What is an Accommodation Bill?
An Accommodation Bill is a bill of exchange where one party, known as the accommodation party or guarantor, signs the bill to support another party (the acceptor). The accommodation party is ensuring the payee (the party receiving the money) that the bill will be honored at maturity, even if the acceptor defaults. Essentially, an accommodation party provides financial backing without receiving a compensatory benefit, primarily to help the acceptor obtain cash or goods.
Key Characteristics:
- Non-beneficial Guarantee: The accommodation party doesn’t receive a direct benefit from this agreement.
- Liability: If the primary debtor (acceptor) defaults, the accommodation party is responsible for ensuring the obligation is fulfilled.
- Trust-Based: Generally, this kind of bill arises out of a trust relationship between the entities involved.
Examples:
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Business Scenario:
- Company A needs to borrow money but lacks the creditworthiness. Company B, a financially stable firm, signs an accommodation bill as a guarantor, enabling Company A to secure financing.
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Individual Level:
- John, a small business owner, needs to purchase inventory but his credit is not strong. His friend, Sarah, signs an accommodation bill to guarantee John’s payment, allowing John to receive the goods on credit.
Frequently Asked Questions (FAQs)
What is the difference between an accommodation bill and a regular bill of exchange?
An accommodation bill involves a third party (the accommodation party) who provides a guarantee, whereas a regular bill of exchange involves only the drawer, drawee, and payee without a third-party guarantor.
What risks does the accommodation party undertake?
The accommodation party risks having to pay the bill in full if the acceptor defaults, potentially impacting their own financial stability.
Why would someone agree to be an accommodation party?
Typically, the accommodation party agrees due to a strong trust-based relationship or in the spirit of mutual business support, such as helping a partner or an affiliate company.
Are accommodation bills legally enforceable?
Yes, accommodation bills are legally enforceable financial instruments. The accommodation party is obligated to pay if the acceptor defaults.
Can accommodation bills be traded?
Yes, just like other negotiable instruments, accommodation bills can be endorsed and transferred to other parties.
Related Terms
- Bill of Exchange: A written, transferable document that orders a payment to a specific person or entity.
- Acceptor: The party who accepts the bill, agreeing to pay the amount specified at maturity.
- Guarantor: An individual or entity that promises to pay in case the primary party defaults.
- Kite: An illegitimate financial maneuver where funds are moved between accounts to cover shortfalls, often linked with check kiting.
Online Resources
- Investopedia on Bills of Exchange
- AccountingTools - Definition of Accommodation Bill
- Oxford Reference - Accommodation Bill
Suggested Books for Further Studies
- “Accounting: An Introduction” by Eddie McLaney and Peter Atrill
- “Financial Accounting: Tools for Business Decision Making” by Paul D. Kimmel, Jerry J. Weygandt, and Donald E. Kieso
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
Accounting Basics: “Accommodation Bill” Fundamentals Quiz
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