Means of Payments - kcse business studies notes

These are the methods or ways the buyer may use to settle debts arising from a business transaction. These are various means of payments that can be used. These means of payments can be put into the following groups;

1. Cash
2. Means of payment provided by the post office
3. Means of payments provided by the commercial banks
4. Means of payments which arise from private arrangements between sellers and buyers
5. Other means of payment.

a. Cash

This refers to the use of notes and coins to make payments. Currency notes and coins are issued by the central Bank of Kenya and are therefore legal tender
Legal tender means everyone is obliged by law to accept them as a means of payment i.e. no one can refuse to accept them as they are backed by the law. Notes and coins are available in different denominations as follows;
Coins; 5cents, 50cents, sh.1, sh.5, sh.10 and sh.40
Notes; sh.10 .sh.20, sh.50, sh.100, sh.200, sh.500 and sh.1000.
Coins are suitable for settling small debts and are acceptable as legal tender up to a certain maximum e.g. 50cents coins the maximum is sh20 and sh.1 the maximum is ksh.100.

Advantages of cash as a means of payment

1. It is the only means of payment which is  a legal tender
2. Convenient for settlement of small debts
3. Convenient to people with or without bank accounts
4. Cash is readily usable

Disadvantages of cash as a means of payment

1. Not convenient to carry around
2. Cash can be lost or stolen easily as it is readily usable
3. Payment is difficult to prove unless a receipt is issued

Circumstances under which cash payment is appropriate

1. Where the amounts involved are small
2. Where the payee (receiver) does not accept other means of payment
3. Where cash is the only means available
4. Where the payee requires cash(money) urgently
5. Where there is need to avoid expenses associated with other means of payments

b. Means of payments provided by the banks

Commercial banks are financial institutions that accept deposits to and withdrawals from them.
They also lend money to customers. Examples of commercial banks include: Commercial bank of Kenya, National bank of Kenya, Barclays bank, and Co-operative bank e.t.c
There are various means of payments provided by the commercial banks. They are;

1. Cheques
2. Bank drafts/bankers cheques
3. Credit transfers
4. Standing orders
5. Traveler’s cheques
6. Telegraphic transfers
7. Debit cards
8. Electronic fund Transfer(E.F.T)

a) Cheques 
​This is a written order by an account holder with the bank (drawer) to the bank (drawee) to pay on demand a specified amount of money to the named person (payee) or the bearer

Parties to a cheque

1. Drawer -This is the person or institution who writes and issues the cheque.He is usually a current account holder with the bank
2. Payee -The person or institution to be paid
3. Drawee -The bank(where the drawer has an account)

Details on a cheque; they include:

• Date when it is issued
• Name of the drawer
• The name of the payee, except in bearer cheques
• The name of the drawee (bank)and branch from where it is issued
• Amount to be paid in figures and in words
• The account number of the drawer
• The signature of the drawer
• The cheque number and bank code
• The appropriate revenue stamps

Types of cheques

1. Open cheques
2. Crossed cheques
3. Bearer cheques
4. Order cheques

i) Open cheques 
​This is a cheque that can be presented for payment over the counter. You present it and cash is paid to you.

ii) Crossed cheques 
This is a cheque that bears two parallel lines on the face. This means the cheque cannot be cashed over the counter. The cheque is deposited in an account (payee’s account)
The payee then withdraws the money from his/her account
A crossed cheque can be opened by the drawer signing twice on its face.
A crossing can be general or special
General crossing - general crossings only contains the two parallel lines. This implies that the cheque will be paid through any bank in which it is deposited.
Special crossings-Has other instructions included in the crossing i.e;

• Not negotiable-Means the cheque can be transferred by the payee to a third party, but he third cannot transfer the cheque (only the original payee can transfer the cheque)
• Account payee only-Means the cheque should be deposited in the account of the payee.
• Not transferable-Means there is no negotiation or transfer of the cheque

iii) Bearer cheques -This cheque does not have the name of the payee written on it. The person presenting it to the bank is the one who is paid.
iv) Order cheque -The cheque bears the name of the payee. The bank pays this particular payee the amount stated in the cheque after proper identification

