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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.

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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 Disadvantages 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.

4. Credit enables immediate

consumption of goods thereby

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 of credit, many

entrepreneurs resort to over-

expansion.

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

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providing for an increase in

material well-being.

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.

or pessimism.

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

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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.

2. Mercantile/Commercial/Trade Credit is granted by manufacturers,

wholesalers, and jobbers as an incident of sale.

3. Bank Credit

4. Investment Credit

5. Agricultural Credit

6. Export Credit

7. Public Credit