Understanding the Accounting for Special Transactions with FAQs
- Blog|Account & Audit|
- 5 Min Read
- By Taxmann
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- Last Updated on 14 August, 2024
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Accounting for Special Transactions refers to the accounting methods and principles used to record and report unique or non-routine transactions that do not fit the standard operations of a business. These transactions can vary widely depending on the industry and specific business circumstances. These special transactions require careful consideration to ensure that they are recorded in a way that reflects their substance and economic reality, adhering to applicable accounting standards and principles.
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1. Accounting for Bills of Exchange
1.1 Important Definitions
According to section 13(1) of the Negotiable Instrument Act, 1881,
“A negotiable instrument means a promissory note or bill of exchange or cheque, payable either to order or to the bearer”
According to Section 5 of the Negotiable Instrument Act, 1881,
‘A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.’
1.2 Other Important Concepts
Essential Elements of Bills of Exchange
- It must be in writing and may be in any language and in any form
- It must be drawn on a particular date
- There are three parties to a Bill of Exchange – Drawer/Maker, Drawee and Payee
- It must be signed by the Drawer/Maker
- It must contain an unconditional and imperative order to pay
- The order to pay must be directed to a certain person
- The order must be to pay a certain sum of money only
- It must be accompanied with proper stamp as per the requirement of the law
1.3 Parties to Bills of Exchange
A bill of exchange transaction often includes the following three parties:
- Drawer: Drawer is the party that issues a Bill of Exchange – Creditor, Lender or Seller. He is the maker of the bill and his signature is necessary.
- Drawee: Drawee is the party to which the order to pay is sent – Debtor, Lendee or Purchaser. The drawee becomes the acceptor of the bill when he/she/it has written the acceptance on the bill of exchange.
- Payee: Payee or the beneficiary is the party to which the bill of exchange is payable – May be Drawer or Other Party.
1.4 Classification of Bills of Exchange
Documentary Bill: In this, the bill of exchange is supported by the relevant documents that confirm the genuineness of sale or transaction that took place between the seller and buyer.
Demand Bill: This bill is payable when it demanded. The bill does not have a fixed date of payment, therefore, the bill has to be cleared whenever presented.
Usance Bill: It is a time-bound bill which means the payment has to be made within the given time period and time.
Inland Bill: An Inland bill is payable only in one country and not in any other foreign country. This bill is opposite to the foreign bill.
Clean Bill: This bill does not have any proof of a document, so the interest is comparatively higher than the other bills.
Foreign Bill: A bill that can be paid outside India is termed as a foreign bill. Two examples of a foreign bill are an export bill and import bill.
Accommodation Bill: A bill that is sponsored, drawn, accepted without any condition is known as an accommodation bill.
Trade Bill: This kind of bill is specially related only to trade.
Supply Bill: The bill that is withdrawn by the supplier or contractor from the government department is known as the supply bill.
1.5 Difference between Trade Bill and Accommodation Bill
| Basis of Difference | Trade Bill | Accommodation Bill |
| Objectives | These bills are drawn to facilitate the trade transactions of sale purchases of goods. | These bills are drawn to help someone in need of financial assistance. |
| Consideration | There is a definite consideration for which the bill is accepted. | These bills are drawn without consideration. |
| Extension of credit | Trade bills are a form of credit extension. | These bills are not a form of credit extension. |
| Proceeds | When trade bills are discounted, the proceeds remain with the holder | When these bills are discounted, the Proceeds may be shared by two parties in an agreed ratio. |
| Recovery | If trade bills are dishonoured, the amount may be recovered easily through the court. | In case of dishonour of these bills, the drawer cannot file a suit against the drawee. |
2. Frequently Asked Questions (FAQs)
FAQ 1. What is Accommodation Bill?
- An accommodation Bill is a bill of exchange signed by a party as drawer, drawee, endorser to accommodate another party whose credit is not strong enough to enable him to borrow on his single name.
- It is drawn for the purpose, of arranging temporary finance. Therefore, an Accommodation Bill is a bill of exchange which has been drawn, on and accepted by a reputable party or the purpose of giving value to the bill so that it can be discounted.
- What actually happens in the case of an accommodation bill is that one party draws the bill and the other party accepts it. Then, the drawing party gets it discounted from the bank and receives ready cash of which he is in need.
- The money received is either wholly utilized by the drawer, or by both, the drawee and the acceptor.
- Before the due date approaches, the required sum of money is sent to the acceptor in order to make him able to honour the bill and the bill is honoured on the due date. Thus, although there is no legal liability, there exists a strong moral understanding between the parties concerned.
FAQ 2. What are the Features of a Bill of Exchange?
As per Section 5 of the Negotiable Instruments Act, a bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person, to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument. The essential of bill of exchange are as:
- There are three parties the ‘Maker’ is termed as the ‘Drawer’ in Bill of Exchange. He is the creditor. The person liable to pay the money is called the ‘Drawee’. The person entitled to get the money is termed as the ‘Payee’. It should be noted that drawer himself can also be the payee. It must be drawn on a specific person
- The bill drawer being the creditor, orders the drawee to pay a certain of sum money.
- A Time Bill of Exchange can be made payable to the bearer.
- It is an instrument in writing and unconditional
- It must be in writing, dated, stamped and signed by Drawer
- It must be payable in demand or after a definite period of time, and for a certain amount of money.
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