Basic Finance

MODULE MATERIALS
List of Modules

No. MODULE
MODULE TITLE
CODE

1 The Philippine Financial System BFin 313-1

2 Banking Key Concepts BFin 313-2

3 The Principles of Stock Market BFin 313-3

4 The Concept and Development of Money BFin 313-4

5 Introduction to Finance BFin 313-5

6 Introduction to Managerial Finance BFin 313-6

7 Finance and Accounting BFin 313-7

8 Understanding Financial Statements BFin 313-8

9 Financial Statement Tools for Decision Making BFin 313-9

10 The Financial Environment BFin 313-10

11 Financial Intermediation BFin 313-11

12 Interest Rate and Its Role in Finance BFin 313-12

13 Financial Assets BFin 313-13

14 Basic Capital Market BFin 313-14

MODULE #4-BFin 313-4

The Concept and Development of Money

MODULE MATERIALS
THE CONCEPT
AND
DEVELOPMENT
OF MONEY

(BFIN 313-4)

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 MODULE CONTENT

COURSE TITLE: Basic Finance

MODULE TITLE The Concept and Development of Money

NOMINAL DURATION: 3 Hours

SPECIFIC LEARNING OBJECTIVES:

At the end of this module you MUST be able to:
1. Have an understanding on the concept and development of money.
2. Explain the distinction between barter and barter exchange.
3. Explain the different forms of money.
4. Illustrate the kinds of checks, bank drafts, and the characteristics of a
good medium of exchange.

TOPIC: (SUB-TOPICS)
1. Origin of Money
2. Definition of money
3. Barter & Barter Exchange
4. Coinage & Kinds of Coinage
5. Different kinds of money
6. Functions of money
7. Forms of money
8. Types of checks
9. Parties to a check
10. Types of bank draft
11. Other classifications of money
12. Characteristics of a good medium of exchange

ASSESSMENT METHOD/S:
Quiz-Multiple Choice
REFERENCE/S:
1. Leuterio, M.M. & Estepa, C.B.
Banking Theory & Practice (Revised Edition), 2018
Pasig City: Anvil Publishing, Inc.
2. Fajardo, Feliciano R. & Manansala, Manuel M.
Money, Credit and Banking 4th Edition, 2017
Mandaluyong City: National Book Store
3. A) Mejorada, N.D.
Introduction to Management Accounting, 2018 Edition
Makati City: Goodwill Trading Co.,Inc.
B) Edlagan and Mercado
Management Advisory Services (Concepts, Methods and
Applications) Volume 1, 2016 Edition
Makati City: Goodwill Trading Co.,Inc.
4. Melicher, Ron & Norton, Edgar
Introduction to Finance, 2018 Edition
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 New York: John Wiley & Sons
5. A) Brigham, Eugene F.
Fundamentals of Financial Management, 20th Edition 2016
Hoboken, New Jersey, USA: John Wiley and Sons
B) Dr. Hughes
Personal Finance 12th Edition, 2017
Upper Saddle River, New Jersey, USA: Pearson Prentice Hall

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 Information Sheet-BFIN 313-4
The Concept and Development of Money

Learning Objectives:
After reading this INFORMATION SHEET, YOU MUST be able to:
1. Explain money and the factors that determine its value.
2. Compare and contrast values of money in different economies.
3. Relate the value of money to your personal consumption.

INTRODUCTION
Can you imagine a world without money? Is it even possible to function
as a society and an economy without the concept of money? Money has had a
fascinating history and has evolved as a concept since ancient times.
Money is really anything that people use to pay for goods and services
and to pay people for their work. Historically, money has taken different forms
in different cultures-everything from salt, stones, and beads to gold, silver, and
copper coins and more recently, virtual currency has been used. Regardless of
the form it takes, money needs to be widely accepted by both buyers and
sellers to be useful.

ORIGIN OF MONEY
Latin word “moneta”
❖ a mint or place for coining money
❖ surname of the Roman Goddess Juno
Latin “monere”
❖ advise or warn
* Old French “monoie” and money, coin, currency,
Modern French “monnaie” or change
In ancient Greece, the word “moneta” meant advisor, one who warns, or makes
people remember.

