What type of transaction is a cash payment to creditors

SDR holdings represent each holder's assured and unconditional right to obtain other reserve assets, especially foreign exchange, from other IMF members. A participant may sell some or all of its SDR holdings to another participant and receive other reserve assets, particularly foreign exchange, in return.

They are classified as valuables. Euro banknotes and coins issued by the Eurosystem are the domestic currency of the Member States in the euro area. Although treated as domestic currency, holdings of euro currency by residents of each participating Member State are liabilities of the resident national central bank only to the extent of its notional share in the total issue, based on its share in the capital of the ECB.

A consequence is that, in the euro area, from a national perspective, part of residents' holdings of domestic currency may be a financial claim on non-residents. Currency issued by the Eurosystem includes notes and coins. Notes are issued by the Eurosystem; coins are issued by central governments in the euro area, although, by convention, they are treated as liabilities of the national central banks which as a counterpart hold a notional claim on general government.

Euro banknotes and coins may be held by euro area residents or by non-residents of the euro area. Deposits usually involve the debtor giving back the full principal amount to the investor. If the account is overdrawn, the withdrawal to zero is the withdrawal of a deposit, and the amount of the overdraft is the granting of a loan. Other deposits cannot be used to make payments except on maturity or after an agreed period of notice, and they are not exchangeable for currency or for transferable deposits without some significant restriction or penalty.

Their availability is subject to a fixed term or they are redeemable at notice of withdrawal. They also include deposits with the central bank held by deposit-taking corporations as compulsory reserves to the extent that the depositors cannot use them without notice or restriction; savings deposits, savings books, non-negotiable savings certificates or non-negotiable certificates of deposit; deposits resulting from a savings scheme or contract.

These deposits often involve an obligation on the part of the depositor to make regular payments over a given period, and the capital paid and interest accrued do not become available until a fixed term has elapsed. These deposits are sometimes combined with the issue, at the end of the savings period, of loans which are proportionate to the accumulated savings, for the purpose of buying or building a dwelling; evidence of deposits issued by savings and loan associations, building societies, credit unions etc.

They are classified under debt securities AF. Bills and zero-coupon debt securities offer no coupon interest; coupon dates, on which the issuer pays the coupon to the securities' holders; the issue price, redemption price, and coupon rate may be denominated or settled in either national currency or foreign currencies; and the credit rating of debt securities, which assesses the credit worthiness of individual debt securities issues.

Rating categories are assigned by recognised agencies. With regard to point c in the first subparagraph, the maturity date may coincide with the conversion of a debt security into a share. In this context, convertibility means that the holder may exchange a debt security for the issuer's common equity.

Exchangeability means that the holder may exchange the debt security for shares of a corporation other than the issuer. Perpetual securities, which have no stated maturity date, are classified as debt securities. A further breakdown of debt securities denominated in various foreign currencies may be appropriate and will vary depending on the relative importance of the individual foreign currencies for an economy.

Three groups of debt securities are distinguished: fixed interest rate debt securities; variable interest rate debt securities; and mixed interest rate debt securities.

Examples are treasury bills, commercial paper, promissory notes, bill acceptances, bill endorsements, and certificates of deposit; deep-discounted bonds having small interest payments and issued at a considerable discount to par value; zero-coupon bonds, which are single-payment debt securities with no coupon payments.

The bond is sold at a discount from par value, and the principal is repaid at maturity or sometimes redeemed in tranches. Zero-coupon bonds may be created from fixed rate debt securities by 'stripping off' the coupons, that is, by separating the coupons from the final principal payment of the security and trading them independently; Separate Trading of Registered Interest and Principal Securities STRIPS , or stripped debt securities, which are securities whose interest and principal payment portions have been separated, or 'stripped', and may then be sold separately; perpetual, callable, and puttable debt securities, and debt securities with sinking fund provision; convertible bonds, which may, at the option of the holder, be converted into the equity of the issuer, at which point they are classified as shares; and exchangeable bonds, with an embedded option to exchange the security for a share in a corporation other than the issuer, usually a subsidiary or company in which the issuer owns a stake, at some future date and under agreed conditions.