Dishonoring a cheque

A cheque is dishonored if the bank refuses to pay and returns the cheque to the drawer.
A cheque can be dishonored due to the following reasons:

1. Insufficient funds in the account
2. If the signature on the cheque differs from the drawers specimen signature in the bank.
3. If the cheque is stale i.e. presented for payment after six months from the date of issue.
4. If the cheque is postdated - meaning the cheque is presented for payment earlier than the date on the cheque
5. If the amount in figures is different from the amount in words
6. If there are alterations on the cheque which are not countersigned by the drawer
7. If the cheque is torn, dirty or default making it illegible
8. If the account holder(drawer) is dead and the bank is aware of the fact
9. If the drawer instructs the bank not to pay the particular cheque
10. If the cheque contains errors which need to be corrected
11. If the drawer becomes bankrupt or insane
12. If the drawer has closed his/her account.

Advantages of using cheques

1. They are more secure than notes and coins because if they are lost or stolen, they can be traced to the person who cashed them.
2. They are convenient to carry and can be used to pay large sum of money which would  be otherwise inconvenient to pay using cash
3. They can be transferred to a third party to make payment/cheques are negotiable
4. Payment can be made by cheque without the need to travel to make payment
5. They provide a record of payment because of the counterfeits.The counterfeits acts as proof that payment has been made.
6. Under special circumstances, they can be cashed or discounted before maturity.

Disadvantages of using cheques

1. Cheques can be dishonored
2. Requires the payee to go to the bank and in some cases to have an account
3. The drawer pays some charges e.g. charges for the cheque book
4. Can only be issued by an account holder/the drawer must have an account
5. They are not readily acceptable by everybody
6. They do not provide immediate cash.

Circumstances under which a cheque is appropriate as a means of payment

• Where the amount of money involved is large
• Where the policy of the business demands so
• Where a cheque is the only means available
• Where there is need to avoid other risks associated with other means of payments

b) Bank drafts/Banker’s cheques 
This is a cheque drawn on a bank i.e. a cheque drawn by one bank to another requesting the latter bank to pay a named person or institution a specified sum of money and charge it to the drawing bank
It can also be drawn by a bank on the request of a customer. The customer fills in an application form obtained from a bank and hands it over to the bank together with the money she wants to transfer and a commission for the service.
The bank then prepares the cheque and gives it to the applicant who can then send it to the payee
A bank draft has the drawing bank’s guarantee for payment. It is therefore more readily acceptable than personal cheques.
It is suitable when urgency is desired in the payment as it is more readily acceptable.

c) Credit transfer 
​This is a means of payment provided by commercial banks to their current accounts holders who want to pay many people using one cheque/at the same time
One cheque is drawn and is usually accompanied by a list of the people to be paid, the amount to be paid to each person and the addresses of the bank branches where the payment is to be made.
The bank then ensures that a credit transfer is affected to the various bank branches and each payee is paid
A credit transfer is usually used by employers to pay salaries to their staff members.

​d) Standing order
This is an instruction to a bank by an account holder to pay a named person or an organization a fixed amount of money at regular intervals over a specified period of time or until stopped
It is a very useful means of payment for business people as it enables them to regularly pay their recurrent bills e.g. water, insurance, electricity, loan payment, hire purchase payment etc.

​e) Traveler’s cheques
This is a cheque drawn by one bank to another requesting the latter to pay a specified sum of money to a named bearer, who usually would have bought that cheque from issuing bank. The cheque holder pays the value of the cheque plus the charges for the services to the issuing bank.
-Traveler’s cheques are usually issued in fixed denominations and are very convenient for travel purposes, hence their name. They enable a person to travel without having to carry a lot of cash. The cheques are also readily acceptable as a means of payment.

f) Telegraphic Transfers
This is a method /means of transferring money offered by commercial banks to anybody who wants to send money to another
The sender is required to fill an application form and provide the following information among others:

• His/her name                          
• The amount of money to be remitted
• Name of the payee                 
• The bank where the money would be paid

The applicant is charged a commission and telegraph fee. The paying bank sends a telegram to the payee who has to identify himself/herself before the payment is made
The method is fast and safe.

