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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
Instruments of Credit
Pay Roll Credit
Open BookAccounts
DocumentaryCredit
Promissory Note
Bills of Exchange
Cheques
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Instruments of Credit
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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Instruments of Credit
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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Instruments of Credit
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