Home Trade - Business Studies Form 1 Notes

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The Office - Business Studies Form 1 Notes

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Introduction
Importance of Trade
Classification of Trade
- Home Trade
- Foreign Trade
Forms of Home Trade
- Retail Trade
- Wholesale Trade
Documents Used In Hometrade
Means of Payment
Terms of Payment
- Types of Terms of Payment
- Discounts
Money Remittance Services
- Telegraphic Transfer
- Standing Order

Introduction

Trade refers to buying and selling of goods and services with the aim of making profit.
Home trade (local trade) refers to trade that is carried out within the boundaries of a country.

Importance of Trade

Helps people to acquire goods and services they don’t produce.
It avails a variety of goods and services to the people
Enables producers dispose their surplus
Creates employment
Encourages specialization and division of labour
Enhances good social relations and understanding among the parties involved in trade
It is a source of revenue to the government through taxation
Ensures steady supply of goods and services
Provides a channel through which goods and services are distributed
Promotes full exploitation and utilisation of economic resources.

Classification of Trade

Trade can be classified into two:

Home (local/domestic) trade
Foreign (international) trade

Home Trade

This trade that is carried out within the geographical boundaries of a country.

Classification of Home Trade

Retail trade: this involves the buying of goods and selling them to the final consumer. It is carried out by retailers
Whole sale trade: this is trade which involves the selling of goods in large quantities to other traders for sale. It is carried out by a wholesaler.

Foreign Trade

This is trade that is carried out between two or more countries.

Classificationof Foreign Trade

Bilateral trade: this is trade which is carried out between two countries
Multilateral trade: this is trade which is carried out among many countries
Import trade: this is trade which involves the purchase of goods and services from other countries
Export trade: this is trade which involves the selling of goods and services to other countries

Forms of Home Trade

There are two form of home trade, namely,

Retail trade
Wholesale trade

Retail Trade

This is a form of home of home trade which involves the buying of goods and selling them to the final consumer.
The person who carries out retail trade is known as a retailer.

Types of Retailers

Retailers can be classified into two, namely.

Small scale retailers
Large scale retailers

Small Scale Retailers

These are retailers who require small amount of capital to start and operate their businesses. They mostly operate small scale businesses.
They are found in all parts of the country hence forming the majority of retail traders.
They are mostly owned by one person.
They deal mostly in fast moving consumer goods such as foodstuffs, kerosene, detergents etc.

Classification of Small Scale Retailers

Small scale retailers can be classified into two:

Small scale retailers without shops
Small scale retailers with shops

Small Scale Retailers Without Shops

These are those small retailers who don’t operate from fixed premises. They include:

Itinerant traders
Roadside sellers
Open air market traders
Automatic vending machines

Itinerant Traders

These are traders who from one place to another to sell their goods. They usually move on foot, bicycles or using motor cycles.
They include hawkers and peddlers.
They mostly sell goods such as clothes, plates, vegetables, fruits etc.
They require a license from the respective local authority before the start operating

Characteristics of Itinerant Traders

They are found mainly in densely populated areas
They move from one place to another to sell their goods
They are very persuasive
Their prices are not fixed

Advantages of Itinerant Traders

Flexible since they move from one place to another
Requires little capital to start and operate the business
Convenient since they deliver goods to customers
They mostly sell in cash hence they do not suffer from bad debts
They require few legal formalities to start

Disadvantages of Itinerant Traders

They are affected by bad weather conditions since they operate in open air markets
Sometimes it is difficulty to transport goods to some places e.g. far away places
They do not offer a guarantee in case goods are found to be defective

Roadside Sellers

These are traders who sell their goods at places where people pass by e.g. along busy streets.
They may place their goods on the ground, on trays, on mats or on empty sacks
They mostly sell fast moving goods such as sweets, roasted maize, scratch cards, fruits etc.

Open Air Market Traders

Open air markets are places set aside by the government where people meet to buy and sell goods.
Traders pay a fee in order to be allowed to sell goods in these markets.
The market under the administration of the local authority (county government).
These markets are open on specific days of the week.

Automatic Vending Machines

These are coin operated machines. Coins are inserted into the machine depending on the price of the goods one wants to buy. The machine will the automatically release the required item.
They are mostly used to buy items like drinks and postage stamps.

Advantages of automatic vending machines

They offer 24 hour services
Does not need an attendant hence reducing labour costs
Serves customers quickly
Renders accurate services
Saves on rent since they are located in an open place
Saves on space

Disadvantages of automatic vending machines

They sell limited varieties of goods
Customers may use fake money to buy from the machine
Machines are expensive to install
Breakdown of the machine inconveniences customers
Not all coins are used to buy goods from the machine
They do not offer personalized services
Coins may be heavy to carry around

Small scale retailers with shops

These are those small scale retailers that operate from fixed premises. They include:
- Single shops (unit shops)
- Tied shops
- Kiosks
- Market stalls
- Canteens
- Mobile shops

Single shops (unit shops)
- Single shops are fixed premises. A unit shop is usually operated by one person who may get assistance from his/her family or employ attendants
- They are commonly known as dukas in Swahili
- They mostly operate in one line of commodity e.g. clothes, groceries, books etc.
Tied shops
- These are retailers that sells the products of one particular manufacturer.
- The shops are owned and controlled by the manufacturer. The manufacturer designs the outlook of the shop
- Examples include Bata shops which sell shoes from Bata, petrol stations for Caltex, total, kobil etc.
Kiosks
- These are small shops which sell fast moving goods such as newspapers, sweets and soft drinks.
- They are mostly located in strategic places such the corner of a busy street, residential areas, road sides etc.
Market stalls
- These are permanent stands found in market places.
- They are open daily.
- They are constructed and owned by the county governments but are leases and hired to traders
Canteens
- These are retail shops that are found in institutions such as schools, colleges, police stations, hospitals etc.
- They sell goods mostly to people within the institution though they also sell to outsiders.
- They can be operated by the management of the institution or by individuals.
- They deal in a variety of consumable goods such as tea, sodas, sugar, foodstuffs etc.
Mobile shops
- These are vehicles that are converted into shops from where customers can buy goods.
- Mobile shops visit different places at different times

