Accommodation Bill of Exchange:
Definition and Explanation of
Retiring a Bill:
Generally a bill of exchange is drawn by a creditor
on his debtor to settle a trade debt. A creditor is
a person who has sold goods on credit basis and a
debtor is a person who has purchased goods on credit
basis. Thus, a bill which is drawn by a creditor and
accepted by a debtor is known as a trade bill of
exchange.
On the other hand, a bill of exchange which is drawn
to oblige a friend or to give him a temporary
assistance or to provide him a loan or to
accommodate one or more parties, is called an
"accommodation bill of exchange".
Such a
bill is drawn and accepted without any sale and
purchase of goods. As the bill is drawn to fulfill
the temporary need of money so there is no question
of retaining this bill by the drawer until the due
date. The bill will be discounted and cash will be
received immediately. The drawer before maturity
date is required to provide the acceptor with funds
so that he may need his acceptance on the due date.
Example:
For
example, let us suppose A is in need of money, he
approaches his friend B and asks him to give him a
loan for $5,000. B also shows his inability but
agrees that he will accept a bill of exchange. A
draws a bill on B which he accepts at three months.
A discounts the bill with his bank and gets the
money. After three months but before the due date, A
sends $5,000 to B in order to meet his acceptance. B
receives amount and pays his acceptance.
Difference Between the Trade and Accommodation
Bills.
Following is the
difference between the trade and accommodation
bills:
|
1. |
These bills
are drawn by creditors and accepted by
debtors. |
1. |
These are not
drawn by creditors. |
|
2. |
These are
drawn against proper consideration. |
2. |
These are
drawn without any consideration. |
|
3. |
Trade bill is
a proof of debts. |
3. |
An
accommodation bill is not a proof of debts. |
The accounting
treatment of accommodation bills are similar to that
of trade bills. An accommodation bill can be drawn
in three different ways:
- Bill is drawn
for the accommodation of drawer only.
- It can be
drawn for the benefit of both the parties.
- Mutual
accommodation, when bills are drawn on each
other.
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