Instruments of Credit

Learning Objectives Why it is vital for a business to sale on credit? Why it is vital for a business to sale on credit? To define on what basis instruments are classified? To define on what basis instruments are classified? Importance of these instruments. Importance of these instruments. How to apply these instruments? How to apply these instruments? To understand the difference between Inland and foreign bills To understand the difference between Inland and foreign bills

Classifications of Instruments of Credit Pay Roll Credit Open Book Accounts Documentary Credit Promissory Note Bills of Exchange Cheques

Instruments of Credit Pay roll Credit Pay roll credit is also called Oral Agreement. Because in this credit a Borrower gets something from the Lender without any written contract. In case a Borrower refuses to pay then Lender cannot claim any obligation.

Instruments of Credit Open Book Account This instrument is consist of entries. In this credit a debtor has entries as “Account Payable” and creditor has entries as “Account Receivable. It is the speedy way of carrying on the business transaction.

Instruments of Credit Documentary Credit instruments Credit instruments This instrument is consist of written agreement in which Creditor gives the specific time period to the Debtor to make payments in the future. It can be a Contract or to be a Promise.

Negotiable Instrument “A negotiable instrument is a specialized type of contract for the payment of money that is unconditional and capable of transfer by negotiation.”

Characteristics of Negotiable Instrument Characteristics of Negotiable Instrument  Transferable by delivery  Entitled to receive money  Filling a suit  Transferee is not affected by defective title

Negotiable Instruments Negotiable Instruments Promissory Note Bill Of Exchange Cheque

According to Section 4 of the Negotiable Instruments Act defines promissory-note as under: According to Section 4 of the Negotiable Instruments Act defines promissory-note as under: “Promissory note is an instrument in writing( not being a Bank Note or a Currency Note) containing an unconditional undertaking signed by the maker, to pay on demand or at a fixed or determinable future time, a certain sum of money only, to, or to the order of a certain person, or to the bearer of the instrument.” Promissory Note

Essentials of Promissory Note Unconditional Written Order Unconditional Written Order Signed by THE Maker Signed by THE Maker Pay certain sum of Money Pay certain sum of Money Payable to or to the order of a certain person Payable to or to the order of a certain person Made by two or more persons Made by two or more persons Amount promised Amount promised

Advantages of Promissory Note Witnesses of both the parties Witnesses of both the parties Easy way to ensure Future Payment Easy way to ensure Future Payment No chance of Fraud by the Borrower No chance of Fraud by the Borrower Simple and Easy Simple and Easy

Rs. 50,000 Lahore August 1, 2005 Sixty days after for value received, I promise to pay, Mr. A or order the sum of Rs. Fifty thousand only. Mr. A 10 G. Gulberg, Mr. B Lahore Signature Stamp Promissory Note Promissory Note

According to Section 4 of the Negotiable Instruments Act defines Bill of Exchange as under: According to Section 4 of the Negotiable Instruments Act defines Bill of Exchange as under: “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, on the demand or at a fixed future time.

Parties of Bills of Exchange  Drawer: The party who draws the bill is called “Drawer” or the “Maker”. The party who draws the bill is called “Drawer” or the “Maker”.  Drawee: The party to whom the bill is addressed or on whom the bill is drawn. The party to whom the bill is addressed or on whom the bill is drawn.  Payee: The party to whom the bill is made payable. It may be drawer or any other party. The party to whom the bill is made payable. It may be drawer or any other party.

Order: The bill of exchange is an order for payment not a request to debtor. The bill of exchange is an order for payment not a request to debtor. In writing: The order of payment for debtor is always in writing. The order of payment for debtor is always in writing.Unconditional: The bill of exchange is an unconditional order for payment. The bill of exchange is an unconditional order for payment. Certain Amount Specified Person (Drawee) Acceptance Features of Bills of Exchange

Points Inland Bill Foreign Bill Parties Both Parties (drawer & Drawee) belong to one or same country The drawer and Drawee do not belong to same country Copies Only one copy of inland bill is prepared Three copies of foreign bill are prepared. Revenue stamp Revenue stamps are pasted once on inland bill Revenue stamps are pasted twice on foreign bill. Difference b/w Inland & Foreign Bill

Period The period of inland bill is considered from its issuance. The period of foreign bill is considered from its acceptance Currency The amount is written in local currency on inland bill. The amount on foreign bill is written in the currency of drawee’s country Difference b/w Inland & Foreign Bill

Advantages of Bills of Exchange  Written Verification of debt  Negotiable Instrument  Discounting facility  Easy transfer of money  Self Liquidating Credit  Facilitates foreign trade

Rs. 40,000 Lahore August 1, 2005 Two months after date pay to Mr. A or his order the sum of Rs. Fourty Thousand only, for value received. To Mr. B 10 G. Gulberg, Mr. C Lahore Signature Bills of Exchange

According to Section 4 of the Negotiable Instruments Act defines promissory-note as under: According to Section 4 of the Negotiable Instruments Act defines promissory-note as under: A cheque may be defined as a written order of a depositor upon a bank to pay to or to the order of a designated party or to bearer, a specified sum of money on demand.

Main Types of Cheque Cheque Open Cheque Crossed Cheque Bearer Cheque Order Cheque General Crossing Special Crossing

Main Types of Cheque  Open Cheque: Open cheque are those cheque which are paid across the counter of the bank. Open cheque may be bearer or order cheque. Open cheque are those cheque which are paid across the counter of the bank. Open cheque may be bearer or order cheque.  Bearer Cheque  Order Cheque  Crossed Cheque: If a cheque is crossed by drawing two parallel lines across the face of the cheque, with or without the words & Co or A/c payee only, it is called a crossed cheque. If a cheque is crossed by drawing two parallel lines across the face of the cheque, with or without the words & Co or A/c payee only, it is called a crossed cheque.  General Cheque  Special Cheque

Importance of Cheque  Convenient and safe method  Transfer of funds from one place to another  Safety to money deposited into bank  Purpose of receipt also  Saving of use of currency notes

Promissory Note & Bills of Exchange Contrast  Promise to Pay  Two parties involved  Unconditional Promise  Not payable to the maker  Needs no acceptance  No notice in case of dishonor  Not drawn in Sets  Liability of Maker is Primary  Order to Pay  Usually three parties  Unconditional Order  Payable to the drawer  Acceptance is must  Notice in case of dishonor  Drawn in Sets  Liability of the Drawer is Secondary

Cheque & Bills of Exchange Contrast  Drawn on a bank  Payable on demand  Acceptance is not required  Immediately payable  It can be crossed  No need of dishonor notice  Payable on demand to bearer  Stoppable by the drawer  No stamp requirement  Drawn on some person or firm  Payable till the expiry of a fixed period  Acceptance is necessary  Three days of grace are allowed for payment  No crossing of bill  Dishonor notice is necessary  Unable to stop by the drawer  Noted and protested to establish dishonor  Properly stamped

Main Modes of Inland Remittances by Commercial Banks Bank Draft Bank Draft Pay order Pay order Telegraphic Transfer Telegraphic Transfer Mail Transfer Mail Transfer Inland Travelers Cheque Inland Travelers Cheque Credit Cards Credit Cards