Features of small scale retailers

They invest small amounts of capital in the business
They are conveniently located to serve the needs of customers more efficiently
They provide personal attention with customers
They may provide credit facilities to their loyal customers
They may operate for longer hours
They are flexible
Overhead costs are low

Advantages of small scale retailers

Requires little amount of capital to start hence it is easy to raise the startup capital
Retailers may give credit facilities to their loyal customers
Retailers have close contact with their customers hence they are able to attend to their complaints and concerns
They are able to use cheap or free labour from family members
Overhead costs and risks are low
The business is simple to manage
Few legal formalities are required when starting the business
It is flexible hence the trader can change from one line of trade to another
The owner can keep business secrets
Decision making is faster since the owner does not need to consult anyone

Disadvantages of small scale retailers

The trader has limited access to wider sources of capital
The trader may not afford to hire specialised staff
The business may suffer from bad debts
The trader does not enjoy economies of scale
The sales volume is low due to the little amount of invested capital
Lack of good managerial skills
The business may face competition from bigger business

Ways in which customers benefit by buying from small scale retailers

They can get free advice on use of the product
There is personal attention hence they are able to voice their concerns directly to the trader
They are assured of steady supply of goods
They can be allowed credit facilities
Goods are brought nearer to them
They can enjoy personalized services from the trader

Large Scale Retailers

These are retail businesses which operate on large scale.
Types of large scale retailers
Large scale retailers include the following:
- Supermarkets
- Chain stores
- Departmental stores
- Hypermarkets
- Mail order stores

Supermarkets
- These are large self-service stores which mostly deal in house hold goods such as utensils, foodstuffs and clothes.
- Goods are displayed on shelves. Each item has a price tag.
- The walks around, selects and picks the items he/she wants to buy and pays for them at the cashier stationed near the exit.

Features of supermarkets
- Requires a large amount of capital to start
- Stocks a variety of goods
- They offer self-service facilities
- Goods have price tags
- Prices of goods are fixed i.e. there is no bargaining
- They do not offer credit facilities
- They sell goods at comparatively lower prices
- Labels are displayed to help shoppers in finding the goods easily
Advantages of supermarkets
- They stock a variety of goods , therefore the customer is able to find what he/she wants
- Their prices are comparatively cheaper
- Self-service system enables them serve many customers within a short time
- There is no risk of bad debts since all goods are sold on cash basis
- The price tags guides the customer
- Shop attendants can assist in packing goods on behalf of the customer
- Supermarkets employ fewer attendants hence reducing their labour costs
- Self-service may promote impulse buying to the benefit of the supermarket
Disadvantages of supermarkets
- There is no personal attention given to customers
- They do not allow credit facilities
- They encourage impulse buying due to self-service. This makes customers buy goods which they do not need
- They are located mainly in urban areas
- They do not deliver goods to the customers’ premises
Chain stores
- These are large-scale businesses with separate branches which are managed and organised centrally e.g. African retail traders.
- Chain stores sell their goods at the same price irrespective of the location.
- They have similar shop-front appearance and displays.
- They sell identical goods in all their stores. They also have a central stores control system.

Characteristics of chain stores
- All purchases are centralised
- Prices are same for all their products in all their branches
- Sales are decentralised
- All branches deal in identical goods
- They are uniform in outward appearance and interior design
- They are managed and controlled by a central administration at the head office
- They sell their goods on cash basis
Advantages of chain stores
- They sell goods at comparatively lower prices. This is due to the fact that they buy goods in large quantities from the supplier hence are given trade discounts enabling them reduce their selling prices
- The cost of running a chain store is managed at the head office hence promoting sharing of costs among various branches
- Slow moving goods in one branch can be moved to another branch where demand is higher
- Identical goods sold by chain store, similar shop-front colours and similar design publicises the business
- They serve a wider market since they are spread all over the country
- Goods are sold on cash basis hence avoiding bad debts
Disadvantages of chain stores
- They are highly inflexible i.e. they can adjust to rapid changes in market conditions
- They require large amount of capital to start
- Centralisation of management leads to slow decision making which may result into loss of an opportunity
- They do not stock a variety of goods since all branches stock identical goods
- Most of don’t offer credit facilities
- Lack of personal touch with customers
- Lack of personal touch between the employer and the employees due to central management may reduce incentive for hard work among staff
Departmental stores
- A departmental store comprises many single shops under one roof and one management.
- Each department deals in a different line of goods and is controlled by a departmental manager.
- The departmental manager is responsible for buying in his/her own department though sometimes this may be centralised.
- Control of general services such as transport, personnel and finance are centralised
- They are mostly located in town centres.

Features of chain stores
- They offer a wide variety of goods at relatively lower prices
- They are usually located in towns
- Each department is managed by a departmental manager
- Each department deals in a different line of goods
- They consist of many shops under one roof and central management
- They have different independent shops, each forming a department
- Each shop is responsible for buying its own stock
- Goods are not transferable from one department to another
- They sell goods on cash basis
Advantages of departmental stores
- Customers are able to buy all they need under one roof
- Their selling prices are relatively low
- The stores are able to employ specialised staff who provide quality services
- They generally open for long hours
- They offer adequate parking facilities to customers
- Decision making is easy and quick since each department is responsible for making its own decisions and implementing them
Disadvantages of departmental stores
- They require a large amount of capital to start and operate
- A departmental store may run one department at a loss in order to attract customers
- They are mostly located in urban areas
- Lack of personal contact with customers
- Managerial problems arise due to their large size
- Credit facilities are not allowed
Hypermarkets
- A hypermarket is a large shopping centre in one building comprising a variety of businesses under different management.
- Hypermarkets are mostly located in places far away from the city centre and are accessible with ample parking space.
- Examples of hypermarkets in Kenya include the sarit centre, yaya centre, uchumi hyper and the Westgate shopping mall.

