BOOKKEEPING INTERMEDIATE AND ADVANCED COURSE COMMERCIAL DRAFTS INTRODUCTION. SIGHT DRAFTS Study the following illustration, giving particular attention to the relation that the different parties bear to each other. Chas. H. Hardy, Hartford, Conn., owes Geo. H. Allen, Chicago, Ill., $500. Amos R. Graham, Chicago, Ill., owes Chas. H. Hardy the same amount. What may Chas. H. Hardy do to serve his own convenience, and at the same time save Amos R. Graham the trouble of sending the money from Chicago to Hartford ? Chas. H. Hardy writes an order directing Amos R. Graham to pay Geo. H. Allen $500. Allen presents the order to Graham, and he pays it in cash. Does this accomplish the same result as if Graham had sent the money to Hardy, and Hardy had sent it to Allen? Whom should Chas. H. Hardy debit? Whom should he credit? A Commercial Draft is a written order in which one person directs another to pay a specified sum of money to the order of himself, or to the order of a third person. The primary object of commercial drafts is to effect the settlement of debts without the risk or the inconvenience of transmitting money. There may be either three parties or two parties to a draft. The Original Parties to a three-party draft are: The Drawer, the one who draws the draft; The Drawee, the one on whom the draft is drawn ; The Payee, the one to whom the order is made payable. Many commercial drafts are drawn as a means of collecting debts, and a large number of them are dishonored. Unless there is a special reason, such as dealing with a delinquent debtor, a draft should not be drawn without a previous arrangement or an understanding between the persons. Without such notice, a draft ordinarily has no more significance than the sending of a monthly statement of account. 1 Sight Paper is paper payable on presentation. The following is the usual form of a sight draft. Study this sight draft in connection with the following diagram: The persons to a three-party commercial draft usually bear the following relation to each other: The Drawee generally owes the drawer; The Drawer generally owes the payee ; The Payee and the drawee bear no relation to each other. The drawee and the payee usually live in the same place. While not bound to do so, the drawer usually notifies the drawee before or at the time of drawing the draft. It is customary to send it to the payee, and he presents it to the drawee. The Drawer's Entry. Mason & Young mail the following draft to C. W. Gray, and make this journal entry: Mason & Young have given C. W. Gray an order equivalent to $500 cash, when presented to Gorham; therefore they should debit Gray. When F. C. Gorham pays the sight draft, he gets out of Mason & Young's debt, $500. He gave the money to Gray, but for the account of Mason & Young; therefore Mason & Young will credit F. C. Gorham. The Payee's Entry. Immediately upon the receipt of this draft Gray will take it to F. C. Gorham and receive the cash, or deposit it in his bank for collection and credit. Gray will get the cash, $500; he will make this cashbook entry on the left side: Gray's Cashbook May| | |Mason& Young|Light drafton acct | 500|| The cash received by Gray came from Mason & Young through Gorham; therefore Gray should credit Mason & Young. The Drawee's Entry. When the draft is presented to Gorham, he will pay it, and make this cashbook entry on the right side: Gorham's Cashbook Mayo | |Mason & Young Pf theinsight draft | 500 | | | Gorham paid Gray $500, but he paid one of his debts to Mason & Young, and thus got out of their debt; therefore he should debit them. The three-party draft is not used so frequently as formerly. The Two-Party Draft; its General Uses. Business men frequently employ the sight draft as an aid in the collection of accounts that are past due. For example, suppose Edgar McMickle, Paterson, N.J., owes Wilbert, Closs & Co., Springfield, Mass., $260.50. The account is past due, and Wilbert, Closs & Co. want the money. They will, after proper notice, draw the following draft: Wilbert, Closs & Co. will indorse the draft and leave it with the Springfield National Bank for collection. As they have no account with a Paterson bank, they will again indorse the draft and forward it to the Chemical National Bank of New York City, with whom they have a regular account. The following indorsements will appear on the back of the draft. The blank indorsement, simply the name, is but little used in business. Banks insist on the use of the full indorsement. A paper bearing a full or special indorsement affords protection to the indorsee, as collection cannot be made without his indorsement. The Chemical National Bank will collect the money from McMickle through a bank in Paterson, and then notify the Springfield National Bank that the draft has been collected and the amount credited. The Springfield National Bank notifies Wilbert, Closs & Co. that the proceeds have been credited. |