Trade & Banking (Notes Payable and Receivables)
This guide defines each term in your list, explains the typical process/how it’s used, and gives simple scenarios/examples.
Bank draft
Definition: A payment instrument issued by a bank, ordering another bank (or the same bank) to pay a specified amount. The funds are typically taken from the purchaser upfront, so it’s considered “more secure” than a personal check.
Process (typical):
Customer requests a draft from their bank and pays the amount (plus fee).
Bank issues the draft payable to a named payee.
Payee deposits the draft.
Banks clear/settle the payment.
Example scenario: A student pays overseas tuition using a bank draft because the university wants guaranteed funds.
Banker’s year
Definition: A convention used in finance where a year is assumed to be 360 days (12 months × 30 days) for interest calculations.
Why it matters: Using 360 days slightly changes interest amounts compared with a 365-day year.
Example calculation:
Principal: $10,000
Rate: 9% per year
Time: 60 days
Banker’s year interest = 10,000 × 0.09 × (60/360) = $150 (Using 365 days would give ~ $147.95.)
Bill of lading (B/L)
Definition: A shipping document issued by a carrier that serves as:
a receipt for goods shipped,
evidence of the contract of carriage, and often
a document of title (whoever holds it may claim the goods, depending on type).
Process (common in trade):
Exporter delivers goods to carrier.
Carrier issues bill of lading with shipment details.
Exporter sends B/L (often through a bank) to importer.
Importer uses B/L to claim goods at destination.
Example scenario: A seller ships 1,000 bags of coffee. The carrier issues a B/L. The buyer needs the B/L to pick up the coffee at the port.
Cashier’s check
Definition: A check drawn on a bank’s own funds and signed/issued by the bank. Because the bank guarantees payment, it’s trusted for large transactions.
Process:
Buyer pays the bank the amount.
Bank prints a cashier’s check payable to the seller.
Seller deposits it; bank clears it.
Example scenario: A person buying a used car pays with a cashier’s check so the seller is confident the funds are real and available.
Commercial draft
Definition: A written order used in trade in which the seller (drawer) orders the buyer (drawee) to pay a specified amount either immediately or on a future date. Often used with shipping documents.
Common forms:
Sight draft (pay on presentation)
Time draft (pay at a future date)
Process (typical documentary collection):
Exporter ships goods and receives shipping documents (e.g., bill of lading).
Exporter draws a commercial draft on the importer.
Exporter sends the draft + documents to their bank.
Banks present to importer:
D/P (Documents against Payment): The importer pays to receive documents.
D/A (Documents against Acceptance): The importer accepts a time draft to receive documents.
Example scenario: A furniture exporter ships goods and attaches the bill of lading to a commercial draft so the buyer can’t collect the goods without paying/accepting.
Contingent liability
Definition: A potential obligation that may occur depending on the outcome of a future event. It becomes a real liability only if the event happens.
Where seen in banking/trade:
Guarantees
Letters of credit
Lawsuits
Endorsing/guaranteeing another party’s debt
Example scenario: A company guarantees a supplier’s loan. If the supplier defaults, the company must pay—until then it’s a contingent liability.
Discounting
Definition: Selling a note, bill, or draft before maturity to a bank/financial institution for less than its face value. The difference is the bank’s discount (income).
Process:
Holder owns a time instrument due later (e.g., 90-day trade acceptance).
Holder brings it to a bank.
Bank pays immediate cash = face value minus discount (and possibly fees).
At maturity, the bank collects the full amount from the payer.
Example scenario: A business holds a 60-day note for $50,000 but needs cash today; it discounts the note with a bank.
Draft
Definition: A negotiable instrument (a written order) where the drawer instructs the drawee to pay a payee a certain amount.
Key parties:
Drawer: creates the draft (often seller)
Drawee: the party ordered to pay (often buyer)
Payee: receives payment (often seller or bank)
Example scenario: A supplier draws a draft on a retailer for the invoice amount.
Face value
Definition: The amount written on the instrument (the stated amount to be paid at maturity). Also called par value.
Example: A note says, “Pay $20,000 on Sept 30.” Face value = $20,000.
