Trade Credit Quiz

Trade credit refers to the credit that a customer gets from suppliers of goods, allowing them to defer immediate cash payments for purchases. It is a major source of short-term financing for firms, granted on an open account basis.

Trade credit as an informal arrangement does not involve the formal acknowledgment of debt or legal instruments, while trade credit in the form of bills payable involves the buyer signing a bill, which appears on the buyer's balance sheet as bills payable.

Trade credit becomes a routine activity once the trade links are established, creating mutual confidence between the buyer and the seller. This confidence allows for the deferral of payments and periodic review of the trade credit by the supplier.

<p>A supplier might prefer bills payable when they are less sure about the buyer's willingness and ability to pay, or when they want cash by discounting the bill from a bank.</p> Signup and view all the answers

<p>A bill serves as a formal acknowledgement of an obligation to repay the outstanding amount, providing clarity and legal weight to the trade credit arrangement.</p> Signup and view all the answers