12.1.1 Nature of Trade Credit

Trade credit or accounts payable is the mirror image of accounts receivable or the sundry debtors. It emerges when a firm purchases raw material on credit. Trade credit is a source of finance in the sense that it finances purchases during the period of the credit. When a firm buys material on credit instead of paying cash, this frees funds that can be used elsewhere in the same manner as if the funds had been borrowed. Trade credit is thus, the act of obtaining funds by delaying payments to the supplier.

The volume of trade credit depends upon the quantum of purchases and the period for which credit is available. For example, if a firm buys goods worth Rs 500 per day on a net 30 term, the amount ...

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