Instruments of Credit.ppt

7/28/2019 Instruments of Credit.ppt

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Instruments of Credit


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Learning Objectives

Why it is vital for a business to saleon credit?

To define on what basis instrumentsare classified?

Importance of these instruments.

How to apply these instruments? To understand the difference

between Inland and foreign bills


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Classificationsof


Pay Roll Credit

Open BookAccounts

DocumentaryCredit

Promissory Note

Bills of Exchange

Cheques


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Pay roll CreditPay 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 paythen Lender cannot claim

any obligation.


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Open Book Account This instrument isconsist of entries. In this

credit a debtor has entriesas Account Payable and

creditor has entries as

Account Receivable. It is

the speedy way of carryingon the business

transaction.


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Documentary

Credit instruments

This instrument is

consist of written

agreement in whichCreditor gives the specific

time period to the Debtor

to make payments in the

future. It can be aContract or to be a

Promise.


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Negotiable Instrument

A negotiable instrument is aspecialized type of contractfor the payment of moneythat is unconditional andcapable of transfer by

negotiation.


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Characteristics of Negotiable

Instrument

Transferable by delivery

Entitled to receive money

Filling a suit

Transferee is not affected by defective title


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Negotiable Instruments

PromissoryNote

BillOf

Exchange

Cheque


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According to Section 4 of the NegotiableInstruments Act defines promissory-note asunder:

Promissory note is an instrument in writing( notbeing a Bank Note or a Currency Note) containingan unconditional undertaking signed by themaker, to pay on demand or at a fixed or

determinable future time, a certain sum ofmoney only, to, or to the order of a certainperson, or to the bearer of the instrument.

Promissory Note


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Essentials of Promissory Note

Unconditional Written Order

Signed by THE Maker

Pay certain sum of Money

Payable to or to the order of a certain person

Made by two or more persons Amount promised


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Advantages of Promissory Note

Witnesses of both the parties

Easy way to ensure Future Payment

No chance of Fraud by the Borrower

Simple and Easy


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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. A10 G. Gulberg, Mr. B

Lahore Signature

Stamp

Promissory Note


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According to Section 4 of the NegotiableInstruments Act defines Bill of Exchangeas under:

An instrument in writing containing anunconditional order, signed by the maker,directing a certain person to pay a certainsum of money only to or to the order of a

certain person or to the bearer of theinstrument, on the demand or at a fixed futuretime.


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Parties of Bills of Exchange

Drawer:

The party who draws the bill is called Draweror the Maker.

Drawee:

The party to whom the bill is addressed or onwhom the bill is drawn.

Payee:

The party to whom the bill is made payable. Itmay be drawer or any other party.


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Order:

The bill of exchange is an order for payment not arequest to debtor.

In writing:

The order of payment for debtor is always in

writing.

Unconditional:

The bill of exchange is an unconditionalorder for payment.

Certain Amount

Specified Person (Drawee)

Acceptance

Features of Bills of Exchange


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Points Inland Bill Foreign Bill

Parties Both Parties (drawer &Drawee) belong to one orsame country

The drawer and Draweedo not belong to samecountry

Copies Only one copy of inlandbill is prepared

Three copies of foreign billare prepared.

Revenue stamp Revenue stamps arepasted once on inland bill

Revenue stamps arepasted twice on foreignbill.

Difference b/w Inland & Foreign Bill


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Period The period of inland billis considered from itsissuance.

The period of foreign billis considered from itsacceptance

Currency The amount is written inlocal currency on inlandbill.

The amount on foreignbill is written in thecurrency of draweescountry

Difference b/w Inland & Foreign Bill


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Advantages of Bills of Exchange

Written Verification of debt

Negotiable Instrument

Discounting facility

Easy transfer of money

Self Liquidating Credit

Facilitates foreign trade


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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


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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.


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Main Types of Cheque

Cheque

Open Cheque Crossed Cheque

Bearer

Cheque

Order

Cheque

General

Crossing

Special

Crossing


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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.

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.

General Cheque

Special Cheque


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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 currencynotes


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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 isPrimary

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 isSecondary


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Cheque & Bills of Exchange

Contrast

Drawn on a bank

Payable on demand

Acceptance is notrequired

Immediately payable It can be crossed

No need of dishonornotice

Payable on demand tobearer

Stoppable by thedrawer

No stamp requirement

Drawn on some person orfirm

Payable till the expiry of afixed period

Acceptance is necessary

Three days of grace areallowed for payment

No crossing of bill

Dishonor notice isnecessary

Unable to stop by thedrawer

Noted and protested toestablish dishonor

Properly stamped


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Main Modes of Inland Remittances by

Commercial Banks

Bank Draft

Pay order

Telegraphic Transfer

Mail Transfer

Inland Travelers Cheque Credit Cards

Documents

Instruments of Credit.ppt