Q. What are accommodation bills? Ans.

An accommodation bill is abill of exchange signed by a party as a drawer, drawee, and endorser to accommodate another party whose credit is not strong enough to enable him to borrow on his single name. It is drawn for the purpose of getting temporary finance. Therefore an accommodation bill is a bill of exchange which has been drawn on and accepted by reputable party for the purpose of giving value to the bill so that it can be discounted. Ordinary bills are drawn for so purposes are known as Trade Bills. But accommodation bills are those bills which are drawn and accepted without any consideration. Here the idea is to assist both the parties financially. Accommodation bills are also known as kite bills. Kiting is the discounting of an accommodation bill at a bank, knowing that the person on whom it is drawn will dishonor it, if the required amount is not remitted to him. As no consideration is involved, accommodations are not legally enforceable. Though accommodation are not bills from a legal point of view, yet they are in practice no way different from an ordinary bill. What actually happens in an accommodation bill is that one party draws bill and the other party accepts it. Then, the drawing party gets it discounted from the bank and receives ready cash of which he is in need. The money received is either wholly utilized by the drawer or both. Before the due date approaches the required sum is sent to the acceptor to make him able to honor the bill and the bill is honoured by the acceptor on the due date. Thus although there is no legal liability there exists a strong moral understanding between the parties concerned. Q. What is meant by retirement of a bill? Ans. Retiring a bill is the act of withdrawing a bill of exchange from circulation when it has been paid before the due date. When the drawee of a bill desires to make payment before the due date, of the bill the drawer and the drawee welcomes it, it is called

retirement of a bill. In such acase the drawer is to allow a discount because what he was to receive at some tie in the future he receives it immediately. The discount is an expese for the drawer and a gain for the drawee. Drawers Book Bank A/C DR Discount Allowed A/C DR To Bills Receivable A/C (Being the bill retired before the Due date) Drawees books Bills Payable A/C DR To Bank A/C To Discount Received A/C (Being the bill retired by us before maturity) EFFECTS OF RETIRING A BILL 1 Upon retirement the drawer of the bill gets an early payment. 2 The rebate on a bill retired is an expense for the drawer and an income for the drawee. 3 The rebate is actually calculated on a fixed percentage per annum on the unexpired period of the bill. Problem no.7 page 3.30 SHULA & GREWAL Ray for mutual accommodation himself and Sarkar draws upon the latter a bill of exchange at 3 months date for Rs. 8000 dated 1 st April 2000. The bill is discounted by Ray @ 15% and half the proceeds are remitted to Sarkar. Sarkar at the same time draws a bill of exchange at 3 months of Ray for Rs. 4000. After securing Rays acceptance the bill is discounted at 18% by Sarkar who remits half the proceeds to Ray. Sarkar becomes bankrupt on 1 st July 2000. and the first and the final dividend of 25% was received from his estate on 15 th September, 2000.

IN THE BOOKS OF RAY

DATE 1.4.2000 PARTICULARS Bills Reeivable a/c DR To Sarkar a/c being-a 3 months bill drawn on Sarkar for mutual accomodation Bank a/c DR Discount on bills a/c DR To Bills Receivable a/c being- the bill discounted with the bank Sarkar a/c DR To Bank a/c To Discount on Bills a/c being-half the amount of bills remitted to Sarkar Sarkar a/c DR To bills Payable a/c being- a bill accepted from Sarkar Bank a/c DR Discount on Bills a/c DR To Sarkar a/c being- half the amount of the bill received Bills Payable a/c DR To Bank a/c being-the bill met by Ray Sarkar a/c DR To Bank a/c being-the amont of the dishonoured bill paid by Ray L/F AMT(Rs) AMT(Rs) 8000 8000

1.4.2000

7700 300 8000

1.4.2000

4000 3850 150

1.4.2000

4000 4000

1.4.2000

1910 90 2000

3.7.2000

4000 4000

3.7.2000

8000 8000

15.9.2000 Bank a/c DR Bad Debts a/c DR To Sarkar a/c being- 25% of the total debt realized

1500 4500 6000

IN THE BOOKS OF SARKAR

DATE PARTIULARS L/F AMT(RS) AMT(RS) 1.4.2000 Ray a/c DR 8000 To BillsPayable a/c 8000 being-bill of exchange received from Mr. Ray for mutual accomodation 1.4.2000 Bank a/c DR Discount on Bills a/c DR To Ray a/c being-cash received from Ray 1.4.2000 Bills Receivable a/c Dr To Ray a/c being-a bill drawn on RAY for mutual accomodation 1.4.2000 Bank a/c DR Discount on Bills a/c DR To Bills Receivable a/c being-the bill of exchange discounted at bank 1.4.2000 Ray a/c DR TO B ank a/c To Discount on Bills a/c being-half the amount remitted to Ray 3.7.2000 Bills Payable a/c DR TO Ray a/c being-the bill dishonoured by Sarkar 15.9.2000 Ray a/c DR To Bank a/c To Deficiency a/c being-25% of the amount due to Ray paid in full settlment 3850 150 4000

4000 4000

3820 180 4000

2000 1910 90

8000 8000

6000 1500 4500

BIBLIOGRAPHY

1 Advanced Accounts, M.S.SHUKLA, T.S.GREWAL, S.C.GUPTA Edition-2006 S.C.CHAND PUBLISHER

2 FINANCIAL ACCOUNTING, A. MUKHERJEE & H.HANIF , EDITION-2008 PAGES 11.29 and 11.37 , TATA MCGRAW HILL PUBLISHERS