Interest
Definition: The cost of using money (from the borrower’s view) or the return on lending (from the lender’s view).
Basic simple interest formula:
Interest = Principal × Rate × Time
Example: $8,000 at 12% for 90 days (banker’s year):
Interest = 8,000 × 0.12 × (90/360) = $240
Maturity value
Definition: The total amount due at maturity. For an interest-bearing note, it is:
Maturity value = Principal + Interest
Example: $10,000 note, 9%, 120 days (360-day year):
Interest = 10,000 × 0.09 × (120/360) = 300
Maturity value = 10,000 + 300 = $10,300
Negotiable instrument
Definition: A signed written document that promises or orders payment of a fixed amount and can generally be transferred so another party can receive payment.
Common examples:
Checks
Promissory notes
Drafts/bills of exchange
Core features (typical):
Written and signed
Unconditional promise/order to pay
Fixed amount
Payable on demand or at a definite time
Payable to order/bearer (depending on jurisdiction)
Example scenario: A supplier endorses (signs over) a negotiable instrument to a bank to get financing.
Note payable
Definition: An accounting term: a liability representing a written promise by a business to pay a lender at a future date, usually with interest.
Process (business borrowing):
Business signs a promissory note to borrow money.
Records a note payable on its balance sheet.
Pays interest over time and principal at maturity.
Example scenario: A company borrows $100,000 from a bank for equipment; it records a note payable.
Note receivable
Definition: An accounting term: an asset representing a written promise that another party will pay the business in the future (principal + interest).
Process (business lending/selling on note):
A business sells goods/services and accepts a promissory note from a customer.
Records a note receivable.
Collects interest and principal at maturity (or discounts it for cash).
Example scenario: A wholesaler sells inventory and accepts a 60-day note from a retailer; that note is a note receivable.
Principal
Definition: The original amount of money borrowed or invested, not including interest.
Example: If you borrow $5,000 at 10%, the principal is $5,000.
Sight draft
Definition: A draft payable immediately upon presentation (“at sight”). Common in international trade collections.
Process (documents against payment – D/P):
Exporter ships goods.
Exporter’s bank presents sight draft and shipping documents to importer.
Importer pays immediately.
Importer receives documents to collect goods.
Example scenario: A seller will release the bill of lading only when the buyer pays the sight draft.
Time draft
Definition: A draft payable at a future date (e.g., 30, 60, 90 days after sight/date). The buyer often must “accept” it (promise to pay at maturity).
Process (documents against acceptance – D/A):
Exporter ships goods.
Importer accepts the time draft (signs acceptance).
Importer receives shipping documents.
Importer pays at maturity.
Example scenario: A buyer wants 60 days to pay after receiving goods, so the seller uses a 60-day time draft.
Trade acceptance
Definition: A time draft drawn by a seller on a buyer for goods sold that the buyer accepts, thereby agreeing to pay on the due date. Once accepted, it becomes a stronger payment obligation.
How it works:
Seller sells goods on credit.
Seller draws a time draft on buyer.
Buyer signs “Accepted” with date and signature.
Seller can hold it to maturity or discount it at a bank.
Example scenario: A manufacturer sells $30,000 of materials to a retailer and draws a 90-day draft. The retailer accepts it; the manufacturer discounts it to get cash now
Quick comparison breakdown
Cashier’s check: A bank-issued check drawn on the bank's own funds. Paid on deposit/clearing. Typically used for large domestic payments.
Bank draft: A bank-issued order to pay. Paid on deposit/clearing. Typically used for secure payments, often cross-border.
Sight draft: A draft payable on presentation. Paid immediately. Typically used for "pay to get documents/goods" terms.
Time draft: A draft payable later. Paid on the specified maturity date. Typically used for trade credit cycles (30, 60, or 90 days).
Trade acceptance: An accepted time draft. Paid on the specified maturity date. Provides a stronger trade receivable asset that can be discounted.
If you want, I can also add
A worked discounting example (bank discount vs true discount)
Journal entries for notes receivable/payable
A one-page summary for exam revision