CREDIT TERMS


CREDIT TERMS

Standard or negotiated terms (offered by a seller to a buyer) that control the monthly and total credit amount, maximum time allowed for repayment, discount for cash or early payment, and (4) the amount or rate of late payment penalty


1-      credit discount
2-      discount period
3-      credit period


When a customer takes an early payment discount to pay for an invoice, the accounting for the transaction is: Debit cash for the amount of cash received.

A discount period is the amount of time a cash discount is available for a customer to make a reduce cash payment

The credit period is the number of days that a customer is allowed to wait before paying an invoice.

EXPLANATION WITH EXAMPLE

2/10 and N/30

The term of credit already mention on the invoice. Usually credit term may state 2/10, N/30. The first number indicate discount means 2, the second number indicate the discount period means N and the last term indicate the credit period means 30.How quickly a firm convert receivable into cash its good for them.If the vendor wants to aware the creditor than he pay the 10% discount, if he pays within 10 days and then he got 2% discount on invoice amount or if he make delay in payments then he got no discount

FORMULA FOR CALCULATION

360 into credit terms divided by credit period – discount period

PRACTICE QUESTIONS

Question NO 1
2/10, N/30

Question no 2
1/10, N/70



Comments

Post a Comment

Popular posts from this blog

IMPORTANCE OF WORKING CAPITAL MANAGEMENT

Image
IMPORTANCE OF WORKING CAPITAL MANAGEMENT 1-       Continuity in the business operation 2-       Dividend payments 3-       Repayments of long term loan 4-       Increase the reputation of company/ credit worthiness 5-       It boost efficiency and productivity 6-       It will increase the good will of the company 7-       It will help to find competition   EXPLANATION 1-       Working   capital keeps the business operation moving it is needed to purchased raw material to pay the worker and the staff and also to pay the utility expenses 2-       WC needed to pay dividend to shareholder the payments of dividend take place on the yearly or half yearly 3-       WC also used to repay long...
Read more

BONDS AND ITS TYPES

Image
BONDS In finance, a  bond  is an instrument of indebtedness of the  bond  issuer to the holders  . Its an    Long term contract .   Generally issued with maturities in the long term of 20 to 30 years and in short terms 7 to 10 years .    Agreement pay interest + principle amount on specific dates .      It is advertised in the newspaper  .  Offered to general public and investors TYPES OF BONDS 1-      Mortgage bond 2-      Debentures 3-      Subordinated debentures 4-      Income bond   A  mortgage bond  is a  bond  secured by a  mortgage  or pool of  mortgages . These  bonds  are typically backed by real estate holdings and real property such as equipment. In a default situation,  mortgage  bondholders have a claim to the underlying property and ...
Read more

CASH MANAGEMENT PURPOSE AND TECHNIQUES

Image
MAIN PURPOSE OF CASH MANAGEMENT ACCORDING TO COMPANY 1     1-   Collections 2-     Payments MANAGING CASH COLLECTION AND DISBURSEMENTS and TECHNIQUES 1-        Accelerating cash collections/ cash inflows 2-        Slowing down the cash outflows   3-        Controlling disbursement ACCELERATING CASH COLLECTION 1-        Decentralized collections 2-        Prompt payments by the customer PROMPT PAYEMENTS BY THE CUSTOMER In order to accelerate cash inflows the collection of the payments from the customer should be prompt and it is possible by prompt revising or invoices. Quick conversation into cash can also help. Cash flow can be accelerate by improving cash collection process and effective cash collection management. It can be possible if the time taken in deposit ...
Read more