Rediscounting Of Acceptances

After the acceptance has been discounted with the bank or discount house, it may be held by the latter in its portfolio until maturity. It may, however, be rediscounted with the Federal Reserve Bank, if its maturity does not exceed ninety days, and if it otherwise conforms in all respects to the requirements of the Federal Reserve Board governing eligible paper. Acceptances, however, arising from commercial transactions are the only ones which are eligible for rediscount with the Federal Reserve Banks, notwithstanding their maturity exceeds ninety days, but which must not exceed six months. The Federal Reserve Banks are the largest purchasers of this class of commercial paper, and at the present time are really the supporters of the American discount market. It is like a financial balancing wheel to the country and places the obligations of seller, buyer and banker in that part of the country which can best meet it. It standardizes commercial methods. It creates bankable paper of a class much more valuable than the open book account.

Recording And Accounting

There are no difficulties to be experienced by users of the acceptance method, either the buyer, the seller or the bank, in the bookkeeping, and recording of trade acceptances. They are essentially the same in nature as the ordinary bills receivable. In Part IV, the very last form is an illustration of a so-called acceptance register. Entries are made therein according to the date of receipt of the accepted paper. At the time of sale, an entry similar to that made under the open book account system, is recorded in the sales books of the seller. As the acceptance operates as a settlement of the transaction representing in itself a liquid asset, and in place of the seller's assets in the form of open accounts, it is therefore applied as a credit to offset the debit account of the customer arising from the sale of the goods. An account would be created such as "Trade Acceptances Receivable" or "Acceptances Receivable." Expressed in simple account form, entries would be made as follows: Upon the sale of goods;

"Dr. Customer Cr. Merchandise" At the time the trade acceptance is received: "Dr. Trade Acceptances Receivable Cr. Customer." At the time the trade acceptance is paid: "Dr. Cash Dr. Less charges if any.

Cr. Trade Acceptances Receivable."

Collections And Other Charges

Banks usually charge a customary rate for the collection of trade acceptances, of from l/20th to l/10th percent of the face amount of the instrument. This charge is generally borne by the seller. Acceptances, as time paper are taxable under the Federal Revenue Act. This charge may be carried either by buyer or seller, depending upon the prior understanding of the parties. (Refer Part V, Taxation of Negotiable Instruments.)

Rediscount Of Acceptances With Sources Other Than Government

The bank is also enabled to have the paper rediscounted with so-called discount houses which make a specialty of this class of business. They act in the capacity of banks, purchasing the commercial paper for sale at an opportune time.