Characteristics of hypermarkets
- They have goods access to roads
- They have ample parking space
- They have many businesses under one roof
- They are attractive and convenient to shop in
- They are located in the outskirts of towns
- They offer a variety of goods and services
Disadvantages of hypermarkets
- They provide a variety of goods and services to customers hence customers do all their shopping under one roof
- They offer easy and convenient parking to their customers
- They are open for long hours
- Some shops in the hypermarket may offer credit facilities by accepting credit cards
- Hypermarkets save on space by having all businesses under one roof. This reduces rents and rates
Disadvantages of hypermarkets
- Since they are located away from the city, they serve a limited number of people especially those with cars
- They may require large space for their establishment
- Their prices are not controlled therefore some businesses may charge high prices
- They require a large amount of capital to start and operate
Mail order shops
- These are retail businesses where buying and selling of goods is done through the post office.
- Mail order shops advertise their goods in catalogues which are sent to the post office. To make a purchase, the customer selects the goods from the catalogue and sends the order by mail. They may also advertise their goods through the print media, journals, radios etc.
- The goods are dispatched mostly on the basis of cash with order or cash on delivery.
- They mostly deal in less bulky, high value, durable and fragile goods.

Characteristics of mail order shops
- They sell goods through the post office
- They advertise their goods through the print media, electronic media, journals and cinemas
- Transactions are carried out through the post office
- Customers do not visit the selling premises
- Goods are dispatched on the basis of cash with order or cash on delivery basis.
- They may have large warehouses
- They mostly sell on cash basis
- There is no contact between the buyer and the seller
Advantages of mail order shops
- They are able to reach customers who are far away
- They do not require the services of sales personnel
- They may not require transport facilities
- It is possible to control the distribution of goods
- There is no need for shops and show rooms
- They sell at relatively lower prices since their operation costs are lower
- They eliminate the need to make trips from one shop to another in search of goods
Disadvantages of mail order shops
- High cost of advertising increases the price of the goods
- Inspection of the goods by the customer is not possible
- Limited variety of goods are sold
- Personal contact between the seller and the buyer is not possible
- This method of selling is only suitable for those who can read and write
- Problems arising in the post office may affect the business e.g. strikes
- Where goods are paid in instalments, the risk of losses due to bad debts is high
- It is not possible to operate the business in places where post office services are not available
- Advertisements in the catalogue may be misleading
- Most mail order shops do not allow credit
- It may lead to impulse buying
Functions of retailers
- Functions of retailers can be discussed by considering the services they render to consumers, wholesalers and producers

Services provided by retailers to consumers
- They offer credit facilities
  - Since retailers have personal contacts with their customers, they are able to give credit to the customers they trust
- They offer after-sales services
  - These are services to buyers by the seller after they have bought the goods in order to retain them. These services may include transport, installation, repair etc.
- They provide a variety of goods to consumers
  - Retailers can buy and stock goods from different manufacturers and wholesalers which they later sell to consumers
- They offer advisory services
  - Retailers advise consumers on matters relating to choice and use of products
- They avail goods to consumers
  - Retailers make goods available to consumers at the right time and place
- They break the bulk
  - Retailers buy goods from wholesalers and manufacturers in large quantities and later sell them to consumers in relatively smaller quantities
Services provided by retailers to producers
- They market goods by displaying them in their shops for all customers to see
- They link producers to consumers by ensuring that producer’s products do reach the consumer
- They provide information to producers on consumer demand in the market
- They break the bulky on behalf of producers
- They provide finances to producers by buying goods from them
Services provided by retailers to wholesalers
- They provide information on market demand to wholesalers
- They distribute goods on behalf of the wholesalers
- They transport the goods on behalf of the wholesaler
- They store goods on behalf of the wholesaler
- They break the bulk on behalf of the wholesaler
- They provide finances to wholesalers by buying goods from them
- They market the goods on behalf of the wholesaler

Qualities of a Good Retailer

Should be customer friendly
Be a good buyer so as to buy from the right supplier
Able to forecast future demand changes and market trends
Be a good manager
Honesty in his/her business dealings
Good record keeping skills
Good personal habits and hygiene

- Wholesale trade is the buying of goods in large quantities for the purpose of reselling in smaller quantities to other traders.
- Wholesale trade is done by a wholesaler. A wholesaler is a trader who buys goods in bulk from producers and sells them to other traders, normally retailers.

Classification of Wholesalers

- Wholesalers can be classified in the following ways

According to the range of products they handle
According to the geographical area in which they operate
According to the method of operation

According to the range of products they handle

- When classified according to the range of products they handle, wholesalers can be categorised into:

General merchandise wholesalers
General line wholesalers
Specialised wholesalers

General merchandise wholesalers
- The word merchandise means goods. These are wholesalers who deal in a wide variety (types) of goods. E.g. a wholesaler who sales hardware, foodstuffs, clothing, chemicals etc.

General line wholesalers
- These are wholesalers who deal in a wide range of products but within one line e.g. a wholesaler who sells all types of hardware such as iron sheets, nails, cement etc.

Specialized wholesalers
- These are wholesalers who deal in particular goods from a given line of product. E.g. a wholesaler who specializes in the distribution of iron sheets only from the line of hardware.

According to the geographical area in which they operate

- When classified according to the geographical area in which they operate, wholesalers can be categorized into:

Nationwide wholesalers
Regional wholesalers

Nationwide wholesalers
- These are those wholesalers who distribute their products all over the country.
- They establish warehouses or depots in different parts of the country from where they distribute their products

Regional wholesalers
- These are those wholesalers who sell their products to certain parts of the country only e.g. soda and bread distributors

According to their method of operation
- When classified according to the method of operation, wholesalers can be categorised into:

Cash and carry wholesalers
Mobile wholesalers
Rack jobbers
Drop shippers
Truck wholesalers (distributors)

Cash and carry wholesalers
- These are those wholesalers who operate on a self-service basis like a supermarket. Traders come, pick their goods and pay in cash

Mobile wholesalers
- These are wholesalers who use vehicles to go round as they sell their goods to traders e.g. distributors of bread.

Rack jobbers
- A jobber is a person who buys goods from a producer or from another country for reselling.
- Rack jobbers are wholesalers who specialise in selling particular products to other specialised wholesalers e.g. a wholesaler who buys horticultural products from farmers and sells them to other wholesalers
- Rack jobbers usually stock their goods in shelves or racks from which customers select the goods to buy
- Rack jobbers may allow their customers to pay for their goods after selling them.

