Financial Accounting · Bills of Exchange

Insolvency of Acceptor and Accommodation Bills: Journal Entries

Updated 10 October 2026 · Fact-checked

When an acceptor becomes insolvent, the bill is dishonoured. The holder debits the Acceptor's account with the full bill amount, then writes off the part not recovered as bad debt and records the cash received. An accommodation bill is drawn only to help raise funds, with no sale of goods. Each party records only their share of the proceeds.

Understand Insolvency of Acceptor and Accommodation Bills

A normal trade bill comes from a sale of goods. The drawer sells goods, draws the bill, and the buyer accepts it. The bill is a way of settling a real debt.

An insolvent acceptor cannot pay the bill on the due date. The bill is treated as dishonoured. The holder first reverses the bill: debit the acceptor's personal account and credit Bills Receivable (or the bank, if the bill was discounted). Then the holder receives only a part of the amount from the insolvent's estate, for example 40 paise in the rupee. The balance is a loss, written off as bad debts. The part received is the dividend.

If the bill was discounted with a bank, Bills Receivable was already credited when the bill was discounted. On dishonour, the bank claims the full amount from the drawer. The drawer pays the bank, so the credit goes to Bank, and the drawer debits the acceptor. Do not credit Bills Receivable again. If the bill was endorsed to a creditor, the endorsee claims from the endorser, who then debits the acceptor. In both cases, the original drawer bears the loss, not the discounter or endorsee.

An accommodation bill is different. It is drawn and accepted to help one or both parties raise money, not to settle a sale of goods. One party may need funds, or both may. They agree to draw a bill, one accepts, and the drawer discounts it with the bank. The proceeds are shared in an agreed way. Before the due date, the party who got the money sends funds to the acceptor, who will pay the bank.

The key idea is that each party has a real liability only to the extent of the money they got. The bill itself is not a sale or purchase, so no purchases, sales or goods accounts are used. Use only the other party's personal account, the bank, discount, and Bills Receivable or Payable where needed.

Key rules to remember

Dishonour due to insolvency: Bill held: Acceptor A/c Dr (full bill amount) to Bills Receivable A/c. Bill discounted: Acceptor A/c Dr (full bill amount) to Bank A/c; Always debit the full bill amount first, even if only part will be recovered. For a discounted bill, Bills Receivable was already credited at discounting, so do not credit it again.
Amount recovered and loss: Amount received = Bill amount × dividend rate; Bad debt = Bill amount − Amount received; The dividend rate is stated as paise in the rupee, so 25 paise means 25%.
Entry for dividend and loss: Bank A/c Dr (received); Bad Debts A/c Dr (loss) to Acceptor A/c (full amount); Interest or noting charges, if any, are added to the acceptor's debit before computing loss.
Accommodation bill, drawer and acceptor with sharing: Drawer's share of proceeds + Acceptor's share of proceeds = Net proceeds of discounting; Each party has a liability only for their own share. The acceptor pays the bank on the due date using funds sent by the drawer.
Discount on accommodation bill: Discount = Bill amount × rate × period ÷ 12 (rate per annum, period in months); Discount is shared in the same ratio as the proceeds unless the question says otherwise.

How to solve Insolvency of Acceptor and Accommodation Bills questions

Use the same steps for any question on insolvency or accommodation bills. Decide first whose books you are writing in.

1Identify the type of bill: trade or accommodation. If accommodation, note who needs funds and how proceeds are shared.
2Identify the position of the bill: held until maturity, discounted, or endorsed. This decides whether you credit Bills Receivable, Bank, or the endorsee.
3For insolvency, write the dishonour entry: debit the acceptor with the full amount, including any noting charges, and credit Bills Receivable (bill held), or the party who claims such as the bank (bill discounted).
4Compute the dividend: multiply the amount due by the rate in paise per rupee.
5Record the dividend received: debit Bank and debit Bad Debts with the loss, credit the acceptor's account.
6For accommodation bills, pass entries separately for the drawer and the acceptor, using the personal account of the other party instead of goods accounts.
7Record discount, remittance of funds to the acceptor, and payment on the due date. Check that the accounts close to nil.

Quickest way: Three-line approach for insolvency problems

When to use it: Use this when you see a bill dishonoured through insolvency with a stated dividend rate, and time is short.

Write the total claim on the acceptor: bill amount plus noting charges.
Multiply by the dividend rate to get cash received. The rest is bad debt.
Pass one combined entry: Bank Dr and Bad Debts Dr to Acceptor Cr. Cross-check that the debits equal the credit.

Common mistakes in Insolvency of Acceptor and Accommodation Bills

Debiting Bad Debts for the full bill amount.
Students forget the dividend received from the insolvent's estate.
Fix: Bad debt is only the unrecovered part. Calculate cash received first, then take the balance.
Treating the dividend rate 40 paise as 40 rupees or 4%.
Confusion with the paise-in-the-rupee wording.
Fix: Convert paise to a fraction of ₹1. 40 paise in the rupee means 40%.
Crediting Bills Receivable again when a discounted bill is dishonoured.
Students use the same credit as for a bill held until maturity.
Fix: For a discounted bill, Bills Receivable was already credited at discounting. On dishonour, debit the Acceptor's A/c with the full amount and credit Bank A/c, since the bank recovers the amount from you.
Using Sales or Purchases accounts in accommodation bill entries.
Mixing up trade bills and accommodation bills.
Fix: No goods are exchanged. Use only the personal account of the other party, Bank, Discount and Bills accounts.
Forgetting to record the funds sent by the drawer to the acceptor before the due date.
The sharing of proceeds is overlooked.
Fix: Write the remittance entry. The acceptor must have the funds to pay the bank.
Ignoring noting charges in the claim on the insolvent acceptor.
Charges appear in a different line of the question.
Fix: Add noting charges to the amount due from the acceptor before applying the dividend rate, unless the question states otherwise.

