Difference Between Accommodation Bill and Trade Bill
An accommodation bill is an important concept in accounting and commerce. It helps students understand how parties use bills of exchange for temporary financial assistance, even when there is no real trade involved. This topic is crucial for school exams, competitive tests, and developing real-world business knowledge.
| Parties Involved | Role in Accommodation Bill |
|---|---|
| Drawer | Draws or creates the bill (often the person seeking funds) |
| Drawee | Accepts the bill (often the party helping for mutual aid) |
| Payee | Receives the payment on maturity (can be drawer, drawee, or another person) |
| Endorser | Transfers rights to another party by endorsement |
| Endorsee | The party to whom the bill is endorsed |
Accommodation Bill Meaning
The accommodation bill is a bill of exchange drawn and accepted without any valuable consideration. Its main purpose is to offer temporary financial help to one or more parties, and not related to any actual sale of goods or services. This concept helps students in exams and real-life financial problem-solving.
Features of Accommodation Bill
- Drawn and accepted without real trade or sale.
- Used for financial accommodation (temporary help).
- Parties may share proceeds and discount charges.
- No valid legal claim if only for accommodation and no consideration exists.
- Commonly used between friends, business associates, or firms for mutual support.
- Different from trade bills which are based on actual sales or purchases.
How Accommodation Bill Works
The process involves two or more parties agreeing to draw and accept a bill, allowing one or both to obtain funds by discounting the bill with a bank. Later, the beneficiary refunds the amount to the accommodating party before the bill’s maturity. The drawee finally pays the bill at maturity.
Stepwise Process of an Accommodation Bill
- One party (needing funds) draws a bill on another (accommodating party).
- The drawee accepts it without any trade involved.
- The bill is discounted with a bank, and money is obtained.
- The proceeds are used as agreed (by one or both parties).
- Before maturity, the beneficiary sends the required amount to the drawee.
- The drawee pays the bill at maturity.
Accommodation Bill Example
Suppose A needs money. He draws a bill for ₹10,000 on B. B accepts the bill to help A, without any sale happening. A gets it discounted from a bank at 12% for three months and receives ₹9,700. Before the due date, A sends ₹10,000 to B, and B pays the bill at maturity. This supports A financially without real trade.
Accounting Treatment and Journal Entries for Accommodation Bill
Proper accounting for accommodation bills is important for exams. Both drawer and drawee record these entries to reflect the financial arrangement correctly.
| Transaction | Journal Entry in Drawer’s Books (A) | Journal Entry in Drawee’s Books (B) |
|---|---|---|
| On discounting the bill | Bank A/c Dr. Discount A/c Dr. To Bills Receivable A/c |
No entry |
| On sending proceeds to B | B’s A/c Dr. To Bank A/c |
Bank A/c Dr. To A’s A/c |
| On payment of bill at maturity | No entry | Bills Payable A/c Dr. To Bank A/c |
Difference Between Accommodation Bill and Trade Bill
| Basis | Accommodation Bill | Trade Bill |
|---|---|---|
| Purpose | Financial help without actual trade | Arises from real sale/purchase of goods |
| Consideration | No consideration involved | There is consideration (goods/services exchanged) |
| Legal Enforceability | Not legally enforceable (in strict sense) | Legally enforceable |
| Use | Temporary cash support | Settlement of trade dues |
| Discounting | Proceeds can be shared by parties | Proceeds go to seller/creditor |
Legality and Practical Implications of Accommodation Bills
Accommodation bills are not strictly enforceable in court if there is no consideration. However, these are widely used for short-term funding among trusted parties. At Vedantu, we recommend learning about their risks and ethical use for exams and business understanding. Always handle such bills with care in practice.
Summary
An accommodation bill is a special type of bill of exchange that provides temporary financial support between parties without actual sales. Understanding this helps students excel in school exams and builds practical business knowledge. Remember its features, accounting entries, differences from trade bills, and practical implications for well-rounded learning. For more resources, explore Bills of Exchange and Journal Entries for Bills of Exchange at Vedantu.
FAQs on Accommodation Bill: Meaning, Features & Examples
1. What is meant by an accommodation bill?
An accommodation bill is a type of bill of exchange drawn and accepted without any valuable consideration. It's essentially a short-term loan used to provide temporary financial assistance.
2. Is an accommodation bill legal or illegal in India?
While accommodation bills are not illegal in India, they are not legally enforceable if there's no consideration. The legal status hinges on whether the parties involved intended genuine transactions. This lack of consideration makes them risky.
3. What are the differences between a trade bill and an accommodation bill?
A key difference is that trade bills arise from genuine business transactions (sale of goods), whereas accommodation bills are created solely for financial assistance, lacking underlying consideration. Trade bills are legally enforceable, unlike accommodation bills which aren't unless consideration exists.
4. Can you give an example of an accommodation bill of exchange?
Imagine X needs funds. Y agrees to accept a bill drawn by X. Z (a third party) accepts the bill. Z pays Y, and X reimburses Z. This lacks a genuine sale; it is purely financial assistance, making it an accommodation bill example. Note that this is a mutual accommodation bill example.
5. Who are the parties involved in an accommodation bill?
The parties in an accommodation bill are: the drawer (the one needing funds), the drawee (the one accepting the bill), and the payee (the one receiving the funds). Often, the payee and the drawer are the same, and the drawee is a third party who helps the drawer to obtain financing. The accommodation bill usually involves three parties, and the endorser and endorsee might also be involved during the negotiation of the bill.
6. What is the difference between accommodation bill and trade bill?
The main difference lies in the consideration. A trade bill represents a genuine business transaction (sale of goods) and is legally enforceable. An accommodation bill is created without underlying consideration solely to provide temporary financial assistance, making it less legally secure.
7. Is an accommodation bill a negotiable instrument?
Yes, an accommodation bill is generally considered a negotiable instrument as it can be transferred to another party through endorsement and delivery. However, its enforceability can be compromised by the lack of consideration.
8. What is the legal status of accommodation bill?
The legal status of an accommodation bill depends on the specific circumstances and whether consideration exists. The lack of consideration may affect the enforceability of the bill. While not strictly illegal, it carries risks and the acceptor might be held liable for the full amount.
9. How does an accommodation bill work?
An accommodation bill facilitates a short-term loan. The drawer (borrower) gets the funds from the payee. Then the drawee (a third party) accepts the bill. When the bill matures, the drawer repays the drawee.
10. What is an accommodation bill of exchange?
An accommodation bill of exchange is a bill of exchange created without any underlying commercial transaction. It is essentially a form of short-term credit arranged between parties to provide financial assistance.
