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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