g) Debit cards 
​These are plastic cards issued by financial institutions e.g. banks that enables a person to purchase goods and services from any business that accepts them.
Debit cards are used to make payments from money held in ones accounts and are therefore an alternative to cash payments. Examples are ATM cards.

h) Electronic Fund Transfer (E.F.T) 
​EFT is a method of transferring money from one account to another where computers are used. The sender is required to fill an electronic fund transfer form provided by the bank which instructs the bank to transfer money from his/her account to a named account.
Information is then sent to the payee’s bank electronically and the amount in the account is increased accordingly. The method is very fast.

c. Means of payments provided by the post office

The post office provides means of payments that can be used to transfer money from one person to another
The means of payments provided by the post office to facilitate payments includes,

1. Money orders
2. Posta pay
3. Postal orders
4. Postage stamps
5. Premium bonds

a) Money orders 
A money order facilitates the transfer of money from one person to another through the post office (and/or bank)
A money order is usually for a specified sum of money usually purchased with cash from the post office
A person wishing to send money using this method visits a post office and completes an application form. Some of the details contained/given in the form include;

• The amount of money to be remitted
• Name of the payee
• The name of the post office where the money order will be cashed
• Name and address of the sender
• Whether the money order is to be ordinary or sent by telegraph
• Whether the sender wishes to be informed if the money has  been paid
• Whether the money is to be paid through a bank account or at the post office counter.

The application form, money to be remitted and commission for the service is handed to the post office clerk who prepares the money order and gives it to the sender who may post it or send it to the payee.
Telegraphic money orders, the post office sends a telegram to the payee informing him/her to go to the post office and claim the money.
Before payment is made, the payee must;

• Identify himself/herself by producing an ID card
• Identify the person who sent the money.

The sender of the money is left with a counterfoil which serves as evidence that money was sent and it can be used to reclaim the money if it did not reach the payee
Money order may be open or crossed. A crossed money order bears two parallel lines drawn diagonally on its face and must be deposited in the bank account of the payee. It cannot be cashed over the counter at the post office.
An open money order can be presented for payment at the post office counter.

Circumstances under which money order is appropriate

1. Where it is the only means available
2. Where other means are not acceptable
3. Where there is need to avoid inconveniences or risks associated with other means

b) Posta pay 
This is an Electronic Fund Transfer (EFT) service offered by the postal corporation of Kenya, for sending and receiving money instantly from various destinations both locally and internationally.
The person sending money fills in a form called ‘send form’ giving the following details;

• Name, address and telephone number of sender
• Name, address and telephone number of receiver
• Pay city, town and location of the receiver
• Signature of the sender
• Amount to be sent

The sender hands over the form, the amount of money to be sent and the commission to the post office clerk for processing
The transfer is done via the internet through a machine that gives a twelve-digit number for the transaction called the ‘Transaction control number’(TCN). The sender then conveys this number, amount sent and pay location to the recipient and instructions to the recipient to visit the named post office for payment. This message is usually conveyed through the quickest means possible such as a telephone call
The sender is given a copy of the processed ‘send form’ as proof that money has been sent. The post office retains the original for record purposes.
When the receiver visits the post office, he/she will fill a ‘receiver form’ giving the following details;

1. The transaction number(i.e. the twelve-digit number)
2. The expected amount
3. The name, address and telephone number of the sender
4. The city town or location of the sender
5. Signature of the receiver.

The receiver then identifies himself or herself by producing an ID card or passport before receiving the money.
The recipient/payee is then given the money, a copy of the receive form as proof of having received the money. The paying post office retains a copy as proof of payment.