Drop shippers
- These are those wholesalers who do not have stores of their own.

Truck wholesalers (distributors)
- These are those wholesalers who combine buying, selling and delivery in one operation

Functions of wholesalers

- The functions of wholesalers can be discussed by considering the services they render to producers, retailers and consumers

Services provided by wholesalers to consumers

They ensure steady supply of goods to consumers through retailers
They stabilise market prices by ensuring a steady supply of goods in the market
They make it possible for producers to enjoy a variety of goods
They break the bulky thereby enabling the consumer through the retailer to get the goods in relatively smaller and convenient quantities
Through the retailer, they give information to consumers on new products available or on changes in products
They transmit consumers’ complaints to producers

Services provided by wholesalers to retailers

They provide a variety of goods to retailers
They avail goods at places convenient to retailers
They break the break for the benefit of retailers
They may offer transport services to retailers
They may offer credit services to retailers
They sort, grade, blend, pack and brand goods thereby relieving the retailer the bother of having to do so.
They store the goods on behalf of retailers
They advise retailers on business matters such as new products, retail prices of products etc.
They link retailers and producers thereby passing information from retailers to producers and vice versa.

Services provided by wholesalers to producers

They distribute goods on behalf of the producer
They relieve the producer of the risks involved in selling the products. Such risks may include a fall in market price, theft of the goods, and damage to the goods etc.
They store goods on behalf of the producer
They carry out market research on behalf of the producer and pass the information obtained to the producer
They transport, break the bulk, sort, grade, pack. Blend and brand goods on behalf of the producer
They market the products on behalf of the producer
They provide finance to producers by buying goods from them

Circumstances when the wholesaler can be eliminated in the chain of distribution

Where retailers operate in large scale
Where the producer decides to distribute goods directly to the retailers
Where the number of retailers to be served are few and can be reached easily by the producer
Where the goods being distributed are perishable in nature

Documents Used In Hometrade

- These are documents which are used to show that trade has taken place. These documents are discussed below

