SS 3 Commerce

Topic: Credit

Contents : Meaning of Credit, Basis for Credit sales, Advantages and Disadvantages of Credit sales.

Credit

Credit can simply be defined as the process by which goods and services are transferred to a buyer from the seller with the aim that the buyer will pay later in the future.

Credit occurs when a seller grants permission to a buyer to take possession and enjoyment of goods or services without value being given immediately.

Basis for Credit Sales

The basis for credit sales are the things to be considered before rendering credit sales .some of these are:

  1. Sources of payment: this means that before a seller can render credit sale to a buyer he /she needs to know and be sure of the buyer’s sources of payment i.e where he will get the money to pay back for the goods or services he has enjoyed.
  2. The income of the buyer: The amount the buyer gets must also be put into consideration before rendering credit services, this helps the seller to be careful on the amount of goods he gives on credit, the seller must ensure the income of the buyer is sufficient enough to pay his or her debts.
  3. Present employment: this is to say that the seller must be sure of the buyers employment as at the time , the kind of job the buyer is doing matters a lot.
  4. Integrity of the buyer: The seller must ensure that the buyer is a person of integrity i.e a person who fears God and who can take responsibility for his /her credit.
  5. Time of payment: this means that the period or time of payment must be agreed on by the two parties involve i.e the seller and the buyer.
  6. Availability of guarantors: A guarantor is a person who is willing to stand on behalf of another person in case there is a default.The seller therefore must ensure that there is a guarantor on ground for the buyer before rendering credit sales or services.

Advantages of Credit Sale

  1. There is enjoyment of goods without immediate payment .i.e customers can enjoy and claim ownership of goods without paying for them immediately.
  2. It encourages bulk purchase: this is to say that customers buy more goods since they are not making payment immediately.
  3. There is increase in sales: since customers are not paying immediately they tend to buy more thereby increasing sale.
  4. Increase in profit: higher prices are charged on credit sales, therefore it helps to increase the sellers profit.
  5. It is a means of meeting temporary needs for cash because customers can buy on credit and use the cash at hand for other things.
  6. It helps to reduce the problem of holding goods for too long as some goods can be become expired or out of use.

Disadvantages of Credit Sale

  1. Problem of non payment i.e customer can have difficulty in paying for the goods they have bought
  2. There is tendency of customers to overbuy i.e customers can be tempted to buy beyond what they plan or what they can afford ,thereby creating problem for them.
  3. It can bring a business to liquidation i.e too much of credit sale can make a business to fold up.
  4. It can lead to bad debt : this is a situation where customers do not pay for goods or services they have enjoyed.
  5. Capital can be tied down
  6. It can lead to court action if the buyer refuses to pay.
  7. It involves a lot of record keeping

Class test and exercise.

  1. The process whereby customers enjoys and claim ownership of goods without immediate payment is called———— (a)opportunity (b)privilege (c)credit (d)free gift.ans (c)
  2. All of these are basis for credit sale except (a)source of payment (b)time of payment (c)availability of guarantor (d)the intellectual ability of the buyer.ans (d)
  3. One advantage of credit sale is (a)it can cause a business to liquidate (b)increase in profit (c)customers can overbuy (d)increase in price ,ans (b)
  4. Credit sale can help to increase the standard of living of the customer is a disadvantages. true/false ans false.
  5. One disadvantages of credit sale is ————– (a)it can lead to bad debt (b)increase in sale (c)increase in profit (d)encouragement of bulk purchase.ans (a)