Accommodation Endorsement – Meaning, Examples, and Accounting Treatment

Definition:

An Accommodation Endorsement is a signature by a third party on a negotiable instrument, such as a bill of exchange or promissory note, made without any consideration to help the original party obtain credit or funding.

Understanding Accommodation Endorsement in Simple Terms

In financial and banking transactions, sometimes a person or business needs support to obtain credit. When someone who is not a party to the transaction signs a negotiable instrument just to lend credibility or improve the creditworthiness of the instrument—without expecting anything in return—it is called an accommodation endorsement.

This endorsement acts as a guarantee for the lender or holder of the instrument that if the maker or drawer fails to pay, the endorser will be held responsible. However, the endorser in this case does not benefit financially from the instrument.

Practical Example

Let’s say Mr. A wants to borrow money from the bank using a promissory note, but the bank is hesitant due to his poor credit history. Mr. B, who has a good credit score, agrees to endorse the promissory note purely to help Mr. A—without receiving any money or benefit.

In this case, Mr. B has made an accommodation endorsement.

Relevance in the Indian Financial System

In India, accommodation endorsements are recognized under the Negotiable Instruments Act, 1881. Though valid, these endorsements carry significant legal liability. If the original drawer fails to pay, the accommodation endorser becomes liable to pay the instrument amount.

Banks and financial institutions scrutinize such endorsements closely to prevent fraud or misuse.

Subsections for Deeper Clarity

1. Parties Involved

• Drawer/Maker: The person who issues the instrument.

• Endorser: The person signing the instrument to support it (accommodation party).

• Payee: The person to whom the payment is due.

2. Purpose

• To support financially weaker parties.

• To help in availing credit facilities.

3. Legal Nature

• Considered binding and enforceable under Indian law.

• No consideration is involved for the endorser.

Why It’s Important

• Credit Support: Helps businesses or individuals with weak credit ratings to raise funds.

• Trust Building: Lenders often feel more secure when a reputable person or business stands as an accommodation endorser.

• Legal Enforcement: Despite no consideration, the endorser is legally liable—so it holds real-world weight in courts and banks.

Formula/Equation

While there’s no standard formula for accommodation endorsement, you can assess the creditworthiness of the bill as:

Effective Credibility of Instrument = Creditworthiness of Drawer + Reputation of Endorser

Journal Entry (Accounting Treatment)

In the books of the drawer (Mr. A):

At the time of endorsement:

No entry is made in the drawer’s books since no consideration is received or given for endorsement.

In case of dishonor and payment by endorser (Mr. B):

In Mr. A’s books:

Endorser’s A/c Dr.     ₹xx  
    To Bank A/c                 ₹xx  
(Being the bill dishonored and paid by accommodation endorser)

Accounting Illustration

Scenario:

Mr. A draws a bill of ₹10,000 payable after 60 days and gets it endorsed by Mr. B to improve credibility. Mr. A discounts the bill with the bank.

After 60 days, the bill is dishonored and Mr. B pays the bank.

In Mr. B’s books:

Mr. A’s A/c Dr.      ₹10,000  
    To Bank A/c            ₹10,000  
(Being amount paid to bank as accommodation endorser for dishonored bill)

Mr. B can now legally recover ₹10,000 from Mr. A.

Legal Implications

• Section 43 of the Negotiable Instruments Act addresses accommodation parties.

• If the drawer fails to pay, the endorser becomes legally bound to honor the payment.

• Misuse of accommodation endorsements can attract civil or even criminal liability in case of fraud or intent to deceive.

Related Terms

• Endorsement
• Negotiable Instrument
• Promissory Note
• Drawer
• Drawee
• Holder in Due Course
• Discounting of Bills
• Dishonor of Bill

FAQs

Q1. Is an accommodation endorser legally liable to pay?

Yes. Even though there is no consideration, the law holds the accommodation endorser liable in case of default.

Q2. Can an accommodation endorsement be revoked?

No, once endorsed, it becomes a binding obligation unless the instrument is canceled or dishonored and settled.

Q3. Is this type of endorsement risky?

Yes. Since the endorser receives no benefit but bears full liability, it carries financial and legal risk.

Q4. Are accommodation endorsements common in India?

They are less common now due to stricter banking norms, but they are still used in informal or small business lending environments.

Expert Tip from ManikaTaxWise.com

💡 Avoid becoming an accommodation endorser unless you fully trust the party. Even if you don’t gain financially, your liability remains absolute under Indian law. Always document your intent clearly to avoid legal disputes.