Letter of inquiry
- This is a document that is sent by the buyer to the seller to inquire about the availability of goods, their prices and methods of supplying the goods.
- It enables the buyer to determine the goods available and the most suitable price.
- The letter of inquiry can be general or specific. A specific letter of inquiry inquires about a particular whereas a general letter of inquiry seeks information about all goods stocked by the seller
Catalogue
- This is a booklet which briefly describes the goods stocked by the seller.
- It responds to the general letter of inquiry.
- It contains the following:
- After-sale services offered by the seller
- Packaging and posting expenses to be incurred
- Delivery services to be used
- Terms of sale
Quotation
- This is a document that is sent by the seller to the buyer in response to a specific letter of inquiry.
- It shows the terms of sale, prices of the goods and a brief description of the goods to be supplied.
- It contains the following:
- Prices of goods or services
- Terms of sale
- Any discount offered
- Any warrant given
- Time of delivery
- Any other special instructions
Pricelist
- This is a list of items sold by the trader together with their prices.
Order
- This is a document sent by the buyer to the seller requesting the seller to supply the goods or services whose details are given in the order.
- It gives a list of goods or services required, date when they are to be delivered and how they are to be transported.
- An order that is used in home trade is known as the local purchase order-
- Its contents include:
- Names and addresses of the buyer and the seller
- The number of the order
- Quantities to be supplied and the amounts to be paid
- A brief description of the goods ordered
- Price per item
- Special instruction on matters relating to packaging and delivery
Acknowledgement note
- This is a document which is sent by the seller to the prospective buyer to inform him/her that the order has been received and is being acted upon.
Packaging note
- This is a document which is prepared by the seller to the buyer where goods are being transported by an independent transporter.
- It gives details of the goods contained in the package or container.
- A copy of the packing note is packed with the goods to enable the buyer make a spot check when the goods arrive.
- It contains the following:
- Quantities of goods packed
- A brief description of the goods
- The means of delivery
- NOTE: a packing note does not contain prices of goods. This is to ensure that those people transporting the goods don’t get to know the value of the goods.
- This is done to avoid theft.
Advice note
- This is a document which is sent by the seller to the buyer after the goods have been dispatched to inform him/her that the goods have been dispatched.
- It is usually sent through the fastest means available so as to reach the buyer before the goods arrive.
- An advice note therefore serves the following purposes:
- It informs the buyer that goods are on the way so that in case of any delay in delivery, the buyer can make inquiries
- It alerts the buyer so that the necessary arrangements can be made for payment when goods arrive
- It contains the following:
- The means of delivery
- A description of the goods
- The quantity dispatched
- NOTE: an advice note can serve the purpose of the acknowledgement note.
Delivery note
- This is a document which shows that the goods have been delivered by the seller.
- The delivery note is sent together with the goods. It is prepared in triplicate. A copy is retained by the seller and the other two copies are sent with the goods to the buyer.
- After counterchecking the delivery note with the goods, and the buyer is satisfied, he/she signs both copies of the delivery note, keeps the original and returns a copy to the seller.
- It contains the following:
- The names and addresses of the seller and the buyer
- Date of delivery
- Delivery note number
- Quantities and descriptions of the goods
- Space for the buyer to sign and comment on the condition of the goods delivered
- Order number
- NOTE: the delivery note like a packing note does not contain the prices of the goods as a precautionary measure
Consignment note
- To consign means to send. The seller is the consignor and the buyer is the consignee. A consignment note is a document that is prepared by the transporter when the goods are received from the seller for transportation.
- A consignment note is sent when the seller does not use his/her own means of transport hence hires a transporting company to carry the goods.
- A consignment note is prepared by the transporting company and issued to the seller who completes and signs it. The seller returns the consignment note to the transporter who takes it together with the goods to the buyer. On receipt of the goods, the buyer signs the consignment note as evidence that the goods were actually transported.
- It contains the following
- Details of the goods to be transported
- Names and addresses of the seller and the buyer
- Terms of carriage and conditions of transporting the goods
Invoice
- This is a sent document that is sent by the seller to the buyer to demand payment for goods delivered.
- There are two types of invoices:
- Cash invoice
- Credit invoice
- A cash invoice is sent when payment is expected immediately after delivery thus acting as a cash sale receipt. A credit invoice on the other hand is issued when the buyer is allowed to pay at a later date.
- The invoice serves the following purposes:
- It shows the details of goods sold i.e. their quantity, prices and terms of sale
- It demands payment from the buyer
- It is used as a source document in recording transactions in the books of account
- Shows details of goods sold
- Shows amount of discount
- Shows the level of indebtness by the buyer
- The letters E & O.E (errors and omissions excepted) are printed at the bottom of the invoice. These letters means that the seller has the right to correct any errors and omissions made in the invoice.
A bill
- This is a document which is sent by the seller to the buyer to demand payment for services rendered by the seller.
- It is used by businesses which provide services
Pro-forma invoice
- This is a document which is sent by the seller to the buyer before goods are delivered. It shows how the invoice will look like in case the buyer buys the goods.
- It serves the following purposes
- It is a polite way of asking for payment before the goods are delivered
- It is sent when the buyer does not want to give credit
- It is used by importers to get customs clearance before goods are delivered
- It is issued to the agent who sells goods on behalf of the seller
- It shows the amount the buyer will pay in case the order is accepted
- It can serve as a quotation
- NOTE: a pro-forma invoice can be used in both home and international trade.
Goods received note
- This is a document which is sent by the buyer to the seller to inform him/her that goods have been received.
- It is prepared in duplicate. The copy is retained by the buyer while the original is sent to the seller.
- It contains the following:
- Date when the document was prepared
- Names and addresses of the buyer and the seller
- The corresponding purchase order
- Details of the goods received
- Date when the goods were received
Goods returned note
- This is a document which is sent by the buyer to the seller to show details of the goods returned by the buyer.
- Goods can be returned by the buyer to the seller due to the following reasons
- If they are damaged on the way
- They are of the wrong type
- They are excess
- They are of the wrong quality
- Where goods are returned due to damage, the note may be referred to as the damaged goods note.
- Once the seller receives the returned goods together with the goods returned note, he/she sends a document known as a credit note to the buyer.
Credit note
- This a document which is sent by the seller to the buyer to inform him/her that amount of money to be paid by him/her has been reduced. It is therefore sent to correct undercharges.
- This amount can be reduced due to the following reasons:
- When goods are returned by the buyer
- When the buyer is overcharged by the seller
- When empty containers and parking cases whose values were included in the invoices are returned by the buyer
- Allowing more discount the buyer
- Inclusion of items in the invoice that were not ordered
- The credit note is usually printed in red to distinguish it from other documents
Debit note
- This is a document that is sent by the seller to the buyer to inform him/her that the amount to be paid by him/her has been increased.
- It acts as an additional invoice.
- It is sent to correct undercharges which may arise from:
- Mistakes in calculation
- Price undercharges on items
- Omission of some items from the invoice
- Disallowing discount
- Failure by the customer to return empty boxes
Statement of account
- This is a document that is sent by the seller to the buyer to show a summary of all the transactions between the seller and the buyer over a given period of time and the amounts owing to the seller.
- Its contents include:
- Names and addresses of the buyer and the seller
- The buyer’s account number
- Date column for recording transaction dates
- Particulars column for recording the type of transaction
- Amount of column for recording the amount of money in each transaction
- Terms of credit
- Number of invoices sent
- Number of receipts issued
- Number of credit notes issued
- Number of debit notes issued
- Amount from the previous period
- Outstanding balance carried forward
Receipt
- This is a document that is issued by the seller to the buyer to act as evidence that payment has been made.
- It contains the following
- Date when payment was made
- Name of the person making payment
- Amount paid both in words and figure
- The means of payment
- Name of the person to whom payment is made
- Receipt number
- The signature of the person issuing the receipt
IOU
- An IOU (I Owe You) is an acknowledgement of a debt. It is written by the debtor (buyer) as an acknowledgement he/she owes the creditor (seller)
- It acts as an evidence that a debt exists
- It however does not indicate the date when the debtor will clear the debt.

Means of Payment

- These are the methods used in paying for goods and services. The common means of payment include:

Cash payment
Cheque
Bill of exchange
Promissory note
Money order
Postal order
Postage stamps
Premium bonds
Banker’s cheque (bank draft)
Credit cards

Cash Payment

This is where payment for goods and services is made using notes and coins.
These coins and notes are referred to as legal tenders.
Legal tender means they are supposed to be accepted by people for settling debts.

Advantages of cash payment

It is the only means of payment with legal tender i.e. the only legal means of settling debts
It is convenient for the settlement of small debts
It can be used by people with or without bank accounts
It gets rid of bad debts

Disadvantages of cash payment

it is cumbersome to carry large sums of money
Cash can be lost or stolen easily since it is readily usable
Payment in cash lacks evidence when a receipt is not issued
If counting machines are not used, counting large sums of money can be cumbersome and time consuming

Circumstances under which cash payment is appropriate

When the amounts involved is small
Where the payee (the person to be paid) does not accept other means of payment
Where cash is the only means of payment available
Where the payee requires cash immediately
Where there is need to avoid expenses associated with the other means of payment

Cheque

A cheque is a written order by the account holder to his bank to pay on demand a specified amount of money to the named person or to the bearer.

Parties to a cheque

Drawer
- This is the person who writes the cheque. The drawer must have an account holder with the bank (drawee)
The payee
- This is the person to be paid.
The drawee
- This is the bank from where payment will be made.

Types of cheques

There are two types of cheques:

Open cheque
Crossed cheque

Open cheque
- This is a cheque that can be cashed over the counter i.e. the payee can receive cash when/she presents the cheque to the drawee (bank).

A crossed cheque
- This is a cheque which must be deposited in payee’s bank account i.e. when the payee takes the cheque to the bank, the bank increases the money in his/her account.
- A cheque is crossed by drawing two parallel lines on its face.
- The crossing can be general or special. A general crossing contains only the parallel lines. A special crossing on the other hand has additional instructions included in the crossing e.g. “account payee only” or “not negotiable” which means that the cheque can only be deposited in the payee’s account and nobody else.

