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;
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
Disadvantages of cash as a means of payment
Circumstances under which cash payment is appropriate
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;
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
Details on a cheque; they include:
Types of 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;
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:
Advantages of using cheques
Disadvantages of using cheques
Circumstances under which a cheque is appropriate as a means of payment
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:
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,
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;
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;
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
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;
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;
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
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)
Differences between postal orders and money order
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
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;
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.
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:
Parties to a bill of Exchange
Essentials of a bill of Exchange
Advantages of using Bill of exchange
Disadvantages of using a bill of exchange
Circumstances under which a bill of exchange is appropriate.
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
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:
Differences between a promissory note and a bill of exchange
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
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
Next: Terms of Payment
Business Studies Notes Form 1 - 4
Atika School Team