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Question

Difficulty: EasyForms and Instruments of Credit

A retailer purchases goods from a wholesaler with an agreement to pay for them 30 days after delivery. What form of credit is being utilized in this transaction?

  1. Trade creditAnswer
  2. B
    Hire purchase
  3. C
    Bank overdraft
  4. D
    Credit note

Answer

Trade credit is a credit facility granted directly by a seller to a buyer, allowing the buyer to receive goods immediately and settle the invoice at a later date.
Trade credit refers to an agreement between businesses where goods are supplied on credit, enabling the buyer to pay the supplier after a specific grace period (such as 30, 60, or 90 days).

Step-by-Step Solution

1
Analyze the commercial relationship in the scenario
The transaction takes place between a merchant buyer (retailer) and a merchant supplier (wholesaler).
Credit granted directly between commercial entities during the purchase of inventory is merchant-based credit.
2
Identify the credit mechanism
Goods are transferred immediately with payment deferred for 30 days.
An arrangement allowing a buyer time to pay for goods delivered by a vendor is known as trade credit.

Key Concept

Trade Credit
Estimated Time:45s
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Topics

Forms and Instruments of Credit

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