Difference Between Trade Bill and Accommodation Bill:: Accommodation Bills of Exchange

Accommodation Bills of Exchange:

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.

Difference Between Trade Bill and Accommodation Bill:

Following is the distinction between a trade bill of exchange and an accommodation bill of exchange.
Trade Bill Accommodation Bill
1 Trade bills are drawn for trade purposes. 1 Accommodation bills are drawn and accepted
for financial assistance
2 These are drawn against proper 2 These are drawn in absence of any
consideration. consideration
3 These bills are proof of debt 3 These are not a proof of debt
4 If discounted full sum retains with holder of 4 If discounted the amount may be divided
the bill between drawer and acceptor in pre-
determined ratio.
5 For obtaining the debt from drawee, drawer 5 Legal action cannot be resorted for recovery
can resort to legal action. of amount against these bills by the
immediate parties.
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
drawee.
3. When the drawer and the drawee write accommodation bills on each other.
All these bills have been discussed below:
Accommodation of the drawer:

When a bill is written for the accommodation of the drawer then the drawee of the bill accepts the bill
without any consideration and returns the bill to the drawer. The drawer gets the bill discounted with
his bank and uses the amount in his business. On the due date he remits the amount to the acceptor
or the bill to enable him to honour the bill on the due date.
Example (Accommodation of the Drawer):
A accepts a bill drawn by B for his accommodation on 1st January, 1991 for $500 at 3 months. The bill
is discounted $ 490 on 4th January. On due date B sends a cheque to A to meet the bill. A duly
honours his acceptance.
Pass journal entries in the books of both the parties.

Solution:
Journal Entries in the books of B
1991 500
Jan. 1 Bills receivable account 500
To A
(Bills drawn on A)
Jan. 4 Bank account 490
Discount account 10
To Bill receivable account 500
(Bill discounted)
April 4 A 500
To Bank account 500
(Cheque sent to A)
Journal Entries in the books of A

1991
Jan. 1 B 500
To Bill payable account 500
(Acceptance given)
April 4 Cash account 500
To B 500
(Cheque received)
April 4 Bills payable account 500
To Cash account 500

(Acceptance met)
Accommodation of the Drawer and the Drawee:

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.
Example (Accommodation of the Drawer and the Drawee):
For mutual convenience of X and Y, X draws a bill for $1,000 on Y at three months on 1at January,
1991. The bill is discounted on 4th January by X at 6 per cent per annum with his bank: half the
proceeds being handed over to Y. On the bill falling due date, X remits $500 by cheque to Y who then
pays the bill.
Pass journal entries in the books of X and Y.
Solution:
Journal Entries in the Books of X
1991
Jan. 1 Bills receivable account 1,000
To Y 1,000
(Bill drawn on Y)
Jan. 4 Bank account 985
Discount account 15
To Bills receivable account 1,000
(Bill discounted)
April 4 Y 500
To Cash account 492.5
To Discount account 7.5
(Half the proceeds remitted)
April 4 Y 500
To Cash account 500
(Cheque sent to him)
Journal Entries in the Books of X

1991
Jan. 1 X 1,000
To Bills payable account 1,000

(Acceptance given)
Jan. 4 Cash account 492.5
Discount account 7.5
To X 500
(Half the proceeds received)
April 4 Cash account 500
To X 500
(Cheque received from him)
April 4 Bills payable account 1,000
To Cash account 1,000

(Acceptance given)
Accommodation Bills Written on Each Other:

In this case both the parties draw bills on each other and get them discounted from their bankers. On
the due date each meets his own bill. The expenses of discount is to be paid by each on other's bill.
Example (Accommodation bills written on Each Other):
On 1st January 1991 P draws a bill on Q at four months for $500 and Q draws on P for similar amount
and term. Both the bills are accepted and discounted respectively at 6 per cent. At maturity both the
parties meet their respectively acceptances. Show the journal entries in the books of both the parties.
Solution:
Journal Entries in the Books of P
Jan. 1 Bills receivable account 500
To Q 500
(Bill drawn on Q)
Q 500

(Acceptance given)
Bank account 490
Discount account 10
To Bill receivable account 500
(Bill discounted)
May 4 Bill payable account 500
To Cash account 500
(Acceptance met)
Journal Entries in the Books of Q

Jan 1 P 500

(Acceptance given)
Bill receivable account 500
To P 500
(Acceptance received)
Bank account 490
Discount account 10
To bill receivable account 500

(Bill discounted)
May 4 Bill payable account 500
To Cash account 500
(Acceptance met)

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Accommodation Bills of Exchange:

Difference Between Trade Bill and Accommodation Bill:

Trade Bill Accommodation Bill

1. When accommodation bill is written for the accommodation of the drawer.

All these bills have been discussed below:

Accommodation of the drawer:

Example (Accommodation of the Drawer):

Pass journal entries in the books of both the parties.

Jan. 1 Bills receivable account 500

Jan. 4 Bank account 490

To Bill receivable account 500

To Bank account 500

Journal Entries in the books of A

To Bill payable account 500

April 4 Cash account 500

April 4 Bills payable account 500

To Cash account 500

Accommodation of the Drawer and the Drawee:

Example (Accommodation of the Drawer and the Drawee):

Pass journal entries in the books of X and Y.

Jan. 1 Bills receivable account 1,000

Jan. 4 Bank account 985

To Bills receivable account 1,000

To Cash account 492.5

To Discount account 7.5

(Half the proceeds remitted)

To Cash account 500

(Cheque sent to him)

Journal Entries in the Books of X

To Bills payable account 1,000

Jan. 4 Cash account 492.5

Discount account 7.5

April 4 Cash account 500

April 4 Bills payable account 1,000

To Cash account 1,000

Accommodation Bills Written on Each Other:

Example (Accommodation bills written on Each Other):

To Bill payable account 500

Bank account 490

To Bill receivable account 500

May 4 Bill payable account 500

To Cash account 500

Journal Entries in the Books of Q

To Bill payable account 500

Bill receivable account 500

Bank account 490

To bill receivable account 500

May 4 Bill payable account 500

To Cash account 500

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