Lecture 04 - Functions and Economic Role of Money - 2020

MONEY
Functions and Economic Role of Money
Presented by:
MARK FRANCIS G. NG, CPA, MBA

Basic Finance
Powerpoint Templates
Page 1
MONETARY THEORIES
§ STATE THEORY OF MONEY
ü This theory of money states that “the purchasing power
of money over goods and services stems from its legal
tender power granted to it by the laws of the State.
ü The State can declare by law what shall be accepted as

money within its jurisdiction.
ü This theory supports one of the definitions of money

that we have stated earlier, which is, “money is what
the law says it is.”
§ ECONOMIC THEORY OF MONEY

ü Under this theory, money is viewed as just like any
other economic good
ü Its value is subject to change as subjected to various

economic factors that influence value
ü It has exchange value because it satisfies human

needs and wants.
Page 2
MONETARY THEORIES
§ COMMODITY THEORY OF MONEY
ü Under this theory, money must be made of some
valuable commodity or material in order to be accepted
in exchange for other goods or services
ü Its acceptability depends upon its own material value.
ü If it has no material value then in itself it will command

no exchange value and would not be used as a medium
of exchange.
§ PURCHASING POWER THEORY OF MONEY

ü This theory posits that the value of money depends
upon the quantity and quality of the goods and services
that it can purchase
Page 3
VALUATION CONCEPTS OF MONEY
§ VELOCITY OF MONEY
ü The velocity of money refers to the number of times
that the average peso or any other monetary unit is
spent in a given period of time
ü Also known as the rate of circulation of money, the

velocity of money also measures the speed with which
money flows from one hand to another in the economic
circulation.
§ LEGAL TENDER
ü Legal tender means money that may be legally offered
in payment of an obligation and that a creditor must
accept
ü A certain money will only be considered as legal tender

if the government commands that it be so and can be
legally used as a medium of exchange in economic
transactions
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§ FACE VALUE
ü This is the value that appears on the “face” of a bank
note or a coin and dictates the exchange value of the
money or the value of goods and services that it can
purchase
§ DOMESTIC VALUE
ü This is the value of money within its country of origin
and is measured by its purchasing power for goods and
services during different periods of time
§ INTERNATIONAL VALUE
ü This value is measured by the exchange rate of the
local monetary unit with respect to other freely
convertible monetary units of foreign countries
Page 5
§ PURCHASING POWER
ü This refers to the quantity and quality of goods and

services that money can purchase.
ü It depends largely on the rates of inflation and deflation

in the economy aside from other economic factors
§ DEVALUATION OR DEMONETIZATION
ü To demonetize means to deprive of current value,

or to withdraw from use as money.
ü In other words, the State (in the Philippines, through

the Bangko Sentral ng Pilipinas) withdraws from
circulation all notes and coins which for any reason
whatsoever are unfit for circulation, and replace them
by adequate notes and coins
ü Money that is demonetized also means that it has

already been deprived of its legal tender power
Page 6
CHECKS AS MONEY
CONCEPT OF CHECKS
•A check may be defined simply as a written order drawn by a

depositor upon a bank directing it to pay on demand a specified
sum of money to the bearer or to the order of some person or
corporation named on the face of the check and charge the
amount against his deposit account.
•The check itself is not considered money.
•It is merely an instrument for transferring money, or a claim to

money
•A check will only be considered cash if it has been presented

by the payee to the bank, enchased or deposited into the
account of the payee and has cleared through the banking
system
•The amount deposited in the bank, subject to withdrawal or

transfer by the issuance of checks is counted as part of the
money supply. This is known as deposit money or checkbook
money
Page 7
ORDER vs. BEARER
§ Checks are considered as negotiable instruments.
§ Negotiable instruments are financial instruments that

can be sold in receipt for cash and from which cash
can be calimed
§ They make the exchange of money between parties

safer and more convenient since one would not
usually tend to carry large amounts of money with
him all the time.
§ Checks are usually drafted by the payor (the paying

party) to the payee (the party receiving the
payment).
Page 8
ORDER vs. BEARER
ORDER INSTRUMENT
•When the name of a specific person or entity is used as

the payee of a check, the instrument is considered as an
order instrument.
•Being such, only the payee may encash the amount

on the check.
•The payee normally proceeds to the bank and

endorses the check to the teller for encashment.
•The check is actually considered as an order by the

payor to the bank that the payee be paid out of
the payor’s account deposited with the bank.
Page 9
ORDER vs. BEARER
BEARER INSTRUMENT
•When the check is not specifically drafted for a

particular person or does not bear the specific name of
the payee, the instrument is considered as a bearer
instrument.
•Such payee names may include PAY TO CASH, PAY

