BILLS OF EXCHANGE
Bill of Exchange:
ü Meaning: A Bill of Exchange means " An instrument in writing containing an unconditional order, signed by the Drawer(maker), directing a certain person (Drawee) to pay a certain sum of only to or to order of, a certain person or to the bearer of the Instrument."
ü Usually, bills of exchange are intended to finance only actual transaction in goods. Example: Shankar purchases goods for an amount of Rs.1000 from Ramesh on credit basis. So Ramesh (maker) makes a Bill for an amount of Rs.1000 and sent to Shankar for acceptance. On the due date, Shankar pays 1000 to Ramesh duly honouring the bill on presentation by Ramesh.
ü Meaning: A Bill made, drawn, accepted, or endorsed by one person for another without consideration, to enable the second person to obtain credit or raise money is called ACCOMMODATION B ILL.
ü Example: In Accommodation Bills, though transaction of selling/buying good not takes place between Shankar and Ramesh, Ramesh (Drawer or Maker) makes/drafts a bill for an amount of Rs. 1000 and sent to Shankar(Drawee) for acceptance for the sole purpose of raising funds temporarily.(by Shankar).
ü Then Shankar discounting the Bill with the Banker for Rs. 975. On the date of maturity, Shankar has to pay Rs.1000 to the Ramesh, who is in order to honor the bill presented by the Banker (Payee).
ü Thus Shankar raises funds to meet his finance requirements temporarily with the help of Ramesh.
ü Some times Shankar and Ramesh (both parties) can raise funds by drawing the bills on others and get them acceptance. Later both can discount their bills at Bankers and get the requisite funds. Like in the above example, both will be honouring the Bills on maturity date.
ü Record of journal entries regards accommodation bills as usual in other Bills of Exchange only. There is no special treatment as far as Accommodation Bills concerned.