Dishonoured cheque
- A cheque is dishonoured when the bank refuses to pay. It is also known as a bounced cheque.

Reasons for dishonouring a cheque
- When the funds in the drawer’s account are insufficient
- When the signature of the account holder is different from the specimen signature provided to the bank when the account was opened
- When the cheque is post-dated i.e. presented for payment earlier than the date indicated on its face
- When the cheque is stale i.e. presented six months from the date of issue
- If the drawer has closed his/her account with the bank
- If the bank learn about death, insanity or bankruptcy of the drawer
- When the cheque has been altered and the drawer has not signed against the alterations
- If the cheque is defaced i.e. torn, or dirty
- When the amount in words differs from the amount in figures
- When the drawer instructs the bank not to pay a particular cheque

Advantages of using a cheque as a means of payment

They are more secure than cash because they can be traced to the person who cashed them in case it is lost or stolen.
It is light hence convenient to carry
Payment can be made without the need to travel
It provides evidence that payment has been made hence acting as a record for future reference
They can be used to pay a third party (someone other than the named payee)
It facilitates payment of large sums of money

Disadvantages of using a cheque to make payment

It may be dishonoured
It requires the payee to go to the bank
The drawer pays some bank charges
It can only be issued by an account holder
Cheques are not readily available by everyone due to fear of being dishonoured
Payment by a cheque depends on the availability of funds in the drawer’s account

Circumstances under which the cheque may be preferred as a means of paymen

When the amount of money involved is large
When the policy of the business demands that payments be made by cheques
When the cheque is the only means of payment available
Where there is need to avoid expenses associated with other means of payment

Bill of Exchange

- This is an unconditional order, made in writing, addressed by one person to another, requiring the person to whom it is addressed to pay on demand, or at a stated future date, the sum of money indicated on the bill to a named person or to the bearer.
- Parties to a bill of exchange

The drawer: this is the person who writes the bill of exchange
The drawee: the person to whom the bill is addressed
The payee: the person to be paid the amount of money stated

Essentials of a valid bill of exchange

It should be issued unconditionally i.e. it is issued without conditions
It must be in writing
The amount of money to be paid must be clearly stated
The payee must be named i.e. he can be the drawer himself, someone else or the bearer.
Date of payment must be stated or can be determined
It must bear the signature of the drawer (the person who writes the bill)
It must be accepted by the drawee
It must bear the appropriate revenue stamp
It must be accepted unconditionally

Procedure of preparing a bill

- The procedure of preparing a bill of exchange involves three key stages

The creditor (drawer) prepares the draft and sends it to the debtor (drawee)
The debtor upon receiving the draft and accepting the conditions laid therein, signs on it and writes the word “accepted”. The signature makes the draft a bill of exchange. He/she then sends it back to the creditor.
Upon receiving the bill, the creditor may:
- Keep it until maturity after which he/she will present it to the debtor for payment
- Discount it with the bank i.e. present it to the bank for payment before maturity upon payment of a discounting fee.
- Negotiate it i.e. use it to pay someone else.

Features of a bill of exchange

a bill of exchange is negotiable
it is drawn by a creditor and sent to a debtor
a bill of exchange can be discounted before maturity
the span of a bill of exchange is 90 days
a bill of exchange must be accepted by the debtor to be valid

Circumstances under which a bill of exchange is appropriate

Where the creditor wants to be assured that payment will be made
Where the creditor wants money while the debtor is not able to raise it before the end of the credit period
Where the creditor wants to use the debt to clear another debt

Advantages of a bill of exchange

The holder may pass the rights of the bill to another person
Payment date is determined in advance
Acceptance of the bill makes it legally binding
The payee may receive money before maturity by discounting the bill

Disadvantages of the bill of exchange

It may be dishonoured on maturity
Sometimes banks may be reluctant to cash bills of exchange from debtors of doubtful financial backgrounds
It may be an expensive means of payment especially when discount charges are paid

Promissory Note

- This is a document whereby one person promises to pay another person a specified sum of money at a certain stated date.
- It resembles a bill of exchange in the following ways:

Both act as evidence of the acknowledge of a debt
Both may be discounted before maturity
Both are legally binding

- Unlike a bill of exchange, the promissory note is drawn and signed by the debtor.

Money Order

- This is a document which is sold by the post office for the purpose of remitting money. To use this service, a customer fills a money order requisition form stating:

The name and address of the payee
The post office where money will be paid
The amount of money to be remitted
Whether the money will be paid through the bank or in cash
Name and address of the sender
Whether the money order is ordinary or telegraphic
Whether the sender wishes to be informed if the money has been paid

- A commission is charged by the post office for using this service.
- For telegraphic money order, the post office sends a telegram to the payee inviting him/her to go to the post office so as to claim the money.
- In order to be paid, the payee has to:

Identify him/herself e.g. by producing his/her identification documents
Identify the person who sent the money

- The sender is left with a counterfoil which may be used as evidence that money was sent. The counterfoil can also be used to reclaim the money if it does not reach the intended payee.
- There is a limit on the maximum amount of money that can be sent in one money order.
- Money orders can be crossed or open. Crossed money orders are paid through a bank account whereas open money orders are paid through at post office

Circumstances under which money orders are preferable

When it is the only means of payment available
When other means of payment are not accepted
When there is need to avoid inconveniences and risks associated with using other means of payment

Advantages of money orders

They guarantee payment hence they are readily accepted in payment for goods and services
They can be crossed to make them more safer
They are cheaper
The sender can claim the money sent in case it is lost before reaching the payee

Disadvantages of money orders

There is a limit on the maximum amount of money that can be sent in a single money order
They are not negotiable i.e. they cannot be transferred to somebody else
A crossed money order must be paid through a bank account hence inconveniencing the payee who doesn’t have a bank account
Open money orders are unsafe