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First Roman Mint
• constructed adjacent to the temple of Juno in BCE 289
• originally producing bronze and later silver coins
• many of the coins bore an image of head of Juno Moneta on its face
Moneta
• eventually became the word to refer for both money and mint and
later changed to the word “money” as we call it at present.
Bucks
• came from the word “buckskins”
• deer hides – a medium of exchange used by settlers during the early
times.

MONEY
1. Medium of exchange

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2. Legal tender

3. Measure of value

4. Standard of value

5. Means of payment

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BARTER
❖ Barter is defined as the exchange of things for other things.

COINAGE
❖ the conversion of metals into coins.
Mint
❖ the place where metals are made into coins.
Coin
❖ an ingot of metal, the weight and fineness of which are certified by the
integrity of the design on its surface and the power of the issuing
authority.
Government
❖ the only authority granted the power of coinage and, ultimately, the
power to print bills as money.

KINDS OF COINAGE
1. Free Coinage or Gratuitous Coinage

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 ❖ Metals brought to the government mint and converted into standard
money without any charge for minting except for the delay involved in
the process.
2. Brassage
❖ The fee charged by the government is just sufficient to cover the cost of
minting. The government does not earn anything.
3. Seigniorage/Seignorage
❖ The fee charged by the government is more than the cost of minting so
the government earns a profit.
4. Limited Coinage
❖ The government converts metals into coins only at its option. The
government buys precious metals in the open market and mints them as
a coin money or the standard medium of exchange at face value higher
than the material content to facilitate trade.

PAPER MONEY
❖ A country's official, paper currency that is circulated for transaction-
related purposes.
❖ The printing of paper money is typically regulated by a country's central
bank/treasury in order to keep the flow of money in line with monetary
policy.
❖ Paper money tends to be updated with new versions that contain security
features that seek to make it more difficult for counterfeiters to create
illegal copies.

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PLASTIC (POLYMER) MONEY
Plastic Money
❖ hard plastic cards used in everyday exchange transactions in place of
actual banknotes.
Polymer Money
❖ bill was printed on clear plastic film.

PLASTIC MONEY
Credit Card
• allows owners to buy products on credit from different stores and
establishments, in lieu of cash or money, except that it has a credit
limit.

Debit Card
• Unlike credit card, payments using debit card are immediately
charged to the cardholder’s bank account, instead of paying the card
at a later date.
• In some instances, the bank gives an overdraft line.

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Cash Card
❖ only allows withdrawal of money through an Automated Teller Machine
(ATM). In short, it is used for ATM transactions only.

PREPAID CASH CARD

Gift card/Certificate
❖ can be given as a gift so that the recipients can choose what they want as
a gift.

Store Card
❖ generally issued by a particular store and can be used for purchase in
the same store. Very seldom can it be used in other establishments.

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Multi-currency Prepaid Card
❖ it can load up different currencies.
❖ no foreign currency conversion fees, annual fees, minimum balance
requirement and other finance charges.

BARTER EXCHANGE
❖ A network of business owners who want to trade products and services
to increase sales and, consequently, profit together with a reduction of
cash outlay, thus freeing business cash for other purposes to run the
business. It is a business-to-business barter exchange.

FUNCTIONS OF MONEY
1. Medium of Exchange
❖ Money is used to facilitate the transfer of goods and services and settle
obligations.

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2. Standard of Value
❖ Goods, services, assets, liabilities and net worth (equity or capital) are all
measured in terms of money.

3. Store of Value
❖ Savings, usually in the form of money, is stored either in the bank or at
home for future use – that is the idea of store of value.

4. Means of Deferred Payment

❖ As legal tender, money is acceptable in payment of debts or liabilities. If
payment is to be made in the future, money becomes a means of deferred
payment.
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5. Conveyance
❖ Similar to the function of medium of exchange. Money conveys or
transfers title or possession.

FORMS OF MONEY
1. Commodity Money
❖ has its own value other than using it as money

2.
Currency (Bills and Coins)

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 ❖ The government of any country issues currency that is legal tender in the
country. These bills and coins are different in denominations, minted
and printed by the central bank of a country.

