2.Discuss the types of Commercial instruments including their distinct character.
Commercial instruments are financial documents that are used in commercial transactions to evidence the transfer of ownership or the right to payment for goods or services. These instruments play a significant role in facilitating business transactions by providing a secure means of conducting trade.
There are various types of commercial instruments, each with its distinct characteristics. Some common types include:
1. Promissory Note: A promissory note is a legal document in which one party (the issuer) promises to pay a specified amount of money to another party (the payee) at a predetermined date or on-demand. It is typically used as a form of short-term borrowing and acts as a written promise to repay a debt. Promissory notes are negotiable instruments, meaning they can be transferred to third parties, enabling the payee to sell or discount the note before its maturity.
2. Bill of Exchange: A bill of exchange is a written order issued by one party (the drawer) to another party (the drawee) to pay a specified amount of money to a third party (the payee) at a set future date. It is a legally binding document used in both domestic and international trade. Unlike a promissory note, a bill of exchange requires acceptance by the drawee to become a binding obligation. It can be transferred by endorsement, facilitating its use as a payment instrument.
3. Cheque: A cheque is a written order by an account holder (the drawer) to their bank (the drawee) to pay a specified amount of money to the payee. It allows the drawer to authorize the transfer of funds from their account to the payee without the need for physical cash. Cheques are widely used for payment in commercial transactions, as they provide a record of payment and can be easily transferred between parties.
4. Letter of Credit: A letter of credit is a financial document issued by a bank on behalf of a buyer (the applicant) to guarantee payment to the seller (the beneficiary) for goods or services. It provides a secure method of payment in international trade, ensuring that the seller will receive payment if they fulfill the terms and conditions specified in the letter. The letter of credit serves as a commitment from the issuing bank to make payment upon presentation of the required documents.
5. Trade Acceptance: A trade acceptance is a time draft drawn by the seller on the buyer, committing the buyer to pay a specified amount of money at a future date. It is used primarily in domestic trade and acts as a payment instrument similar to a bill of exchange. Trade acceptances are commonly used in credit sales, allowing the seller to receive payment at a later date while providing the buyer with a deferred payment option.
Each of these commercial instruments has its unique features and serves different purposes in facilitating commercial transactions. Promissory notes and bills of exchange are legally binding promises to pay, while cheques and letters of credit act as payment instruments. Trade acceptances, on the other hand, combine elements of both promissory notes and bills of exchange.