problem

Example problem:

1. On 1st March, 2018, Karan approached his friend Wahid for a loan of Rs 6,000 and the latter being unable to find money accepts a two months bill for the amount. Karan discounts the bill with his banker on 3rd march, 2018 at 12% p.a. on the due date of the bill; Karan sends the necessary amount to Wahid to enable him to meet the bill. Show the journal entries in the books of Karan and Wahid.

Explanation: well till now you must have already learned basic journal entry rules and also we have seen some important journal entries in our earlier lessons. So I’m sure you don’t need an explanation but if you want you can refer to previous lesson.

Solution: here’s how the transaction will be recorded.

In the books of Drawer Karan:

1st entry as bill is drawn and duly acceptance received.

2nd entry as bill is discounted with the bank.

3rd entry as cash is sent to Wahid on the due date for his help.

In the books of Drawee Wahid:

1st entry as bill is accepted for Karan.

2nd entry as cash is received from Karan.

3rd entry as bill met on its due date.

 

2. When the bill is drawn for the accommodation of the drawer and the drawee

In this case, the Drawer draws a bill on another person who accepts it without any consideration. Then the drawer discounts the bill and the cash thus realized is shared by the drawer and the drawee in agreed proportions. They also share the discounting charges of the bill in the same proportion in which they share the cash proceeds of the bill. Before the due date, the drawer sends his proportion to the drawee to enable him to meet the bill by adding his share of money.

Now let’s see one more example where Karan and Wahid had a mutual accommodation.

Example problem:

2. On 1st March, 2018, for the mutual accommodation of Karan and Wahid, Karan draws a bill on Wahid for 6,000, which is accepted by the Wahid and returns it to Karan. Karan discounts the bill with his banker on 3rd march, 2018 at 12% p.a. The proceeds are shared between Karan and Wahid in proportion of 2/3rd and 1/3rd respectively. On the due date of the bill Karan remits his proportion to Wahid who meet the bill. Show the journal entries in the books of Karan and Wahid.

Solution: here’s how the transaction will be recorded.

In the books of Drawer Karan:

1st entry as bill is drawn and duly acceptance received.

2nd entry as bill is discounted with the bank.

3rd entry as remittance of 1/3rd proceeds is send to Wahid and 1/3rd discount charged to him.

4th entry as after the bill is remitted, the balance amount of the bill is sent to Wahid to meet the bill on the due date.

 

In the books of Drawee Wahid:

1st entry as bill is accepted for Karan.

2nd entry as 1/3rd proceeds received from Karan and discount charged.

3rd entry as balance amount is received from Karan.

4th entry as bill met on its due date.

 

3. When two persons draw on each other for equal amounts for their own accommodation

In this case, we can say that both parties are in need of funds, they draw bill on each other for equal amounts and after acceptance both discount the bills with their bankers and bear the discounts charges of their respective bills. Both of them meet their own acceptances on the due date.

Now let’s see one more example where Karan and Wahid both draws bill on each other.

Example problem:

3. On 1st March, 2018, Karan and Wahid, draws a bill on each other for 2 moths for 6,000 each for their mutual accommodation. On 3rd march 2018, they discount each other’s bill @ 12% p.a. and on the maturity date each party honours his own acceptance. Pass journal entries in the books of both parties. 

Solution: here’s how the transaction will be recorded.

In the books of Drawer Karan:

1st entry as bill is drawn and duly acceptance received.

2nd entry as bill is accepted for Wahid.

3rd entry as bill is discounted with banker @ 12 %

4th entry as bill met on its due date.

 

In the books of Drawee Wahid:

1st entry as bill is drawn and duly acceptance received 

2nd entry as bill is accepted for Karan.

3rd entry as bill is discounted with banker @ 12 %

4th entry as bill met on its due date.

 

I hope you have understood this lesson. Now let me give you one (DIY) for your practice let’s see how you will do! Well I have shared my knowledge with you let’s see did you gained that knowledge?

DO IT YOURSELF (DIY):

1. On 1st Jan 2018, Sobiya approaches her friend Sonia for some financial assistance. But Sonia unable to find money, so she accepts a one month bill for the amount of Rs. 2,000. Next day, Sobiya discounted the bill @ 10%. On the due date, Sobiya sends bill amount to enable her to meet the bill. Next, on 1st Feb, Sobiya again draws a bill of Rs 5,000 on Sonia for mutual accommodation for a month. Next day, Sobiya discounted the bill @ 12%. The proceeds are shared between Sobiya and Sonia in proportion of 2:1 ratio. On the due date, Sobiya remits his proportion to Sonia who meets the bill on its due date. Again on 1st March, Sobiya and Sonia draws bill on one another for amount of 3,000 each for 2 months. Next day, they both discount the bill @10% and on the maturity date each party honours his own acceptance. Pass the journal entries in the books of both parties.

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