3. Check
❖ Is generally used by businesses and persons in conducting business, as
well as personal transactions.

Different Types of Checks

a. Personal Check
❖ is issued by persons to be drawn against their own current/checking
account in a bank. A check is withdrawn from the checking account.
❖ NOW account (Negotiable Order of Withdrawal) is an interest-bearing
checking account.

Sample of a Local Check

Sample of a Foreign Check

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b. Business Check
❖ is issued by companies/businesses.
❖ it is drawn on the issuer’s bank checking or current account.
❖ it is used for business transactions.
c. Cashier’s Check/Manager’s Check
• treated as a bank draft, cashier’s check is issued by the bank against its
own account, ensuring availability of funds.
• it is to be purchased with a fee from a bank that issues the check.
• it can be signed by the bank cashier or any other bank official.
• it can be used to pay somebody else, even a company.
d. Certified Check
• is like a cashier’s check. However, it is issued by the bank certifying that
the account of the person issuing it has available funds (just like any
ordinary personal check).

Parties of a Check
1. Maker
❖ the drawer or writer of the check. He is the payer or debtor, the one who
owes someone or some company. He is the depositor with a current
account with the bank where the funds will come from.
2. Drawee
❖ Is the bank which is ordered to pay the payee. It is the bank where the
current account is maintained.
3. Payee
❖ Is the one to whom the check is to be paid. He is the creditor. He
endorses or signs the back of the check.

e. Traveler’s Check
❖ a prepaid fixed amount that operates like cash that a purchaser can use
to buy goods or services when traveling. A customer can exchange a
traveler's check anywhere for cash. Major financial service financial
institutions issue traveler's checks, and banks and credit unions sell
them.
Parties of a Traveler’s Check
1. Issuer or Obligor
❖ The company issuing or producing the traveler’s check. Both the maker
and obligor are the drawee because he makes final payment on traveler’s
check.

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 2. Agent
❖ The financial institution who sells the traveler’s check.
3. Purchaser
❖ The person buying the traveler’s check and will use it as a form of
money.
4. Payee
❖ The seller of goods or services to be paid with the traveler’s check.
4. Bank Draft
❖ is issued by banks against their own account.
❖ at times, they are called cashier’s check or manager’s check.
❖ like certified and cashier’s checks, bank draft ensures availability of
funds without any need to check on the character of the person issuing
the check.

TYPES OF BANK DRAFT

1. Demand Draft
❖ also called as sight draft. Payable on demand or upon sight.
2. Time Draft
❖ payable sometime in the future like post-dated check
3. Local Draft
❖ issued by a bank in a single country. For local transactions only.
4. International Draft
❖ Used globally or internationally. Usually used by multinational
companies.
5. Automatic Back Draft (ABD)
❖ This draft takes out money from the payer’s account electronically. The
payee requests the bank for payment directly. It is also known as
automatic payment or automatic bill pay.
5. Money Order
• Refers to the instrument issued generally by the post office of a country
ordering a sum of money to be paid to the payee indicated on the
instrument.
• Often used by individuals who do not have checking accounts and want
to pay their bills through mail.
6. Warehouse Receipt
• Being a document of title to goods , is a proof of the: (1) possession or
control of the goods; or (2) authorizing or purporting to authorize the
possessor of the documents to transfer or receive either by endorsement
or by delivery goods presented by such document.
• Issued by a warehouseman or a person who is lawfully engaged in the
business of storing goods for profit.

OTHER CLASSIFICATIONS OF MONEY

1. Fiat/Fiduciary Money
❖ Latin word “fiat” means “Let it be done”
❖ Has no corresponding reserve
❖ Money was given value by the government through a decree, which
means that money became legal tender.

2. Representative Money

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 ❖ was backed by a government’s or bank’s promise to exchange it for
a certain amount of silver or gold.
❖ can be redeemed when exchanged with the issuing authority.

CHARACTERISTICS OF A GOOD MEDIUM OF EXCHANGE

1. Scarcity
❖ rare or hard to find. Scarcity makes something valuable, over-abundance
makes it worthless.
2. Divisibility
❖ quality of being broken down into smaller units. Malleability of metals
makes them desirable for coinage because they can be melted and
formed into different shapes and sizes and denominations.
3. Portability
❖ ease in handling or carrying
4. Durability
❖ long lasting

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