Accommodation of Bills
Accommodation of Bills
Bills of exchange are usually drawn to facilitate
trade transaction, finance actual purchase and sale of goods. But apart from,
financing transaction in goods, bills may also be used for raising fund
temporarily.
Suppose, A needs finance to the extent of Rs. 10000/- for 3 months. In this
case he may induce his friend B to accept a Bill of Exchange drawn on him for
Rs. 10000/- for 3 months. A can then get the bill discounted with his bank
paying a small sum of discount. Thus he can use the funds for 3 months and just
before maturity, he will remit the amount to B to whom the bill will be
presented by the bank for payment.
If both A and B need money, the same device
can be used. Either A accepts a bill of exchange or B does. In either case the
bill will be discounted with the bank and proceeds divided between the two
parties according to mutual agreement. The discounting charges must also be
borne by two parties in the same ratio in which the proceeds are divided on the
due date the acceptor will receive from the other party his share. The bill
will then be met. When bills are used for such purpose, they are known as
accommodation bills.
ð In case of accommodation of bills, all the journal entries are
passed in the books of two parties as same in the ordinary bills.
ð The only additional entries to be passed are for sending the
remittance to the other parties and also debiting the other parties with the
requisite amount of discount.
Bankruptcy: Bankruptcy/Insolvency of
a person means person who has accepted the bill is unable to pay his
liabilities and
v When it is known, the acceptor of the bill has become insolvent;
entry for dishonour of his acceptance
must be passed.
v When and if an amount is
received, cash account will be debited and personal account of debtor will be
credited.
v The remaining amount will be
irrecoverable and should be written off as bad debt.
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