TO JUAN DELA CRUZ, etc.
•Being a bearer instrument, anyone who comes into

possession of such an instrument may encash the
check upon endorsement to the bank.
•Because of this, it is usually safer to draft an order

instrument than a bearer instrument.
•In addition, with the current banking laws in the

Philippines, only the payee may be allowed to endorse
the check for encashment to the bank.
Page 10
ORDER vs. BEARER
§ It should be noted, however, that checks will only
be considered as money:
§ when they have already been enchased as
currency; or
§ when they have already been deposited in
the bank and has cleared through the
clearance process
§ On the other hand, in drafting amounts in checks,

one should observe consistency in writing the
amount in words and the amount in figures.
§ Inconsistencies between the two may lead to

problems in determining the amount of encashment
for the check.
§ According to law, when the amount in words and the

amount in figures are not the same, the amount in
words shall prevail.
Page 11
DIFFERENT KINDS OF CHECKS
Open Check
§ an open check is one without a crossing
§ it does not have to be presented through a

banking account
§ it is payable to the order of a specified individual

or company, or payable to bearer
Page 12
Crossed Check
§ a crossed check cannot be presented to the bank

for cash payment
§ the check has to be deposited to the account of

the payee in his bank
§ a crossed check may easily be recognized and

distinguished by the presence of two parallel lines
appearing on the top left hand corner of the check
§ the use of crossed checks affords a distinct

advantage over that of an order or bearer check
in that in the event of loss, since it cannot be
cashed for payment, its recovery is quite possible
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Certified Check
§ when a check is certified for payment, the

certification transforms the maker’s order into a
bank’s promise to pay
§ it is not subject to non-payment because of stop-

payment orders or insufficiency of funds
§ when a bank certifies a check, the word “certified”

or its equivalent is stamped on the face of the
check and the certification signed by the cashier
of the bank
§ A certified check is a form of cheque for which the

bank verifies that sufficient funds exist in the
account to cover the check. When a check is
stamped certified, this means that the check has
already been subject to payment by the bank.
Page 16
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Cashier’s Check
§ the cashier’s check is the bank’s order to pay

drawn upon itself and signed by the cashier,
payable to the person or firm designated by the
depositor
§ this is commonly used at present instead of

certified checks
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Post-dated Check
§ a post-dated check is one which is issued by the

drawer showing a future date
§ as a rule, a check cannot be paid before the date

it bears
§ a post-dated check cannot be paid because the

bank cannot know whether the drawer (bank
customer) has merely made a mistake, or does
not wish to be paid before that date
§ sometimes, this is done when a drawer is

constrained to make payment covering his
obligation at a time when he does not have
sufficient funds in his account to cover payment of
the indicated amount, although he is quite certain
that at a certain date in the future he shall have
enough funds which he shall deposit in his
account Page 20
Stale Check
§ one fundamental principle involving the use of checks is

to have it presented immediately to the bank for
payment
§ however, for some reasons, a check may not be

presented to the bank for payment not until the lapse of
a considerable period of time, usually six (6) months
after it has been issued
§ however, this depends on bank policy
§ some stale checks may be three (3) months after

issuance or 30 or 60 days after issuance
§ this is known as a stale check
§ the bank will refuse to honor the payment of a stale

check, and will instead request the payee to kindly
request his drawer for another check which will take the
place of the stale one
Page 21
Counter Checks
§ as a matter of common banking practice,

commercial banks ordinarily keep on their desks
at the lobby a special check for the use of its
customers; such checks are known as counter
checks
§ counter checks are used by a depositor who

wishes to withdraw his money from his account
but whose booklet of checks has been exhausted
§ counter checks are intended solely for purposes of