Advantages of using Posta pay as a means of payment

1. Accessibility-Posta pay outlets (post offices) are located countrywide to eliminate movement over long distances to get money
2. Ease of use-Sending or receiving money is easy as one only needs to fill a form which is processed immediately
3. Speed-the transfer of money is instant (fast)
4. Security-Confidentiality in the transmission of money is provided and money is only paid to the person intended
5. Convenience-Posta pay services are offered for long hours during the day and pay locations are conveniently located
6. Affordability-Posta pay services are relatively affordable as large amounts can be sent at reasonable costs.

c) Postal orders 
​Postal orders are sold by the post office for the purpose of remitting money
They are available in fixed denominations of sh.5, 10.20,40,60,80,100 and 200
On buying a postal order, the sender pays for both the face value of the postal order and a commission charged for the service
Postal orders just like money orders are issued with counterfoils that the sender will keep as evidence of remittance in case the person to whom he/she remits the money does not receive it.
The sender writes the name of the payee on the postal order as a safety measure.
Payment to the bearer can be made in any post office with postal order facilities
Postal orders may also be crossed or open (see crossed and ordinary money orders)

1. Where the amounts involved are small
2. Where it is the only means available
3. Where there is need to avoid inconveniences and risks associated with the other means of payment.

Differences between postal orders and money order

Postal orders	​Money orders
​It can be cashed at any post office	​Can only be cashed at a specific post office
Are in fixed denominations	​Varies according to the needs of the remitter
Does not require any application form to make a remittance	Requires the filling of an application form in making remittance
Can be cashed by the bearer	Can only be cashed by the payee
Value can be increased by affixing revenue stamps	​Value cannot be increased by affixing revenue stamps

d) Postage stamps 
​Postage stamps may be used to pay small amounts of money. The person to whom the stamps are sent can then use them for sending mail and/or to pay someone else.

e) Premium Bonds 
​Premium bonds are issued by the post office in denominations of sh.10 and sh.20.They mature after a given period, after which one can cash them.
Bearers can also enter into draws so as to win money.
Premium bonds can be used to settle debts, but it is not a safe method because they can be cashed by anybody i.e. by the bearer.

Circumstances under which postage stamps and premium bonds are used

1. Where the amounts involved are small
2. Where they are the only means available.

a. Means and payments which arise from private arrangements between the sellers and the buyers

There are various business documents that originate from private agreements between buyers and sellers. The buyer acknowledges the credit and accepts to pay at specified future dates by signing some documents. These documents include;

1. I Owe you (IOU)
2. Bill of exchange
3. Promissory note.

a) Bill of Exchange 
​This is unconditional order, in writing, addressed by one person to another, requiring the person to whom it is addressed by one person to another, requiring the person to whom it is addressed to pay on demand, or at a stated future date, the sum of money on the bill to the drawer, or a named person or to a bearer.

1. Order-is a command not a request
2. Unconditional-Without condition i.e. no use of such words as ‘if’ or ‘whom’
3. The bill must be in writing
4. Amount of money must be clearly stated
5. Payee must be named. He/she can be the drawer or someone else or the bearer
6. Date of payment must be stated or can be determined e.g. ‘Two months from the date of today’ or Three days after 31st January 2012’

A bill of exchange is prepared by a creditor to a debtor when a creditor wants to be assured of payment by a debtor on a given future date or when asked to do so by the creditor
If the buyer/debtor signs the bill “accepted” then he/she cannot deny responsibility for the debt since he/she has acknowledged responsibility for the date.

Procedure for preparing a bill of exchange

A bill of exchange is written by a person (creditor) to his debtor to seek assurance that the debtor would pay the debt.
Step 1.The creditor prepares the draft and sends to the debtor.
Step 2.The draft and after accepting the conditions laid therein, he/she signs on it and write the words “accepted”. He/she then sends it back to the creditor. At this point the draft becomes a bill of exchange.
Step 3.The creditor receives the bill and may:

1. Keep it until maturity when he would present it to the debtor (accepted) for payment
2. Discount it with a bank. This is presenting to a bank or any financial institution and receiving cash against it before the maturity date. One is however charged(discounting charge) for the service
3. Negotiate it -Using it to pay someone else apart from the payee.

Parties to a bill of Exchange

1. Drawer-This is the person who gives the debtor the written order to pay the value of the bill of exchange(the creditor)
2. Drawee-This is the person to whom the order to pay is given (Debtor).He or she accepts the bill.
3. Payee-This is the person to whom the payment is to be made. The payee may be the drawer, or 

Essentials of a bill of Exchange

1. It must be signed by the drawer(creditor)
2. It must be accepted by the drawee(debtor)
3. It must be accepted unconditionally
4. It must bear appropriate revenue stamps

NOTE: A bill of exchange becomes a means of payment when it is presented (discounted) to the banks or negotiated.

