Credit and Collection

Transition from Barter Economy to Money Economy Barter is the exchange of goods and services without the presence of money. Plunder or Robbery is the brute force and strength of acquiring goods that were owned by someone. In primitive times, recognition of private property was established so things that are already owned by one individual can be conveyed unto another, either as gifts or in exchange for other articles. Barter is inefficient methods of exchanging goods because goods offered in exchange were of quiet different values A common medium of exchange was developed such as fish-hooks, sea shells, cows, slaves, cotton, beads, cattle, tobacco, hoes, knives, and many others.

The Need for Money Adam Smith author of the book, Wealth of the Nations, who entertained the belief that money originated from mans rational effort to meet the necessity of finding some medium of exchange. Multiplier Effect In the beginning, the use of money was not intended for production, but for consumption. This explains that taking interest on money lent was not only looked upon with disfavour but actually forbidden. For Aristotle, money is barren and it does not breed. As such, he concluded that it is intended to be used only in exchange but not to increase at interest. In due time, it was modified and justified the thought of governing interest through history such as the doctrines of damnun emergens (that is suffering of a loss by the lender) and lucrum cessans (that is the loss of chance to gain).

The Birth of Credit Credit comes from the Latin word credere which means to trust; means borrowing of money; is essentially a transfer of goods, services or funds giving rise to obligations that must be discharged in the future.

Two Parties Involved in Credit 1. Debtor credit to him represent power or the ability to obtain goods without an actual tender of payments. 2. Creditor as a seller of goods or services on credit, has both the moral and legal right to demand of his debtor to pay the obligations when due.

Banking refers to an entry in the books of a bank showing its obligation to a customer. Bookkeeping is an entry showing that the person named has a right to demand something but not necessarily money. Commerce is an exchange transaction. Buying on Credit or Extension of Credit involves the purchase and sale of goods and services with money payments to be made at some future time.

The Use of Credit The Use of Credit is the life-blood of business. Business entities and individuals find credit a distinct convenience. The customers are able to obtain the desired goods even at a time when they suffer from lack of cash or purchasing power. Advantages of Credit 1. Credit facilitates and contributes to the increase in wealth by making funds available for productive purposes. 2. Credit saves time and expense by providing a safer and more convenient means of completing transactions. 3. Credit helps expand the purchasing power of every member of the business community from producer to the ultimate consumer. Disadvantages of Credit 1. Credit, at times, encourages speculation. 2. Credit also tends to contribute to extravagance and carelessness on the part of people who obtain it. 3. Because entrepreneurs expansion. of credit, many resort to over-

4. Credit enables immediate consumption of goods thereby

4. Owing to the observation that business can be expanded or contracted rapidly through the use of credit, businessmen are not susceptible but eventually succumb to an air of confidence

providing for an material well-being.

increase

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or pessimism.

5. Credit helps expand economic opportunities through education, job training and job creation. 6. Credit spreads progress to various sectors of the economy. 7. Credit makes possible the birth of new industries. 8. Credit helps buying become more convenient for customers.

The Cost of Credit Interest charge for the use of credit. Operating Expenses Risk

Classes and Kinds of Credit 1. Personal/Consumer Credit a. Charge Account (Open-Book Credit, Open Charge Account, 30-Day Credit) facilitated using credit card. Advantages 1. It is a very convenient way of shopping. 2. It eliminates the inconvenience as well as the danger of carrying too much money. 3. Charge accounts enable customers to buy goods only at the time they want them. 4. Charge account enables consumers to obtain goods even before they have the money. 5. Charge accounts provide a valuable means of reference in many business transactions. Disadvantages Installment Credit

Personal Loans Promissory Note is a written promise that the amount borrowed will be repaid on a certain date. Signature or Character Loan borrowing of a person by his signature alone (with good credit standing). Co-Signer responsible for paying the debt should the borrower fail to pay. Collateral anything used as security for a loan. Secured Loan a loan backed by security. Endorser becomes responsible only after the lender has used all other means of collecting payment. by manufacturers,

2. Mercantile/Commercial/Trade Credit is granted wholesalers, and jobbers as an incident of sale. 3. Bank Credit 4. Investment Credit 5. Agricultural Credit 6. Export Credit 7. Public Credit