ACCOMMODATION BILL

Definition:

An accommodation bill, a note, or a draft is drawn and acknowledged by the drawer and the drawee without having any consideration in it. These drafts, notes, or bills are attracted to help either one party or all parties for their monetary aid in a bill of exchange.

Meaning:

Bills of exchange appear due to similar trading activities. A bill is drawn on the debitor for the consideration of goods sold by the creditor. This bill is known by many names, such as a trade bill, bills of exchange, windmills, wind bills, and kite bills. Accommodation bills are not enforceable by law since they lack consideration, and they run on the moral understanding of the parties that draw the bill.

Parties in a formation of a bill:

An accommodation bill hosts the accompanying parties in particular.

Drawer: A drawer is an individual who makes the bill or issues the bill or composes the bills of exchange. This individual is usually the creditor or the seller.

Drawee: The drawee is the individual on whom the bill of trade is drawn for his acknowledgement. Typically, he is the purchaser, and he needs to pay the measure of the bill of trade to the cabinet on the due date.

Payee: The payee is the individual to whom the amount of a bill of trade is to be paid. The payee can simply be the drawer or the drawer’s creditor.

Endorser: The endorser is the individual who moves privileges of payment.

Endorsee: The endorsee is the individual in whose favour of the bill of exchange is supported by the drawer.

Bearer: A bearer is the individual possessing the title bearer in the bill of trade.

How does an accommodation bill work?

Accommodation bills are composed to offer monetary help to either one party or all parties, and a significant inquiry is how to accomplish their work.

As far as how an accommodation bill works, the drawer makes the bill and the drawee acknowledges it. Then, at that point, the bill can be discounted by the maker’s bank of the bill and has received the money. The discounted sum is utilised by the drawer or both the drawee and the drawer.

Prior to the due date, the maker or the drawer of the bill sends the sum they used to the drawee to empower the drawee to pay the bill. On the due date, the receiver or the drawee honours the bill.

Accounting Treatment: Journal Entries for an Accommodation Bill

I) For the Accommodation of the Drawer Only

If an individual needs cash, they make or draw a bill of exchange or trade bill on their companion and get the bill discounted from the bank. The bill proceeds are utilised exclusively by the maker or drawer of the bill. Prior to the due date of the bill, the maker or the drawer of the bill directs the due amount of the bill to the drawee, who respects and honours the bill.

For example:

For his own convenience B drew on C a bill for rupees 10,000 for three months. B had the bill discounted on a similar date at 12% p.a. Prior to the due date, B sent the sum to C, who honoured the bill on the due date.

Working note:

Amount of discount = Rupees 10,000 X 12/100 X 3/12 = Rupees 300

ii) For the Mutual Accommodation of the Drawer and Drawee, Bill Drawn by One Party

Now and again, two parties require reserves when the parties are not in a situation to get cash from some outside source. To settle the circumstance, either of the parties makes or draws a bill on the other. Ultimately, the bill proceeds are shared and also discounted have partaken to a concurred extent.

The sum of rebate additionally partakes to a similar extent. On the due date, the maker or drawer of the bill dispatches their portion of the proceeds, which is received by the drawee. Thus, the drawee organises their portion of the trade bills and honours the bills.

For example

For the shared convenience of A and B, A drew a three-month bill on B on 1st March 2018 for the measure of Rupees 3,000.

A had the bill limited for Rupees 2,700 and dispatched 1/3 of the returns to B. On the due date, A transmitted the sum because of B to empower him to meet the bill. Additionally, on the due date, the bill was properly met by B.

Working note 1:

Amount of proceeds sent to B = Rupees 2,700 X 1/3 = Rupees 900

Working note 2:

Amount of proceeds shared by B = Rupees 300 X 1/3 = Rupees 100

iii) For the Mutual Accommodation of the Drawer and Drawee, Bill Drawn by Both Parties on Each Other

This is one more method of utilising bills by making or drawing bills on one another and getting the bills discounted from their individual bankers/investors. The discounting charges and the bills’ proceeds have partaken to a concurred extent.

On the due date, the individual party transmits the necessary amount to the next party, empowering both to meet their bills.

Accounting treatment for accommodation bills with the same amount and time duration.

Accommodation bills might have a similar sum and term when made or drawn and acknowledged by all the parties. This is made so that there would be no compelling reason to share remit balances and share proceeds. The individual party gets their bills discounted by their respective banks and pays their dues on the bills.

For example,

B, for shared convenience of himself and of C, draws a bill for Rupees 15,000 on B on 16 January 2018 for a very long time.

C, on a similar date and for a similar reason, draws a three-month bill on B for a comparable sum. Both the bills are discounted at 12% p.a. on a similar date. On the due date, the two players honour the bills.

Working note:

Amount of discount = Rupees 15,000 X 12/100 X 3/12 = Rupees 450

Conclusion:

Accommodation bills is a bill, draft, or note made, drawn, acknowledged, or endorsed by one individual for one more without consideration to empower that other to fund-raise or get credit subsequently.