Worked examples

Example 1

Ravi Traders of Pune received a bill of ₹40,000 from Mohan Stores, accepted by Mohan. Ravi held the bill until the due date. Mohan became insolvent, and his estate paid 35 paise in the rupee. Pass journal entries in Ravi's books.

Show the solution

On dishonour, debit Mohan with the full bill: Mohan's A/c Dr ₹40,000 to Bills Receivable A/c ₹40,000.
Dividend received = ₹40,000 × 35 ÷ 100 = ₹14,000.
Bad debt = ₹40,000 − ₹14,000 = ₹26,000.
Entry for recovery: Bank A/c Dr ₹14,000; Bad Debts A/c Dr ₹26,000 to Mohan's A/c ₹40,000.

Answer: Dishonour: Mohan's A/c Dr ₹40,000 to Bills Receivable A/c ₹40,000. Recovery: Bank A/c Dr ₹14,000 and Bad Debts A/c Dr ₹26,000 to Mohan's A/c ₹40,000. Loss on bad debts is ₹26,000.

Example 2

Sharma and Gupta agree that Sharma will raise funds through an accommodation bill. On 1 January, Sharma draws a three-month bill of ₹60,000 on Gupta, who accepts it. Sharma discounts it with his bank at 12% per annum. The net proceeds and the discount are shared equally. Sharma sends Gupta his half of the proceeds at once. Before the due date, Sharma sends Gupta the further amount Sharma owes him. Gupta pays the bank ₹60,000 on the due date. Pass entries in Sharma's books.

Show the solution

Discount = ₹60,000 × 12% × 3 ÷ 12 = ₹1,800.
Net proceeds = ₹60,000 − ₹1,800 = ₹58,200.
On discounting, Sharma receives the money and Gupta is liable to the bank for ₹60,000: Bank A/c Dr ₹58,200 and Discount A/c Dr ₹1,800 to Gupta's A/c ₹60,000.
Half of the proceeds goes to Gupta = ₹58,200 ÷ 2 = ₹29,100. Entry: Gupta's A/c Dr ₹29,100 to Bank A/c ₹29,100.
Gupta bears half of the discount = ₹1,800 ÷ 2 = ₹900. Entry: Gupta's A/c Dr ₹900 to Discount A/c ₹900.
Balance of Gupta's A/c = credit ₹60,000 − debit ₹29,100 − debit ₹900 = credit ₹30,000. This is Sharma's own share of the bill: ₹29,100 of proceeds he kept plus ₹900 of discount he bears.
Before the due date Sharma remits this balance: Gupta's A/c Dr ₹30,000 to Bank A/c ₹30,000. Gupta's account now closes to nil.
Check from Gupta's side: he receives ₹29,100 + ₹30,000 = ₹59,100 from Sharma and adds ₹900 of his own for his share of the discount. This gives the ₹60,000 he pays the bank.

Answer: Net proceeds are ₹58,200. Sharma sends ₹29,100 to Gupta and keeps ₹29,100. Each party bears ₹900 of the discount. Sharma remits a further ₹30,000, being his own share of the bill, and Gupta's account in Sharma's books closes to nil. Gupta pays ₹60,000 to the bank, funding ₹59,100 from Sharma and ₹900 himself.

Exam tips

Read whether the bill was held, discounted or endorsed. Many marks are lost by choosing the wrong credit account on dishonour.
Convert the dividend rate carefully: paise in the rupee means percentage. Write the working in a clear line for step marks.
For accommodation bills, state clearly whose books you are writing in. Show proceeds, discount and each party's share in neat workings.
In MCQs, remember that accommodation bills involve no goods and no real trade debt. Eliminate options that use sales or purchases.
Check that your final entries make the acceptor's account close to nil. If not, a step is missing.

Practice questions from Bills of Exchange

Insolvency of Acceptor and Accommodation Bills in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CA FoundationAccommodation Bills

Insolvency of Acceptor and Accommodation Bills: frequently asked questions

What happens to a bill if the acceptor becomes insolvent?

The bill is treated as dishonoured. The holder debits the acceptor with the full amount and credits Bills Receivable, or Bank if discounted. Any dividend from the estate is received in cash, and the rest is written off as bad debt.

Who bears the loss when a discounted bill is dishonoured by an insolvent acceptor?

The drawer bears the loss. The bank recovers the full bill amount from the drawer. The drawer then claims only the dividend from the acceptor's estate and writes off the balance.

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

A trade bill arises from a real sale of goods on credit. An accommodation bill is drawn only to help raise funds, with no goods sold. In accommodation bills, only personal accounts, Bank and Discount are used.

Do accommodation bills use Sales or Purchases accounts?

No. Since no goods move between the parties, no sales or purchases are recorded. Entries use the other party's personal account, Bills accounts, Bank and Discount.