1. Showing the settlement of the several claims in cash—in case Robbins had collected $125.75 from Perkins and had paid $125.75 to Jackson & Co., the payments being made independently in each case:
2. Showing a settlement by draft—a clearing house method:
The commercial, three-party draft is little used now. With the larger function of banks in the conduct of modern business, other kinds of drafts as discussed below have come into use. The three-party relationship is the basis of all draft transactions, however, and must therefore be thoroughly understood.
Classification of Drafts.—There are several kinds of drafts, which may be either sight or time instruments. A draft drawn “at sight” is a request on the drawee to pay at sight, i.e., immediately upon presentation to him. The use of the sight draft in making collections is quite common. A delinquent customer is drawn on at sight and collection is attempted through the bank. The method is oftentimes effective because refusal to pay may reflect on the drawee’s credit with his own bank. Usually no formal book entry is made of such drafts until paid. A draft drawn, say, “at 60 days’ (or 30 days’) sight” is a request to pay 60 (or 30) days after presentation. Hence, the dating of the acceptance of such a draft is of prime importance. Such a draft is, of course, a time draft.
A draft drawn “60 (or other number) days after date” is called a date draft and is payable 60 days from the date of the instrument—not, as in the first case, 60 days after presentation or acceptance. It also is a time draft. It is not necessary, although customary, to present time drafts for acceptance.
Drafts may be “commercial” or “bank” according as the drawee is a merchant or a bank, respectively. B. V. Robbins’ draft on Perkins shown above is a merchant’s draft. A bank draft is a request by one bank on a correspondent bank to pay a given amount of money to a named payee. A customary method of remitting money is by the purchase and remittance of a bank draft, for the issuing of which banks usually charge a fraction of a per cent. To illustrate its use, take the following situation:
L. W. Roberts of Denver owes Field & Co. of Chicago $210 on account. Roberts goes to his Denver banker and buys a bank draft which may read as follows:
