EXERCISE XIII. DRAFTS. 159. The special purpose of this exercise is to illustrate the use of bills of exchange, or, as they are more commonly called, drafts. There are three kinds of negotiable paper in common use bills of exchange, promissory notes, and checks. With the use of the last two of these you are already somewhat familiar. In this exercise you will use two new books: a purchase book in which to record your purchases of merchandise, and a bill book in which to keep a record of your bills receivable and bills payable. 160. A Bill of Exchange, or, as we shall call it hereafter, a draft, is a written order drawn by one party on a second, directing him to pay a certain sum of money to a third. Of these three parties to a draft the one who writes or draws the draft is called the drawer, the one who is directed to pay the money, the drawee, and the one to whom it is payable, the payee. If William H. Covert owes John B. Hudson $100, and A. W. Dakin owes Mr. Covert the same amount, Mr. Covert may direct Mr. Dakin to pay $100 to Mr. Hudson and so cancel both debts by one The following illustration shows a draft drawn for this transaction. purpose. 161. Kinds. All drafts may be divided into two classes: personal drafts and bank drafts. A Personal Draft is one drawn by one person or company on a second person or company. It may be payable at sight, after sight, or after date. A Bank Draft is similar to a check in form, and is simply an order by one bank upon a second bank to pay a certain sum of money to the person named in the draft. Bank drafts, like checks, are usually payable on demand. Nearly every bank keeps a deposit in some other bank in a large city, and probably each of the large banks of the country keeps an account in some bank in New York. A bank draft on a bank in New York is known as a New York draft, and, similarly, one drawn on a bank in Chicago is known as a Chicago draft. The following illustration shows the usual form for A Bank Draft. CITY NATIONAL BANK OF SPRINGFIELD. NO 67862 SPRINGFIELD, MASS.. Sept 5, 1902 $12500 PAY TO THE ORDER OF William Chase TO THE FIRST NATIONAL BANK OF NEW YORK CITY } DOLLARS Geo, D. Porter CASHIER, 162. Uses. The three principal uses of drafts are: to collect debts, to make remittances, and for the convenience of travelers away from home. As a rule, a personal draft should not be drawn without advising the drawee, and under some circumstances it is well to obtain his consent before drawing. 163. A Bank Draft, payable in one of the larger commercial cities, is usually available anywhere, while individual checks are not readily accepted outside of the community in which the drawer lives except by persons to whom the drawer is well known. A bank draft bought for the purpose of making a remittance may be drawn payable to the person or firm to whom the remittance is to be Ar UNIVERSITY made, or it may be drawn to the order of the person making the remittance and by him indorsed to the order of the one who is to receive the money. By the latter method the draft carries its own history and shows the name of the person making the remittance. Bank drafts issued to travelers are made payable to the order of the person who intends to use them.and are issued in amounts which will be convenient for use. Many banks make a charge, called exchange, when they sell drafts, but the practice is not uniform. 164. Entries for Bank Drafts. The purchaser of a bank draft must pay cash for it, either giving currency or drawing his check; therefore his entry will be in his cash book and will be the same as if he actually paid the money to the person to whom he sends the draft. A bank draft will be the same as cash to the person to whom it is remitted, and he will make the same entry in his cash book as if he had received the currency or a check. 165. Money-Orders are issued at the principal post-offices and by express companies, and may be purchased and used for remittances the same as bank drafts. These money-orders are issued only for small sums and are not intended for use in making large remittances. They are as safe as New York drafts and may be deposited in a bank in the same manner as checks and bank drafts. 166. Time of Payment. A draft may be payable at sight like the one shown on page 132; it may be payable a certain time after sight like the one shown on page 139, which is payable 60 days after sight and must be accepted in order to fix its date of maturity; or it may be payable a certain time after date, like the one shown on page 137, which is payable one month after the date of the draft. 167. Sight Drafts. On page 132 you will find an illustration of a sight draft. Such a draft is payable at once on presentation to the drawee, except in those states where days of grace are allowed on sight drafts. Sight drafts are most frequently used as a means for collecting debts against parties in other cities, as explained in § 169. 168. Entries for Sight Drafts: The Drawer's Entry. When William H. Covert draws the sight draft shown on page 132, he will give or mail it to John B. Hudson, because he wishes him to present it and receive the money. If the draft is paid, the result of the transaction will be the same as if Mr. Covert had collected $100 from Mr. Dakin and paid it to Mr. Hudson; therefore the entries to be made in their accounts by Mr. Covert will be the same, and he must debit John B. Hudson, to whom the money is to be paid, and credit A. W. Dakin for paying the money. The following illustration shows Mr. Covert's journal entry when he issues the draft. John B. Hudson Drew sight draft on 100 HH 100 The Payee's Entry. When John B. Hudson receives this draft, he should immediately present it to A. W. Dakin for payment, or leave it at a bank to be collected. When Mr. Hudson receives the money for the draft, he should credit William H. Covert and not A. W. Dakin, because the money is paid to him by the order of Mr. Covert and to pay Mr. Covert's indebtedness to Mr. Hudson. The following illustration shows the entry to be made on the debit side of Mr. Hudson's cash book when the draft is paid. Wm. H. Covert Sight draft on A. W. 100 The Drawee's Entry. When A. W. Dakin pays this draft, he should debit William H. Covert and not John B. Hudson, because he is paying the money on Mr. Covert's order, and to pay his indebtedness to Mr. Covert. The following illustration shows the entry to be made on the credit side of Mr. Dakin's cash book when he pays the draft. Wm. H. Covert Sight draft favor J. B. 100 169. A Sight Draft for the Collection of a Bill would not be drawn till the debt was due, and usually not without proper notice to the drawee. The drawer of such a draft usually leaves it with some bank for collection and makes no entry on his books till the draft has been paid, and then his entry will be the same as if the debt had been paid without the use of the draft. The bank with which the draft is left for collection will send it to some bank in the drawee's city, and this bank will present the draft to the drawee for payment. If the drawee refuses to pay the draft, it will be returned to the drawer with a statement of the reasons for nonpayment. When the draft shown below has been collected, Henry W. Richards will debit Cash and credit Potter & Co., and Potter & Co. will debit Henry W. Richards and credit Cash. 170. Summary of Rules for Sight Drafts: 1. The Drawer of a sight draft for collection will usually make no entry for the draft until it has been paid, and then he will debit Cash and credit the Drawee. 2. The Drawer of a sight draft other than one for collection purposes will debit the Payee and credit the Drawee. 3. The Payee of a sight draft will make no entry for the draft until it has been paid, and then he will debit Cash and credit the Drawer. 4. The Drawee of a sight draft when he pays the draft will debit the Drawer and credit Cash. 171. Time Drafts are used for the same purpose as the sight draft shown on page 132, when the drawer desires to have the drawee pay a |