Here are some notes about accommodation bills in detail:
- Definition: An accommodation bill is a bill of exchange that is drawn without any consideration. In other words, there is no underlying trade transaction that gives rise to the bill. The bill is simply drawn to help one party raise funds or to provide financial assistance to another party.
- Legal status: Accommodation bills are not enforceable by law. This is because they lack consideration, which is one of the essential elements of a valid contract. However, accommodation bills can still be useful financial instruments, as long as all parties involved are aware of the risks involved.
- Parties involved: There are three parties involved in an accommodation bill: the drawer, the drawee, and the accommodation party. The drawer is the person who draws the bill and is ultimately responsible for its payment. The drawee is the person who is named on the bill and who is obligated to pay it on maturity. The accommodation party is the person who agrees to guarantee the payment of the bill.
- Accounting treatment: Accommodation bills are treated as a liability by the drawer and as an asset by the drawee. The accommodation party is not treated as a party to the bill for accounting purposes.
- Importance: Accommodation bills can be used for a variety of purposes, such as:
- Raising funds for a short-term need
- Providing financial assistance to a friend or family member
- Securing a loan from a bank
- Risks: There are a number of risks associated with accommodation bills, including:
- The possibility that the drawee will not pay the bill on maturity
- The possibility that the accommodation party will not be able to honor their guarantee
- The possibility that the bill will be dishonoured, which could damage the credit rating of the drawer
Overall, accommodation bills can be a useful financial instrument, but it is important to be aware of the risks involved before using them.