Question

Task 3

Accounts receivable is the amount owed to a company resulting from the company providing goods and/or services on credit. The term trade receivable is also used in place of accounts receivable. The amount that the company is owed is recorded in its general ledger account entitled Accounts Receivable.

Required:

With reference to Accounts for Receivables:                                             (2.5X2=5 Marks)

1. Explain with example the concept of Credit Terms.
2. Explain what factors should be considered while deciding whether to relax credit terms standards or not.

Answer 1

Accounts receivable is the amount owed to a company resulting from the company providing goods and/or services on credit. The term trade receivable is also used in place of accounts receivable. The amount that the company is owed is recorded in its general ledger account entitled Accounts Receivable.

With reference to Accounts for Receivables:   

The concept of credit terms :

This concept is defined as the terms on which any company provides goods to its customers on credit basis.
The credit term policies indicate the due date of payment and special discounts provided if paid before due date.

Example : ABC company provides goods to its customers on credit terms 3/10, net30.
This indicates that the amount gets due in 30 days and if paid within 10 days discount of 3% will be given by the company to its customers.

Relaxation of credit terms standards should only be considered by the company if the customers of the company who buys goods on credit pays within due date and company is confident that new customers will also pay credits with relaxed terms.

The factors that should be considered while deciding whether to relax credit terms standards or not are :

Credit period : the company should decide credit period before providing any relaxation to credit terms standards.

Discount rate : should also be considered.

Collection policy : company should also formulate its collection policy.

Credit standards : should be set up to regulator acceptable customers who are eligible for credit.