ACCOMMODATION BILLS

 5.6 ACCOMMODATION BILLS

Nornally a bill is drawn by tile seller on the buyer or by the lender on the borrower. In other words, a bill is drawn for sornc debt. Sometimes, a bill is drawn even when no debt is involved. This is done primarily to help or acconlmodate a fellow businessman and is called 'an 'accommodation bill'. When such a billis drawn and accepted, the drawer discounts it with the bank and the money so raised is either fully utilised by him or shared with the drawee. Before or on the due date, the drawer remits the ainount utilised by him to the drawee and the drawee then meets the acceptance on the due date by making payment to the bank with which the bill had been discouilted. The parties car] also draw separate bills on each other. In sucb a situation, each party discouilts his own bill with the bank and utilises the amount. When the bills become due for payment they meet their acceptances and settle their accounts. Fronl the above discussion it is clear that there can be three types of arrangements in case of accommodation bill. They are as follows:

i) A bill is drawn for accominodation of the drayer only. 

ii) A bill is drawn and the proceeds are'shared by drawer and drawee. 

iii) Qne bill each is drawn by both the parties on each other i.e. two bills are drawn. 

The accounting treatment of acco~nmodation bill is similar to the treatment of normal biils. However, in case of accommodation bills you should remember that if the amount of the bills is shared by both the parties, the amount of discount charged by the bank is to be borne by both the parties. It is shared in the same proportion as the amount utilised by each party. A suitable entry for proportionate amount of discouilt shall also be pssed in the journals of both the parties. Look at Illustrations 7 and 8 hnd see how entries are passed when the bill is ' drawn and accepted for mutual accommodation. 

Illustration 7 

Illustration 7 Ori January 1,3 988 Woolmer draws a bill on Steele for Rs. 600 for three months. Steele accepts the bill and returns it to Woolmer who discounts it for Rs. 585 and remits one third of the proceeds to Steele. On March 30 Woolmer sends the requisite amount to Steele who meets the bill, on the due date. Pass the necessary journal entries in the books of Woolmer and Steele.

  

5.4 BILLS SENT FOR COLLECTION

When bill becomes due for payment, the holder of the bill usually presents it to the drawee through the bank. In other words the bills ate sent for collection to the bank as and wheh they fall due. The bank will credit the account of the drawer when it receives the payment of the bill. Generally, no entries are passed when bills are sent for collection. An entry 1s made id the Cash Book when an intimation about the payment is received from the bmk.'But, some accounttants prefer to record the entries even when the bills are sent for collection, In that case the following entry will have to be made in the journal of the holder for the bill sent for collection.