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Home Accounting for Bills of Exchange Accommodation Bill of Exchange
 
 

Accommodation Bill of Exchange:

Definition and Explanation of Retiring a Bill:

Generally a bill of exchange is drawn by a creditor on his debtor to settle a trade debt. A creditor is a person who has sold goods on credit basis and a debtor is a person who has purchased goods on credit basis. Thus, a bill which is drawn by a creditor and accepted by a debtor is known as a trade bill of exchange.

On the other hand, a bill of exchange which is drawn to oblige a friend or to give him a temporary assistance or to provide him a loan or to accommodate one or more parties, is called an "accommodation bill of exchange".

Such a bill is drawn and accepted without any sale and purchase of goods. As the bill is drawn to fulfill the temporary need of money so there is no question of retaining this bill by the drawer until the due date. The bill will be discounted and cash will be received immediately. The drawer before maturity date is required to provide the acceptor with funds so that he may need his acceptance on the due date.

Example:

For example, let us suppose A is in need of money, he approaches his friend B and asks him to give him a loan for $5,000. B also shows his inability but agrees that he will accept a bill of exchange. A draws a bill on B which he accepts at three months. A discounts the bill with his bank and gets the money. After three months but before the due date, A sends $5,000 to B in order to meet his acceptance. B receives amount and pays his acceptance.

Difference Between the Trade and Accommodation Bills.

Following is the difference between the trade and accommodation bills:

1. These bills are drawn by creditors and accepted by debtors. 1. These are not drawn by creditors.
2. These are drawn against proper consideration. 2. These are drawn without any consideration.
3. Trade bill is a proof of debts. 3. An accommodation bill is not a proof of debts.

The accounting treatment of accommodation bills are similar to that of trade bills. An accommodation bill can be drawn in three different ways:

  1. Bill is drawn for the accommodation of drawer only.
  2. It can be drawn for the benefit of both the parties.
  3. Mutual accommodation, when bills are drawn on each other.

Relevant Articles:

Definition and Explanation of Bill of Exchange
Types and Classification of Bill of Exchange
Accounting Treatment of Bill of Exchange
Discounting of a Bill of Exchange
Endorsement of Bill of Exchange
Bill of Exchange Sent to Bank for Collection
Dishonor of Bill of Exchange
Renewal of Bill of Exchange
Insolvency of One Party
Retiring a Bill of Exchange Under Rebate
Accommodation Bills of Exchange
Bills Receivable and Bills Payable Books
Promissory Note

 

 

A D V E R T I S E M E N T

 

Financial Accounting Topics


  Introduction to Accounting
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  Transactions and Accounting Equation
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  Analysis of Business Transactions
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  Journal, Ledger and Trial Balance
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  Accounting for Bills of Exchange
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Final Accounts
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  Work Sheet
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  Capital and Revenue Items
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  Valuation of Inventories
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  Accounts of Non-profit Making Organizations
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  Statement of Cash Flows
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  Accounting Ratios Analysis
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  Depreciation, Provisions and Reserves
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  Accounting Dictionary
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  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
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  Cost Volume Profit Relationship
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  Variable Costing System
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  Materials and Inventory Cost Control
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  Activity Based Costing System
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  Standard Costing and Variance Analysis
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  Balanced Scorecard
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  Capital Investment Analysis/Capital Budgeting
 

 

 

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