a) State four functions of money. b) Explain six advantages of payment by cheque

Answer Details

(a) Four functions of money

1. Medium of exchange: Money is generally accepted in payment for goods and services, so it removes the difficulties of trade by barter.
2. Measure of value (unit of account): Money provides a common standard for expressing and comparing the value of different goods and services.
3. Store of value: Money can be saved and kept for future use because it retains its value over a reasonable period.
4. Standard for deferred payments: Money makes it possible to buy now and pay later, so debts, wages and future obligations can be fixed in money terms.

(b) Six advantages of payment by cheque

1. Safety: Payment by cheque avoids the risk of carrying large sums of cash that could be lost or stolen.
2. Convenience: A single cheque can be used to settle a very large debt without counting bundles of notes.
3. Proof of payment: The paid (returned) cheque and the counterfoil serve as evidence that payment was made.
4. Crossing gives extra security: A crossed cheque can only be paid into a bank account, so it cannot easily be cashed by a thief.
5. Stopping payment is possible: The drawer can instruct the bank to stop payment on a cheque if the need arises, for example if it is lost.
6. Payment can be made at a distance: A cheque can be sent by post to a creditor in another town, avoiding the need to travel with cash.