Debt securities, interest on which is linked to the credit rating of another borrower, are classified as index-linked debt securities, as credit ratings do not change in a continuous manner in response to market conditions. At the date of issue, the issuer cannot know the value of interest and principal repayments. They cover debt securities that have: a fixed coupon and a variable coupon at the same time; a fixed or a variable coupon until a reference point and then a variable or a fixed coupon from that reference point to the maturity date; or coupon payments that are pre-fixed over the life of the debt securities, but are not constant over time.

They are called stepped debt securities. Private placements involve an issuer selling debt securities directly to a small number of investors. The credit worthiness of the issuers of these debt securities are typically not assessed by credit rating agencies, and the securities are generally not resold or repriced, so the secondary market is shallow.

However, most private placements meet the criterion of negotiability and are classified as debt securities. A variety of assets or future income streams may be securitised including, among others, residential and commercial mortgage loans; consumer loans; corporate loans, government loans; insurance contracts; credit derivatives; and future revenue.

Securitisation has been driven by different considerations. For corporations, these include: cheaper funding than is available through banking facilities; the reduction in regulatory capital requirements; the transfer of various types of risk like credit risk or insurance risk; and the diversification of funding sources.

These schemes can be grouped into two broad types: a financial corporation engaging in the securitisation of assets and a transfer of the assets providing collateral from the original holder, known as a true-sale; and securitisation schemes involving a financial corporation engaged in the securitisation of assets and a transfer of credit risk only, using credit default swaps CDS — the original owner retains the assets, but passes on the credit risk.

This is known as synthetic securitisation. Where the financial corporation is the legal owner of a portfolio of assets, issues debt securities that present an interest in the portfolio, has a full set of accounts, it is acting as a financial intermediary classified in other financial intermediaries. Financial corporations engaged in the securitisation of assets are distinguished from entities that are created solely to hold specific portfolios of financial assets and liabilities.

These entities are combined with their parent corporation, if resident in the same country as the parent. However, as non-resident entities they are treated as separate institutional units and are classified as captive financial institutions. The proceeds from the issue of debt securities are placed in a deposit or in another safe investment such as AAA bonds, and the interest accrued on the deposit, together with the premium from the CDS, finances the interest on the debt securities issued.

If a default occurs, the principal owed to the holders of the ABS is reduced — with junior tranches getting the first 'hit' etc. Coupon and principal payments may also be redirected to the original collateral owner from investors in the debt securities to cover default losses. In case of default of the issuing or guarantor financial corporation, bond holders have a priority claim on the cover pool, in addition to their ordinary claim on the financial corporation.

Deposit taking corporations normally record short-term liabilities as deposits, not as loans. For households , a useful sub-categorisation is as follows: loans for consumption; loans for house purchases; and other loans.

By contrast, debt security issues consist of a large number of identical documents, each evidencing a round sum, which together form the total amount borrowed. In cases where loans become negotiable on an organised market, they are to be reclassified from loans to debt securities, provided that there is evidence of secondary market trading, including the existence of market makers, and frequent quotation of the financial asset , such as provided by bid-offer spreads.

An explicit conversion of the original loan is normally involved. Financial corporations determine the conditions and households may only choose either to accept or refuse. The conditions of non-standardised loans however are usually the result of negotiations between the creditor and the debtor. This is an important criterion which facilitates a distinction between non-standardised loans and debt securities. In the case of private security issues, however, the creditor and the debtor negotiate the issue conditions.

Trade credit arises when payment for goods and services is not made at the same time as the change in ownership of a good or the provision of a service. Trade bills drawn on a customer by the supplier of goods and services, which are subsequently discounted by the supplier with a financial corporation, become a claim by a third party on the customer. The securities borrower may be required to provide assets as collateral to the securities lender in the form of cash or securities.

Legal title passes on both sides of the transaction so that borrowed securities and collateral can be sold or 'on-lent'. The commitment to repurchase may be either on a specified future date or an 'open' maturity. The different features of the two arrangements are shown in Table 5. Feature Securities lending Repurchase agreements Cash collateral Without cash collateral Specific securities General collateral Formal method of exchange Lending of securities with an agreement by the borrower to deliver it back to the lender Sale of securities and commitment to repurchase them under terms of master agreement Form of exchange Securities versus cash Securities versus other collateral if any Securities versus cash Cash versus securities Return is paid to the supplier of Cash collateral the securities borrower Securities not collateral securities the securities lender Cash Cash Return repayable as Fee Fee Repo rate Repo rate.

