Chapter IX CREDIT INSTRUMENT Objective: To familiarize the different credit instrument use in business transactions. What is a CREDIT INSTRUMENT?

It is a document which gives evidence of a credit obligation resulting from a past transaction w/c set forth the responsibility of the debtor to his creditor. Examples of credit instrument are: Ordinary IOUs Checks

CLASSES OF CREDIT INSTRUMENT A. INVESTMENT CREDIT INSTRUMENT- financial instrument used by business organizations for the purchase of fixed assets. 1. BONDS- are promises to pay the principal as well as interest to its holders at a certain specified time indicated in the instrument. sample picture of a bond 2. SHORT TERM NOTES- are in a number of respects, may appear similar to bonds. sample picture of a short term note 3. Stocks- represents permanently invested capital of corporation contributed by the owners terned as stockholders w/c are evidence by certificates. Types of Stocks a. Preferred Stockb. Common Stockc. Preference in dividends.

d. Preference in assets in the event of liquidation. e. Convertible into common stock. f. Callable at the option of the corporation.

g. Nonvoting.

B. COMMERCIAL CREDIT INSTRUMENT- evidences the existence of certain commercial transaction but, moreover, in the case of checks, they function to some extent as near substitute for money. Types of COMMERCIAL CREDIT INSTRUMENT: 1. PROMISES TO PAY A. OPEN BOOK ACCOUNTS/ BOOK ACCOUNT- one of the oldest form of credit instrument whereby an entry in the retailers books is made, debiting the customer with the amount involved. Dr: Accounts Receivable- Angel Locsin 3,000 Cr: Sales 3,000

B. BANK DEPOSIT- when a depositor exchanges his funds for the banks promise to pay, either on demand or upon previous advance notice as in the case of time deposits. illustration C. PROMISSORY NOTE- a written promise by a person (the maker) to another party (the payee) to pay a definite sum of money at a certain future time. Elements of a promissory note: a. A promise to pay b. Definite sum of money c. Future date SINGLE NAMED NOTE illustration TWO NAMED NOTE illustration 2. ORDERS TO PAY Three (3) Parties involved in an order to pay 1. DRAWER- party ordering that payment be made 2. DRAWEE- party ordered to make payment 3. PAYEE- party to whom payment is to be made A. CHECK- written order drawn by a depositor (the drawer) upon a bank (the drawee) to pay on demand or at future determinable time sum of money to order or bearer (the payee). PAYABLE TO ORDER VS. PAYABLE TO BEARER illustration Kinds of Check: 1. OPEN CHECK-this check does not require presentation through a payees banking account. It can either be payable to order or bearer. It has a current date on its face and can be encash on demand. 2. CROSSED CHECK- it has two parallel lines on the left corner. It must be presented through a payees banking account for deposit. Can be payable to order or bearer. 3. CERTIFIED CHECK- the word certified or good for payable is stamped on its face representing an assurance that the fund to cover the check will be sufficient. 4. MANAGERS CHECK/CASHIERS CHECK- checks issued by banks against their account. 5. TRAVELERS CHECK- purchased by individuals before leaving for a trip outside the country. 6. OVERDRAFT CHECK- also known as DRAWN AGAINST INSUFICIENT FUNDS CHECK. A check drawn against no sufficient fund checking account of the depositor. 7. BOUNCING CHECK- A check drawn against no fund. 8. STALE-DATED CHECK- this is where date on its face and date on encashment exceeds six months. Banks dishonor this kind of check to protect the interest of the depositor. 9. POST DATED CHECK- this is where the date on the face of the check is a future date considering the day of encashment or payment. 10. STALE CHECK-a check becomes stale when it remains outstanding for 6 months. 11. COUNTER CHECK12. VOUCHER CHECK- these are checks with an accompanying voucher for purposes of keeping an accurate record of the amounts and purpose for which the checks have been received. ADVANTAGES OF CHECKS 1. Safety and Convenience 2. Stop Payment 3. Odd Amounts 4. Serves as receipt or proof of payment. 5. Eliminates risks and dangers involving large amounts of money

DISADVANTAGES OF CHECKS 1. It is not accepted by the general public to pay small amounts using checks. 2. It cannot be use in transactions involving the immediate delivery of goods between people who do not know one another, as purchases in retail stores. 3. Checks are not legal tender.