LESSON 5: MAJOR DOCUMENTS USED IN CREDIT TRANSACTIONS

WRITTEN CONTRACT

precise in its terms and constitutes a permanent record of the transaction.

WRITTEN CONTRACT

Could at times, be transferred to a third party should a need arise.

CREDIT INSTRUMENTS

Refers to a document which evidence the existence of credit transaction serve to establish the rights and responsibilities of the parties to the transaction.

The presence of risk involved in that payment is deferred to a later date

The debtor-creditor relationship is stressed.

A credit instrument has two specific characteristics, namely

OPEN BOOK ACCOUNT

One of the most common forms of credit instruments

OPEN BOOK ACCOUNT

this constitutes the implied verbal promise of the debtor when he buys consumable goods on credit

OPEN BOOK ACCOUNT

The creditor enters this in the ledger to show the existence of the credit transaction. The listing may not be as formal as in bookkeeping, but one that is simply noted and kept by a storeowner

OPEN BOOK ACCOUNT

In other establishments, this is entered as accounts receivable in the books of accounts

PROMISSORY NOTE

It is an unconditional written promise of the maker to pay a sum certain in money to the bearer on order or demand at a future determinable time

COLLATERAL PROMISSORY NOTE

This is just like the ordinary promissory note, except that the collateral is indicated on the surface or on a separate document.

COLLATERAL PROMISSORY NOTE

The collateral usually has values over and above the loan granted. Such may be in the form of shares of stocks and bonds, as evidenced by warehouse receipts, or those pledged under chattel mortgage or trust receipts.

COMMERCIAL LETTERS OF CREDIT

is a written promise on the part of the bank to honor drafts drawn against it or for its account, by a specified beneficiary or his order, under the specifications

COMMERCIAL LETTERS OF CREDIT

This instrument is used widely in financing foreign trade

CIRCULAR

when the opening bank issues a letter addressed generally to persons or companies indicating its intention to honor the drafts of beneficiaries under specified terms.

SPECIALLY ADVISED

When the opening bank notifies the beneficiary directly or through a notifying bank

REVOCABLE

Whenever the bank withdraws or modifies the credit substituted for the buyer by using such phrases as "good until cancelled" or "good until (a certain period of time)

IRREVOCABLE

When the bank waives its right to cancel the credit or revoke the same prior to the date specified

CONFIRMED

When the advising bank, upon instructions of the opening bank assumes the obligation to perform the undertaking stipulated in the letter of credit

UNCONFIRMED

When the advising bank does not assume any other obligation except that of notifying the beneficiary

SIMPLE

When the opening bank carries an account in the currency to be paid with the paying bank, the reimbursement is accomplished by book entries that include the service charge

REIMBURSMENT

When the paying bank prefers to receive the reimbursement by draft, or when the two banks have no interbank accounts

The amount reimbursed shall include commissions and interest, as the case may be.

NEGOTIATION

If It is a circular letter of credit, payment is termed as

STRAIGHT

If it is specially advised, payment is _________

ACCEPTANCE

If payments are to be affected with time drafts subject to _______

LOCAL CURRENCY

If stipulation directs that the drafts be paid in the currency of the seller

FOREIGN CURRENCY

If the payment should be made in foreign currency, whether that of the buyer's or not.

ORDERS TO PAY

used in commercial activities may come in the form of checks, drafts or acceptance

Checks

is an order of a depositor to his bank to pay a sum certain in money to a third person or himself on demand.

Checks

classified into: (1) personal (2) cashier's/manager /treasurer's, (3) certified and (4) traveler’s.

personal check

known as business check

personal check

This is the most widely used by both private individuals and businessmen. It is distinct in that its drawer is an individual.

cashier's/manager's/treasurer's check

When the cashier of a bank, in his official capacity, draws the order against the

bank's fund

certified check

originally a personal check. However, to enhance its acceptability in case of doubt, bank certification is required by the recipient of the check.

traveler's check

it comes in convenient sizes and dollar denominations. It is also an order by the bank president to pay the holder of the check.

post-dated check

dated beyond the date of deposit or actual issuance.

Rubber or bouncing checks

are those returned to the drawer because they are not sufficiently covered with funds

Drafts

are orders to pay and are likewise drawn against a drawee to pay a third person a sum certain in money on demand at a future determinable time.

Money order

may either be a bank money order or postal money order.

Money order

When the order is drawn by a bank on another bank or its branch to pay a

specified payee

Bank draft

order of a bank to another bank, or that of the depositor to his bank, to pay a third person a definite sum of money. The bank draft may either be payable on demand or at a future determinable time.

Trade or commercial draft

is an order to pay used by merchants

Sight or demand draft

payable on sight upon presentation to the drawer.

Usually, no future determinable time appears on its face except the date of issue

Bonds

are long-term promissory notes issued under a corporate seal, usually in

large sums and in a series.

Long-term promissory notes

Differs from promissory note is a longer length of payment

it would also be a matter of time and the intent of the corporation issuing them.

Stock Certificate

ownership of a corporation's capital through purchase of a share of stocks. It is not, however, a promise to pay.

Stock Right

refers to the pre-emptive right attached to ownership of a share of stock.

The original stockholder is given the option to purchase additional shares of stocks at the new issue price before such stocks are offered to the public