Credit Terms | Accounting

Credit Terms are the terms mentioned on the invoice at the time of buying goods from the seller on the credit. In other words, the credit terms provokes the customer for the early payment in order to accelerate the flow of inbound cash. Copy the link given below and paste it in new browser window to get more information on Credit Terms:- http://www.transtutors.com/homework-help/accounting/merchandising-operations-credit-terms/

1. Credit terms Credit terms are the terms mentioned on the invoice at the time of buying goods from the seller on the credit

2. Credit terms Mentioned on the invoice at the time of buying goods It is a contract between the buyer and seller about the timings and payment to be made for the goods bought in the future

3. AMOUNT OF CREDIT TO BE EXTENDED TO A CUSTOMER The total amount of credit to be extended to a borrower by a lender is known as credit exposure. The vastness of the credit exposure tells us about the extent to which a lender is exposed to the risk loss in case of borrower’s default. For example, if a bank has made a short term and long term loans of worth $400 million to company XYZ, then its credit exposure to a company XYZ is $400 million .

4. PAYMENT TIME PERIOD

5. Early payment discount terms An early payment discount is offered by some companies in order to encourage credit customers to pay sooner. The early payment discount also known as prompt payment discount or cash discount.

6. Penalty in case of late payment The rate of the penalties is driven by the country’s inflation and interest rate. Every country follows the different policies. The late penalties must be shown in the sales conditions, in the business contract and in the invoices.

7. ACCOUNTING FOR CREDIT TERMS Date Particulars Debit (Dr.) Credit (Cr.) 1 Oct 2016 Cash for the amount received (Dr.) xxxx     Sale discounts for the amount of early payment discount (Dr.) xxxx     Accounts receivable for the full amount of credit sale or invoice (Cr.)   xxxx

8. CREDIT ANALYSIS Credit analysis is a method through which the credit worthiness of a business or organization can be calculated. The main objective of the credit analysis is see whether both the borrowing and the lending facility being proposed and to assign risk rating.

9. FIVE C’s of credit

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