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An accommodation bill of exchange is a bill of exchange which has been drawn for the mutual financial accommodation of the parties involved. Generally it is drawn not for value received. In order to oblige friends, many times bills are drawn, accepted and endorsed by businessmen without any consideration. By accepting such a bill the acceptor is able to lend his name, and the other party (drawer) taking advantages of the reputation of the acceptor gets it discounted with his bank. After meeting his aim with this temporary finance, he (drawer) sends back money to the acceptor thus making it possible for him to meet the bill on the due date. Since such bills are accepted without consideration, therefore, there is no liability of the acceptor to the drawer but since the third party takes such a bill for value, therefore, the acceptor is liable to the third party.
The bookkeeping entries in connection with accommodation bills are made in the same way as for genuine bills. Generally there are three methods of raising money on accommodation bills. They are as under:
1. When accommodation bill is written for the accommodation of the drawer. 2. When accommodation bill is written for the mutual accommodation of the drawer and the 3.
drawee. When the drawer and the drawee write accommodation bills on each other.
Solution:
500 500
490 10 500
500 500
500 500
500 500
500 500
When a bill is drawn by one party for the mutual accommodation then the drawee after accepting the bill returns to the drawer. The drawer gets the bill discounted with his banker and after retaining the agreed portion of the proceeds of the bill remits rest of the proceeds to the acceptor of the bill. On the date of maturity the drawer of the bill remits rest to the acceptor the amount retained by him earlier to enable the acceptor to honour the bill. The expenses of discount are shared by the parties.
Solution:
1,000 1,000
Jan. 4
985 15 1,000
500 500
1,000 1,000
Jan. 4
500 500
1,000 1,000
Solution:
500 500
500 500
(Acceptance given)
490 10 500
May 4
500 500
500 500
500 500
490 10 500
May 4
500 500