Fundamentals of Financial and Cost Accounting · Bills of Exchange

Insolvency of Acceptor and Accommodation Bills Explained

Updated 10 October 2026

When an acceptor becomes insolvent, the drawer or holder receives only a part of the bill amount as dividend and writes off the unpaid balance as bad debt or loss. An accommodation bill is drawn to help a party raise funds, not for goods. Proceeds are shared and each party records its own share.

Understand Insolvency of Acceptor and Accommodation Bills

A bill of exchange is a promise to pay on a due date. Sometimes the acceptor cannot pay because he is insolvent. The court declares that he can pay only part of what he owes. The holder of the bill is an unsecured creditor and receives a dividend, for example 60 paise in the rupee.

The accounting is simple. The bill was recorded as an asset (Bills Receivable) in the holder's books. When it is dishonoured, you move the amount back to the acceptor's personal account. Then you record the cash actually received, and write off the unpaid part as bad debt. Only the loss is an expense. The money received is not.

An accommodation bill is different. It is drawn without any sale or purchase of goods. Two parties, say A and B, help each other with credit. One draws and the other accepts, so the drawer can discount the bill with a bank and get cash. The purpose is to raise short-term finance.

The proceeds are usually shared between the parties. The party who accepts the bill must pay it on the due date, so he receives his share of the proceeds from the drawer. In the books you record no sales or purchases. You use cash, bank, discount and the personal account of the other party.

A trade bill arises from a real sale of goods. An accommodation bill arises only from a mutual favour. This is the key difference to remember for MCQs.

Key formulas to remember

Amount received on insolvency: Dividend received = Bill amount × Rate of dividend (paise per rupee ÷ 100); Example: ₹10,000 at 75 paise in the rupee = ₹7,500.
Loss on insolvency: Bad debt = Bill amount − Dividend received; Debit Bad Debts Account. If a provision for bad debts exists, you may charge the loss to it.
Entry on dishonour due to insolvency (holder): Acceptor's A/c Dr; To Bills Receivable A/c; Then: Bank A/c Dr and Bad Debts A/c Dr; To Acceptor's A/c.
Entry in acceptor's books on his insolvency: Bills Payable A/c Dr (full amount); To Drawer's A/c (full amount). Then: Drawer's A/c Dr (full amount); To Bank A/c (dividend paid); To Profit/Gain on Insolvency A/c (balance).; The unpaid part is a gain to the insolvent acceptor, so the drawer's books show a loss while the acceptor's books show a gain.
Accommodation bill: drawer's entries: Bills Receivable A/c Dr (face value); To Acceptor's A/c. On discounting: Bank A/c Dr; Discount A/c Dr (full discount); To Bills Receivable A/c. Send acceptor his share of net proceeds: Acceptor's A/c Dr; To Bank A/c. Charge his share of discount once: Acceptor's A/c Dr; To Discount A/c. Before maturity remit the balance: Acceptor's A/c Dr; To Bank A/c.; Use one method only. The share sent is a cash split of the net proceeds. His share of the discount is charged to his account once, through the Discount A/c entry. Remittance before maturity = Face value − Share of net proceeds sent − Acceptor's share of discount. The acceptor pays the full face value at maturity.
Accommodation bill: acceptor's entries: Drawer's A/c Dr; To Bills Payable A/c (on acceptance). Bank A/c Dr; To Drawer's A/c (share received and later remittance).; At maturity: Bills Payable A/c Dr; To Bank A/c (full face value).

How to solve Insolvency of Acceptor and Accommodation Bills questions

Use this order for any question on acceptor insolvency or accommodation bills. Decide first whose books you must write.

1Read the question and note whose books are asked: drawer, holder, acceptor or both parties.
2Find the type of bill: trade bill, or accommodation bill with no goods involved.
3For insolvency, reverse the bill: debit the acceptor's personal account and credit Bills Receivable (or the endorsee's/bank's account if the bill was discounted or endorsed).
4Compute dividend: bill amount × rate. Compute loss: bill amount − dividend. If the question says noting charges are debited to the acceptor's account and the dividend is paid on the total amount due, use bill amount + noting charges as the base. Otherwise use the bill amount as given.
5Record the cash received in dividend and the loss as bad debt (or against provision, if the question says so).
6For accommodation bills, find the net proceeds after discount, then split them as the question states and record the transfer of the other party's share.
7At maturity, record payment by the acceptor, and any further dishonour or insolvency if asked.
8Check that each journal entry balances and that no sales or purchases appear in accommodation entries.

Quickest way: Three-line shortcut for insolvency and accommodation

When to use it: Use it for MCQs that ask for loss, dividend, or the amount a party pays or receives.

For insolvency, compute loss = bill amount × (1 − rate). Write it down first. It answers most MCQs.
For accommodation bills, compute net proceeds = face value − discount. Then compute each party's share from the given ratio or amount.
Remember the rule that the party who needs money draws and the party who accepts pays the full face value at maturity. The drawer funds the acceptor with his share of net proceeds, plus a remittance of face value − share sent − acceptor's share of discount, so the acceptor's net cost equals his agreed share of the discount.
Eliminate any option that shows sales, purchases or profit on an accommodation transaction.

Common mistakes in Insolvency of Acceptor and Accommodation Bills

Treating the whole bill amount as bad debt even though a dividend is received.
Students think insolvency means total loss.
Fix: Debit Bank for the dividend and Bad Debts only for the unpaid balance.
Debiting Bills Receivable instead of crediting it on dishonour.
Students confuse the dishonour entry with the receipt entry.
Fix: Dishonour reverses the asset. Debit the acceptor's account and credit Bills Receivable.
Recording sales or purchases in an accommodation bill.
Students copy the trade bill entry pattern.
Fix: No goods move. Use only Bills Payable/Receivable, Bank, Discount and the personal accounts of the parties.
Forgetting to record the other party's share of proceeds.
The discount entry feels like the end of the transaction.
Fix: After discounting, the drawer must send the agreed share to the acceptor. Record this as Acceptor's A/c Dr; To Bank.
Leaving the whole discount with the drawer when the question says it is shared.
Students stop after the discounting entry, which shows the full discount in the drawer's Discount A/c.
Fix: The drawer records the full discount first, then charges the acceptor's share to his personal account once: Acceptor's A/c Dr; To Discount A/c. Do not also cut the share of proceeds you send him, because that would take the discount from him twice. Work out the final remittance as face value − share sent − his share of discount.
Ignoring noting charges when the question says the dividend is on the total amount due.
Charges appear as a small extra line and are overlooked.
Fix: Use the bill amount as given unless the question says noting charges are debited to the acceptor's account and the dividend is on the total due. In that case, apply the rate to bill amount + noting charges.

Worked examples

Example 1

Ravi Traders held a bill of ₹20,000 accepted by Mohan. Mohan became insolvent and Ravi Traders received 60 paise in the rupee in full settlement. Pass journal entries in Ravi Traders' books.

Show the solution

On dishonour, reverse the bill: Mohan's A/c Dr ₹20,000; To Bills Receivable A/c ₹20,000.
Dividend received = 20,000 × 60 ÷ 100 = ₹12,000.
Loss = 20,000 − 12,000 = ₹8,000.
Record receipt and loss: Bank A/c Dr ₹12,000; Bad Debts A/c Dr ₹8,000; To Mohan's A/c ₹20,000.

Answer: Mohan's A/c Dr ₹20,000 To Bills Receivable ₹20,000; Bank Dr ₹12,000 and Bad Debts Dr ₹8,000 To Mohan's A/c ₹20,000. Bad debt is ₹8,000.

Example 2

Anil and Sunil are friends. Anil draws a bill for ₹30,000 on Sunil for 3 months, and Sunil accepts it. Anil discounts the bill with his bank at ₹600 discount. The proceeds and the discount are shared equally. Show the entries in Anil's books until Sunil's share is sent, and find the amount Sunil must pay at maturity and the amount Anil must remit to him.

Show the solution

Net proceeds = 30,000 − 600 = ₹29,400.
On receiving the accepted bill: Bills Receivable A/c Dr ₹30,000; To Sunil's A/c ₹30,000.
On discounting, Anil records the full discount: Bank A/c Dr ₹29,400; Discount A/c Dr ₹600; To Bills Receivable A/c ₹30,000.
Sunil's share of net proceeds = 29,400 ÷ 2 = ₹14,700. Entry: Sunil's A/c Dr ₹14,700; To Bank A/c ₹14,700. Anil keeps the other ₹14,700. This entry is only the cash split. It does not charge any discount to Sunil in the books.
Charge Sunil's half of the discount, once: Sunil's A/c Dr ₹300; To Discount A/c ₹300. Anil's Discount A/c now shows ₹300, his own half. This is the only place Sunil's discount share is charged.
Sunil's account in Anil's books: Cr ₹30,000 − Dr ₹14,700 − Dr ₹300 = Cr ₹15,000. This is the remittance: face value 30,000 − share sent 14,700 − his share of discount 300 = ₹15,000.
At maturity Sunil, as acceptor, pays the full ₹30,000 to the bank. Before the due date Anil remits ₹15,000: Sunil's A/c Dr ₹15,000; To Bank A/c ₹15,000. Sunil's account is now nil.
Check: Anil's cash is +29,400 − 14,700 − 15,000 = −₹300. Sunil's cash is +14,700 + 15,000 − 30,000 = −₹300. Anil sends Sunil ₹29,700 in all, and Sunil adds ₹300 of his own to pay ₹30,000. Each bears ₹300.

Answer: Net proceeds ₹29,400. Anil keeps ₹14,700 and sends ₹14,700 to Sunil. Sunil pays ₹30,000 at maturity, and Anil remits a further ₹15,000 to Sunil before the due date (₹29,700 sent in all). Each party bears ₹300 of the discount.

Exam tips

Read the first line to see whose books are asked. Most mistakes come from writing the wrong party's entry.
In MCQs, loss on insolvency is usually the answer. Compute bill amount × (1 − dividend rate) before looking at options.
If goods are not mentioned, treat the bill as an accommodation bill and rule out options with sales or purchases.
There is no negative marking, so always mark an option. Eliminate those that show profit on accommodation or full write-off when a dividend is given.

Practice questions from Bills of Exchange

Insolvency of Acceptor and Accommodation Bills: frequently asked questions

What is the journal entry when the acceptor of a bill becomes insolvent?

First debit the acceptor's account and credit Bills Receivable for the full amount. Then debit Bank with the dividend received and Bad Debts with the balance, and credit the acceptor's account for the full amount.

What is an accommodation bill?

It is a bill drawn and accepted to help one or both parties raise money, not because goods were bought or sold. The drawer usually discounts it with a bank and shares the proceeds with the acceptor.

What is the difference between an accommodation bill and a trade bill?

A trade bill comes from a real sale of goods on credit. An accommodation bill comes from a mutual agreement to lend credit, with no goods involved. Only the trade bill appears in sales or purchases.

Who pays the bill at maturity in an accommodation arrangement?

The acceptor pays the full face value at maturity. The drawer sends him his share of the net proceeds earlier. Before the due date the drawer remits the balance, which is face value − share sent − the acceptor's share of discount. In the Anil and Sunil example, Anil sends ₹14,700 and then ₹15,000, so Sunil can pay ₹30,000 and bears only ₹300.