Postal Order

- Postal orders are documents which are sold by the post office in fixed denominations such as Ksh 50, Ksh100 and Ksh 500 and are used to remit or make payments for small amounts. The sender buys postal orders whose value is equal to the amount of money to be sent.
- A commission is charged by the post office for using this service.
- The sender remains with a counterfoil which acts as evidence of the remittance and can be used to claim the money in case it is does not reach the payee.
- The sender writes the name of the payee on the postal order as a safety measure otherwise payment will be made to the bearer. The payee can be paid at any post office with postal order services

Circumstances under which postal orders are appropriate

Where the amount to be sent is small
Where it is the only means of payment available
Where there is need to avoid inconveniences and risks associated with other means of payment

Differences between postal orders and money orders

Postal orders	Money orders
They can be cashed at any post office	They are cashed at a specific post office
They are in fixed denominations	Denominations vary depending on the needs of the remitter
Does not require any application form when making remittances	Requires the filling of an application form when making remittances
They can be cashed by the bearer	They are only cashed by the payee

Postage Stamps

- This is means of payment that is used to make payments for small amounts of money. The person to whom stamps are sent can use them to send mail or pay somebody else.

Premiums Bonds

- This is a means of payment which is offered by the post office. They are issued in denominations of Ksh 10 and Ksh 20.
- Once someone buys premium bonds, he/she has to wait for a given period of time for them to mature after which he/she can cash them or use them to pay debts. Premium bonds can also be entered in a draw to win money.
- NOTE: postage stamps and premium bonds are suitable for making payments involving small amounts of money.

Banker’s Cheque (Bank Draft)

- This a cheque which is drawn by the bank on itself. To use this means of payment:

One has to fill an application obtained from the bank
The filled application form together with the money to be transferred is handed over to the bank
On receiving the filled application form and the money, the bank prepares a banker’s cheque and gives it to the applicant
The applicant can then sent the banker’s cheque to the payee as a means of payment

- A commission is normally charged by the bank for using this service.
- Banker’s cheques are readily acceptable as a means of payment since they guarantee payment.
- They are mostly used to pay school fees.

Circumstances when banker’s cheques are appropriate

Where the amount involved is large
Where the payee wants to be guaranteed payment

Credit Cards

- These are cards which are issued by some major banks and other credit card companies to enable the holder of the card to buy goods or services from business organisations which accept the cards without paying for them on the spot. The value of the goods and services bought is deducted directly from the holder’s bank account.

Terms of Payment

These are terms used by the seller to indicate how payment is to be made, when it is to be made and what the quoted price contains.

Types of Terms of Payment

Terms of payment can be categorised into two:
1. Cash
2. Deferred payment

Cash

- Refers to where payment is made immediately on or before delivery. It is also referred to as spot cash or a cash transaction.

Terms used under cash transaction

Cash on delivery (COD)
- This is where payment is made when goods or services are delivered and received
Cash with order (CWO)
- This is where payment is made at the time of making the order.

Advantages of cash transactions (COD&CWO)

It reduces the risk of bad debts
Ensures the continued availability of working capital
Reduces the number of records to be kept by the business hence resulting in fewer employees
No time is wasted to follow customers to pay

Circumstances under which cash transactions (COD&CWO) are appropriate

When the buyer is new to the seller
Where the buyer’s credit worthiness is in doubt
Where the seller is operating a business that does not allow credit e.g. a supermarket and a mail order shop.
Where the policy of the business requires all transactions to be in cash

Deferred Payments

- This is where payment for the goods is made at a future date either on instalments or as a lumpsum.

Types of deferred payment

- Deferred payment may take three forms;

Open trade credit (credit purchase)
Hire purchase
Instalment buying

Open trade credit (credit purchase)

- This is where the buyer pays for the goods delivered at a future date or within a given period of time. The buyer may pay for the goods in agreed instalments.
- Under open credit, ownership of the goods passes to the buyer immediately after entering the contract with the seller.
- No interest is charged on open trade credit, the seller may however allow the buyer a cash discount in order to encourage him/her pay quickly

Factors to consider when giving credit

Credit worthiness of the buyer i.e. ability and willingness of the buyer to pay
The repayment period
Amount of goods to be sold on credit
Availability of the required goods in the right quantities
Honesty and reliability of the buyer
The number of times the buyer buys from the seller
The objectives or intentions of the seller
Prevailing economic conditions
Credit period
Accessibility of the customer
Type of security provided

Ways of ensuring that the buyer will pay

Ascertaining the credit worthiness of the buyer
Asking the buyer to commit him/herself in writing e.g. by signing a bill of exchange
Requiring the buyer to have a guarantor
Requiring the buyer to pledge his/her property ass security

Factors influencing the credit period

The relationship between the seller and the seller
The types of goods sold
The value of goods sold
Financial ability of the seller i.e. if the seller is financially stable, a longer period may be allowed

Forms of open trade credit

Simple credit (prompt cash)
- This is credit that is extended to the buyer for a very short time i.e. not more than a week.
Monthly credit
- This credit that is extended to the buyer for one payment i.e. the buyer pays for the goods after one month.
- The buyer can however continue to take more goods from the seller in the course of the month.
- This credit is usually extended to salaried people.
Budget accounts
- This is a form of credit which is usually extended by large scale retailers to their regular customers.
- The retailer opens and keeps an account of his/her regular customers in his/her books of account in which all transactions between them are recorded.
- The customer is required to pay a deposit to the retailer followed by regular payments after which he/she will be allowed credit up to a given maximum.
- The retailer may also offer after sale services to the customer at a fee.
Trade credit
- This a type of credit which is given by a trader to another trader who buys goods for purposes of reselling.
Credit cards
- This is a card which enables the holder to obtain goods and services on credit from specific sellers. The holder may also use the card to obtain money from specified banks and other financial institutions.
- After buying the goods, the holder of the card fills a specified form which is provided by the seller. The seller will use the dully filled form to claim payment from the holder’s bank.

