Trade credit is a business-to-business (B2B) agreement in which a customer can purchase goods without paying cash up front, and paying the supplier at a later scheduled date.
Trade credit is an agreement between two businesses that allows one business to purchase goods or services from another business without paying cash upfront . The seller extends credit to the buyer, allowing the buyer to pay for the goods or services at a later date. Here are some of the characteristics of trade credit:
1. **Treatment in the books of accounts**: The trade credit that a firm extends to another business is treated as an asset and appears in the accounts receivable. Similarly, the trade credit that a firm receives from another company is treated as a liability and comes under the accounts payable section .
2. **Short-term debt**: Trade credit is usually treated as a short-term debt with no interest amount associated with it in most cases .
3. **Credit period**: The credit period is usually for a week, month, two months, six months, or a year since it is not a long-term arrangement. But firms can also set the dates according to their convenience and ability to pay back the loan amount. The credit period depends on several factors like the perishability of goods, the size of the account, and the probability of the other party reneging on their commitment to pay .
Some benefits of trade credit include expansion of business, flexible terms of payment, and no interest amount . However, there are also some disadvantages such as loss of discounts and late payment fees if payments are not made on time .
Answers & Comments
Answer:
Trade credit is a business-to-business (B2B) agreement in which a customer can purchase goods without paying cash up front, and paying the supplier at a later scheduled date.
Explanation:
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Answer:
Trade credit is an agreement between two businesses that allows one business to purchase goods or services from another business without paying cash upfront . The seller extends credit to the buyer, allowing the buyer to pay for the goods or services at a later date. Here are some of the characteristics of trade credit:
1. **Treatment in the books of accounts**: The trade credit that a firm extends to another business is treated as an asset and appears in the accounts receivable. Similarly, the trade credit that a firm receives from another company is treated as a liability and comes under the accounts payable section .
2. **Short-term debt**: Trade credit is usually treated as a short-term debt with no interest amount associated with it in most cases .
3. **Credit period**: The credit period is usually for a week, month, two months, six months, or a year since it is not a long-term arrangement. But firms can also set the dates according to their convenience and ability to pay back the loan amount. The credit period depends on several factors like the perishability of goods, the size of the account, and the probability of the other party reneging on their commitment to pay .
Some benefits of trade credit include expansion of business, flexible terms of payment, and no interest amount . However, there are also some disadvantages such as loss of discounts and late payment fees if payments are not made on time .
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