withdrawals and therefore cannot be transferred
from one person to another as in the case of
ordinary checks
Page 22
Bouncing Checks
§ these are checks whose accounts from which
payment is to be drawn are insufficient to cover
the amount for payment indicated on the check
Page 23
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NEW CHEQUE CLEARING POLICY
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CHECKS vs. CURRENCY
ADVANTAGES OF CHECKS VERSUS CURRENCY
Although checks are not legal tender, their use has been
widespread in business transactions because of the following
advantages:
1.Checks are relatively safer and more convenient to use than

currency
2.The stub of the check serves as a record of the transaction
3.The cancelled check is an evidence of the payment made
4.In case of loss of the check, payment can be stopped by

notifying the bank in time
5.The check can be written for exact amounts, thus avoiding

counting
6.The check can be issued for large amounts, this saving

transportation and communication expenses
Page 30
PRECAUTIONS WHEN WRITING CHECKS
For his own personal protection, as well as in accordance
with the interest of the bank, it becomes incumbent
upon the holder of a checking account to observe some
precautions in writing checks which include the
following:
1.Before writing the check, fill in the stub, showing the

date, the amount to whom payable, and for what the
check is in payment
2.Fill the check with care, writing or printing plainly.

Checks may also be prepared on the typewriter or in the
case of big business houses, on a check-writer
3.Do not change the amount if you make an error.

Instead, destroy the check from where you make an
error and write a new one
4.Make your figures plain and make sure that they

agree with the written amount in words
Page 31
5. While checks may be written in pencil, however,

always use ink in filling out your stubs and checks.
This assures a permanent record and moreover
makes alteration more difficult
6. Use money for making payments for less than one

peso. This will save on the cost of the check
7. Write your signature plainly and write it the same

way on all checks
8. Do not sign checks with the amount left blank. Such

a practice is extremely dangerous and the depositor
may be held responsible for the amount filled in by
others
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… end
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MONEY

Functions and Economic Role of Money

MARK FRANCIS G. NG, CPA, MBA

ü The State can declare by law what shall be accepted as

ü This theory supports one of the definitions of money

§ ECONOMIC THEORY OF MONEY

ü Its value is subject to change as subjected to various

ü It has exchange value because it satisfies human

ü Its acceptability depends upon its own material value.

ü If it has no material value then in itself it will command

§ PURCHASING POWER THEORY OF MONEY

ü Also known as the rate of circulation of money, the

ü A certain money will only be considered as legal tender

ü This refers to the quantity and quality of goods and

ü It depends largely on the rates of inflation and deflation

ü To demonetize means to deprive of current value,

ü In other words, the State (in the Philippines, through

ü Money that is demonetized also means that it has

•A check may be defined simply as a written order drawn by a

•The check itself is not considered money.

•It is merely an instrument for transferring money, or a claim to

•A check will only be considered cash if it has been presented

•The amount deposited in the bank, subject to withdrawal or

§ Negotiable instruments are financial instruments that

§ They make the exchange of money between parties

§ Checks are usually drafted by the payor (the paying

•When the name of a specific person or entity is used as

•Being such, only the payee may encash the amount

•The payee normally proceeds to the bank and

•The check is actually considered as an order by the

•When the check is not specifically drafted for a

•Such payee names may include PAY TO CASH, PAY

•Being a bearer instrument, anyone who comes into

•Because of this, it is usually safer to draft an order

•In addition, with the current banking laws in the

§ On the other hand, in drafting amounts in checks,

§ Inconsistencies between the two may lead to

§ According to law, when the amount in words and the

§ it does not have to be presented through a

§ it is payable to the order of a specified individual

§ a crossed check cannot be presented to the bank

§ the check has to be deposited to the account of

§ a crossed check may easily be recognized and

§ the use of crossed checks affords a distinct

§ when a check is certified for payment, the

§ it is not subject to non-payment because of stop-

§ when a bank certifies a check, the word “certified”

§ A certified check is a form of cheque for which the

§ the cashier’s check is the bank’s order to pay

§ this is commonly used at present instead of

§ a post-dated check is one which is issued by the

§ as a rule, a check cannot be paid before the date

§ a post-dated check cannot be paid because the

§ sometimes, this is done when a drawer is

§ one fundamental principle involving the use of checks is

§ however, for some reasons, a check may not be

§ however, this depends on bank policy

§ some stale checks may be three (3) months after

§ this is known as a stale check

§ the bank will refuse to honor the payment of a stale

§ as a matter of common banking practice,

§ counter checks are used by a depositor who