Documents Used in Home Trade 3
Causes of undercharge include:
Circumstances under which a debit note will be sent to the buyer
a) When there is an undercharge in the invoice
b) If the buyer had been given a discount that was not due to him
c) If some items had been omitted in the original invoice
d) If the buyer decides to retain some empty containers or crates
Differences Between a debit note and a credit note
Debit Note
1) Issued to correct an undercharge
on the invoice.
2) Written on blue or black.
3) Issued when containers have not
been returned
Credit Note
1) Issued to correct an overcharge
on the invoice
2)Usually written in red
3) Issued when containers have
been returned.
Documents used at the payment stage
This is the final stage of a credit business transaction.
It takes place after the invoice has been received and ascertained to be correct or where necessary,corrections made.
The documents used at the payment stage include;
i) Receipt
This is a document issued to the buyer by the seller as proof that payment has been made.
- Payment can be done in cash, cheque, other forms of money or in kind
- The receipt also serves as a source document for making entries in books of accounts.
Contents of the receipt include;
The issuance of a receipt by the seller to the buyer after receiving payment marks the end of the credit transaction between the seller and the buyer(where payment has been done in full)
- A receipt serves the same purpose as the cash sale slip serves the same purpose as the cash sale slip
ii) Statement of Account
This is a document prepared by the seller and sent to the buyer, giving a summary of all the dealings/transactions between them during a particular period of time, usually a month.
It has the following details;
-Debit column-increases in the amounts payable due to credit sales or under charge correction.
-Credit column-Decrease in the amounts payable due to overcharges corrected or payments recorded.
-Balance column-Amount owing after each transaction (Balance outstanding)
• Any discounts allowed to the buyer
• Date when the buyer is expected to clear the balance
• Terms of credit e.t.c.
-The statement of account enables the buyer to ascertain the correctness of the transactions which have taken place with the seller over the stated period
iii) IOU
An IOU (I owe you) is a document written by the buyer and sent to the seller to acknowledge a debt.
-It does not specify date when settlement will be made.
-It acts as evidence that a debt exists.
Summary of documents used in home trade
Document sent by buyer
Document sent by seller
Means of Payments
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;
i) Cash
ii) Means of payment provided by the post office
iii) Means of payments provided by the commercial banks
iv) Means of payments which arise from private arrangements between sellers and buyers
v) Other means of payment.
i) 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
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:
i) It is the only means of payment which is a legal tender
ii) Convenient for settlement of small debts
iii) Convenient to people with or without bank accounts
iv) Cash is readily usable
Disadvantages of cash as a means of payment
i) Not convenient to carry around
ii) Cash can be lost or stolen easily as it is readily usable
iii) Payment is difficult to prove unless a receipt is issued
Circumstances under which cash payment is appropriate
i) Where the amounts involved are small
ii) Where the payee (receiver) does not accept other means of payment
iii) Where cash is the only means available
iv) Where the payee requires cash(money) urgently
v) Where there is need to avoid expenses
associated with other means of payments
ii) 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:
a. Cheques
b. Bank drafts/bankers cheques
c. Credit transfers
d. Standing orders
e. Travellers cheques
f. Telegraphic transfers
g. Debit cards
h. 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
i) Drawer
This is the person or institution who writes and issues thecheque.He is usually a current account holder with the bank
ii) Payee
The person or institution to be paid
iii) Drawee
The bank(where the drawer has an account)
Details on a cheque; they include:
Types of cheques
i) Open cheques
ii) Crossed cheques
iii) Bearer cheques
iv) Order cheques
i) Open cheques
This is acheque that can be presented for payment over the counter. You present it and cash is paid to you.
ii) Crossed cheques
This is acheque 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;
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
Dishonouring a cheque
A cheque is dishonored if the bank refuses to pay and returns the cheque to the drawer.
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