Advantages of credit cards
1. They are smaller hence convenient to carry around
2. Enables the holder get the goods he/she requires immediately without paying for them
3. Enables the holder to obtain money from specific banks
4. They increase the credit rating of the holders
5. It is safe to carry compared to carrying cash
6. Some credit cards may be accepted internationally
Disadvantages of credit cards
1. It is not easy to acquire the card since the holder is required to have a good credit record
2. The card holder is charged interest by the card company
3. It is prone to abuse through fraud
4. Interest is charged to the card holder in case there is delay in payment
5. The card is issued only to people who are above 18 years
6. The may encourage impulse buying
7. They are mostly used in urban areas only
8. They are accepted by very few businesses
9. Long procedures are involved when getting the card
10. They are only afforded by high income earners

Characteristics of open credit (credit purchase)

Ownership of the goods passes to the seller immediately the contract is entered into to
The buyer takes possession of the goods immediately
Payment for the goods is not made immediately
The buyer has the right to transfer ownership of the goods to another or resell them before payment is made

Advantages of open credit to the buyer

The buyer is able to obtain the goods or services before making payment
The credit period allowed gives the buyer time to raise the required money
The buyer can resell the goods during the credit period to raise the required money
The goods cannot be repossessed by the seller in case the buyer fails to pay for them

Disadvantages of open credit to the buyer

It may encourage impulse buying
The buyer may be sued by the seller in case he/she fails to pay for the goods

Advantages of open credit to the seller

It leads to increased sales
Perishable goods can be sold faster
The seller can attract and retain more customers
Goods sold on credit are usually sold at higher prices than the cash price hence generating more profits

Disadvantages of open credit to the seller

The goods cannot be repossessed in case the buyer fails to make payment
Suing the buyer to recover the debt may be an additional expense to the seller
There is a risk of bad debts
The seller needs a high amount of working capital to able to sell on credit
The seller must keep buyers’ records which is time consuming and costly

Hire Purchase

- To hire means to use someone else’s property for a payment. Hire purchase therefore is a method of hiring property with an option to buy.
- Under hire purchase, the buyer pays a deposit and takes possession of the property. The remaining balance is paid in equal monthly instalments. Ownership passes to the buyer after the last instalment has been paid.
- The buyer cannot transfer or resell the property before paying all the instalments
- On payment of the last premium, the seller issues a certificate of completion to the buyer to as proof of transfer of ownership.
- If the buyer fails to complete payment of all instalments, the seller can repossesses the property.
- Goods sold on hire purchase are mostly durable and expensive goods like radios, television sets, vehicles, refrigerators etc.
- Hire purchase price is usually higher than the cash price.
- The law requires that both cash and hire purchase prices are to be displayed on goods to enable the customer make an informed decision on the appropriate method to use.

Advantages of hire purchase to the buyer

The buyer possesses the goods immediately he/she pays the deposit
The amount of money to be paid in each instalment is calculated and determined in advance hence the buyer is able to budget
Enables the buyer to buy expensive goods

Disadvantages of hire purchase to the buyer

The seller retains ownership until all the instalments have been cleared
It may need to impulse and unplanned buying
The buyer pays more under hire purchase compared to cash
Limited variety of goods can be bought under hire purchase

Advantages of hire purchase to the seller

It increases the volume of sales
Hire purchase price is higher than cash price hence it earns more profit
Goods belong to the seller until the buyer clears all the instalments
It attracts an retains customers
The seller can repossess the goods and resell them in case the buyer fails to clear all the instalments

Disadvantages of hire purchase to the seller

Hire purchase requires high amount of working capital to be operated efficiently
Goods repossessed by the seller from the buyer can only be sold at a lower price as second hand
The risk of loss is high e.g. bad debts
Expenses incurred when operating hire purchase business are normally high e.g. for repairing damaged goods

Characteristics of hire purchase

Goods belong to the seller until the last instalment is paid
The buyer cannot resell the goods or transfer them to another person before paying all the instalments
Hire purchase price is usually higher than cash or credit price
The seller can repossess the goods if the buyer defaults in paying the instalments as agreed

Differences between hire purchase and open trade credit

Hire purchase	Open trade credit (credit purchase)
Ownership is retained by the seller until the last instalment is paid	Ownership passes to the buyer immediately he/she enters into contract with the seller
The buyer cannot resell or transfer the goods before clearing all the instalments	The buyer can resell or transfer ownership of the goods to another person
Hire purchase price is usually higher than credit price	Credit price is usually lower than hire purchase price
The seller can repossess the goods in case the buyer defaults in paying the instalments	The seller cannot repossess the goods if the buyer defaults in payment but he/she can sue the buyer

Instalment Buying

- Instalment buying is similar to hire purchase except that possession and ownership of the commodity passes to the buyer immediately the deposit is paid.
- The seller cannot repossess the commodity in case the buyer defaults in making payment. The seller can however take legal action against the buyer to reclaim the amount due from the buyer.
- Instalment buying unlike hire purchase can be used for non-durable goods.

Circumstances under which deferred payments may be appropriate

When the credit worthiness of the buyer is unquestionable
When the seller wants to attract and retain customers
When the seller wants to increase his/her sales
When market competition is high and the buyer wants to use deferred payment as a tool to counter market competition
When the seller wants to expose off slow moving stock

Discounts

- A discount is an allowance by the seller to the buyer which enables the buyer to pay less than the marked price.
- There are three types of discounts:

Quantity discount
Trade discount
Cash discount

Quantity Discount

This is a discount which is allowed to the buyer to encourage him/her buy more goods. The amount of discount increases with the quantity of goods bought

Trade Discount

This is a discount which is allowed by a trader to another trader who is buying goods for resell

Cash Discount

This is a discount which is allowed to customers who buy on credit to encourage them to pay their debts promptly.
It is usually calculated as a percentage of the marked price after trade discount has been deducted.

Money Remittance Services

- These are methods used to send money from one person to another through the bank
- They include:

Telegraphic transfer
Standing order (bank order)

Telegraphic Transfer

- This is a method of remitting money which is provided by the bank. The person wishing to send the money will fill an application form and provide the following information:

The sender’s name
The payee’s name
The amount of money to be sent
The bank where money will be paid

- The payee identifies him/herself before payment is made.
- The sender pays a commission to the bank for using this service.

Standing Order

- A standing order is an instruction to the bank by the account holder to pay the person named a specified amount of money according to the order.
- A standing order may remain in force for a given period of time e.g. a year. A fee is charged by the bank for using this service.