Such provision of funds to institutional units other than monetary financial institutions is treated as loans ; for deposit taking corporations, it is treated as deposits. They involve an exchange of gold for foreign exchange deposits with an agreement that the transaction be reversed at an agreed future date at an agreed gold price.

The transaction is recorded as a collateralised loan or a deposit. Under a financial lease, the lessor is deemed to make, to the lessee, a loan with which the lessee acquires the asset.

Thereafter the leased asset is shown on the balance sheet of the lessee and not the lessor; the corresponding loan is shown as an asset of the lessor and a liability of the lessee. Other kinds of leases are i operating lease ; and ii resource lease. Contracts, leases and licenses, as defined in Chapter 15, can be considered as leases as well. They are classified in other equity AF. Shares and stocks have the same meaning. A depository issues receipts listed on one exchange that represent ownership of securities listed on another exchange.

Depository receipts facilitate transactions in securities in economies other than their home listing. The underlying securities may be shares or debt securities. Such an exchange may be a recognised stock exchange or any other form of secondary market. Listed shares are also referred to as quoted shares.

The existence of quoted prices of shares listed on an exchange means that current market prices are usually readily available. Dividend shares do not give holders the status of joint owners — holders therefore do not have the right to a share in the repayment of the registered capital, the right to a return on this capital, the right to vote at shareholders' meetings, etc.

Nevertheless, they entitle the holders to a proportion of any profits remaining after dividends have been paid on the registered capital and to a fraction of any surplus remaining on liquidation; Participating preference shares or stocks, which entitle holders to participate in the distribution of the residual value of a corporation on dissolution. The holders have also the right to participate in, or receive, additional dividends over and above the fixed percentage dividend.

The additional dividends are usually paid in proportion to any ordinary dividends declared. In the event of liquidation, participating preference shareholders have the right to a share of any remaining proceeds that ordinary shareholders receive, and receive back what they paid for their shares. Such equity securities are often issued by smaller, younger corporations for financing reasons, or by large enterprises to become publicly traded. In an IPO the issuer may obtain the assistance of an underwriting entity, which helps to determine what type of equity security to issue, the best offering price and time to bring it to market.

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Find out how GoCardless can help you with ad hoc payments or recurring payments. GoCardless is used by over 60, businesses around the world. Learn more about how you can improve payment processing at your business today. Learn more Sign Up. Experts answer businesses questions on what's next for the future of payments. Contact sales. Skip to content Open site navigation sidebar. Was the language and grammar an issue? Didn't find yours?

Ask a new question Get plagiarism-free solution within 48 hours. Review Please. Next Previous. Related Questions. How does this type of trans- action affect the accounting equation? Distinguish be- tween a current liability and a long-term debt Question 1. The accounting equation is the basis for analyzing, summarizing, and recording transactions in accounting. View Solution: What type of transaction is a cash payment to creditors How. Trade payables constitute the money a company owes its vendors for inventory -related goods, such as business supplies or materials that are part of the inventory.

Accounts payable include all of the company's short-term debts or obligations. For example, if a restaurant owes money to a food or beverage company, those items are part of the inventory, and thus part of its trade payables. Meanwhile, obligations to other companies, such as the company that cleans the restaurant's staff uniforms, fall into the accounts payable category. Both of these categories fall under the broader accounts payable category, and many companies combine both under the term accounts payable.

Accounts receivable and accounts payable are essentially opposites. Accounts payable is the money a company owes its vendors, while accounts receivable is the money that is owed to the company, typically by customers. When one company transacts with another on credit, one will record an entry to accounts payable on their books while the other records an entry to accounts receivable.

A payable is created any time money is owed by a firm for services rendered or products provided that has not yet been paid for by the firm. This can be from a purchase from a vendor on credit, or a subscription or installment payment that is due after goods or services have been received.

Accounts payable are found on a firm's balance sheet, and since they represent funds owed to others they are booked as a current liability. Receivables represent funds owed to the firm for services rendered and are booked as an asset. Accounts payable, on the other hand, represent funds that the firm owes to others. For example, payments due to suppliers or creditors.

Payables are booked as liabilities. Expenses are found on the firm's income statement, while payables are booked as a liability on the balance sheet. Financial Statements.

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