BILLS OF EXCHANGE
AND
ACCOMMODATION BILL
Bill of Exchange:
ü Meaning: A Bill of Exchange means " An instrument in writing containing an
unconditional order, signed by the Drawer(maker), directing a certain person
(Drawee) to pay a certain sum of only to
or to order of, a certain person or to the bearer of the Instrument."
ü Usually, bills of exchange are intended to finance
only actual transaction in goods. Example: Shankar purchases goods for an
amount of Rs.1000 from Ramesh on credit basis. So Ramesh (maker) makes a Bill
for an amount of Rs.1000 and sent to Shankar for acceptance. On the due date,
Shankar pays 1000 to Ramesh duly honouring the bill on presentation by Ramesh.
Accommodation Bill:
ü Meaning: A Bill made, drawn,
accepted, or endorsed by one person for another without consideration, to enable the second
person to obtain credit or raise money is called ACCOMMODATION B ILL.
ü Example: In Accommodation Bills, though transaction of
selling/buying good not takes place between Shankar and Ramesh, Ramesh (Drawer
or Maker) makes/drafts a bill for an amount of Rs. 1000 and sent to Shankar(Drawee)
for acceptance for the sole purpose of raising funds
temporarily.(by Shankar).
ü Then Shankar discounting the Bill with the Banker for
Rs. 975. On the date of maturity, Shankar has to pay Rs.1000 to the Ramesh, who
is in order to honor the bill presented by the Banker (Payee).
ü Thus Shankar raises funds to meet his finance
requirements temporarily with the help of Ramesh.
ü Some times Shankar and Ramesh (both parties) can raise
funds by drawing the bills on others and get them acceptance. Later both can
discount their bills at Bankers and get the requisite funds. Like in the above example, both will be
honouring the Bills on maturity date.
ü Record of journal entries regards accommodation bills
as usual in other Bills of Exchange only.
There is no special treatment as far as Accommodation Bills concerned.
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