Advantages of using Bill of exchange

1. The holder may pass rights on the bill to another person
2. Date of payment is determined
3. Acceptance by the debtor makes it legally binding
4. The payee may receive money before due dates by discounting

Disadvantages of using a bill of exchange

1. It may be dishonoured on maturity
2. Cash may not be readily available as banks may be reluctant to cash bills from debtors of doubtful financial backgrounds
3. It is an expensive form of credit as the creditor may lose part of the face value of bill in form of discount

Circumstances under which a bill of exchange is appropriate.

• When the creditor wants to be assured that the payment would be done
• Where the creditor wants money while the debtor is not able to raise it before the end of the credit period
• Where the creditor wants to use the debt to pay another debt.

b) Promissory note; this is a document in which a debtor promised to pay a creditor a specified sum of money at a specified time/date.

Features of a promissory note

1. There are two parties i.e. the drawer (debtor) and the payee (creditor)
2. There is a promise to pay
3. It is written by the debtor to the creditor
4. It does not require acceptance since it is signed by the person committing to pay the money
5. The writer/maker is liable on the note as he/she is the debtor.

After drawing and signing the promissory note, the debtor (borrower) sends it to the seller. (Lender)
The seller/lender may keep it until maturity and then present it for payment or may discount it with the banks before maturity.

Similarities between a bill of exchange and a promissory note:

1. Both act as evidence of the acknowledgement of a debt
2. Both may be discounted or endorsed before maturity
3. Both are negotiable i.e. can be transferred from one person to another
4. Both are legally binding
5. Both allow for adequate time within which to organize for the payment of the value of the bill or note.

Differences between a promissory note and a bill of exchange

Promissory note	Bill of Exchange
Drawn and signed by the debtor	Drawn and signed by the creditor
​It does not need to be accepted	​It must be accepted by the debtor for it to be valid
The drawer and drawee are one person	​The drawer is the creditor and the drawee is the debtor

c) The IOU 
​IOU is an abbreviation of ‘I owe you’
It is a written acknowledgement by a buyer of a debt arising from the purchase of goods and services on credit. It is written and signed by the buyer and sent to the seller
If the seller accepts it, then the buyer can receive goods and services on credit.
Though the IOU does not usually indicate the specific date of payment, the buyer acknowledges the debt and accepts responsibility to pay at a suitable future date
NOTE: The use of IOU is restricted to commercial transactions involving parties who have dealt with each other for a long time; hence they know each other well.

d. Other means of payment

1. Credit cards
2. Mobile money transfer services e.g. M-Pesa.

a) Credit cards(plastic money) 
​These are plastic cards that enable a person to purchase goods or services on credit from any business willing to accept the card
They are both a means of payment and a term of payment

b) Mobile money transfer services e.g. M-pesa 
This is a means of money transfer services provided by mobile phone service providers to their customers (subscribers)
It can only be used to transfer money between people subscribed to the same mobile phone network e.g. from one safaricom subscriber to another safaricom subscriber, Airtel to Airtel etc.
The sender must register for the money transfer service and is issued with a PIN (personal identification number)
When money is sent, both the sender and the receiver will receive a message confirming the transfer.
A person can send money anytime anywhere so long as he/she has value in his/her m-pesa, pesa pap account.
Each mobile service provider has a range of value that can be transferred using this method.
A small transaction fee is charges for the transfer i.e. for sending and withdrawing

1. Confidentiality-The secret PIN protects the value in the customer’s  account
2. Ease of use-The service is easy to use as the agents assists to carry out transaction
3. Speed-Money transfer is an instant service conveyed to the receiver via the short message service(SMS)
4. Convenience-The service is convenient to both the sender and the receiver, as they only need to go to the nearest agent(money can be sent/deposited or received anywhere)
5. Accessibility-The agents e.g. m-pesa agents are located in most parts of towns and also in rural areas. Money can hence be sent and received anywhere and anytime.
6. Affordability-The service charges are very low for registered users and very affordable for non-registered users
7. Security-Relatively secure when the sender uses the correct phone number of the receiver.

Next: Terms of Payment

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