Trade Credit is an interim debt arising from credit sales and recorded as an account receivable by the seller and as an account payable by the buyers.
Types of trade credit:
- Open Account:
In this system at the time of delivery of the products, the seller is required to send an invoice showing quantum, price, total price and condition of sales if any purchaser buys the product on the account. But this usually not documented. It is given on the basis of the purchaser creditability. Thus no signature of the purchaser is needed.
- Notes Payable:
The process of notes payable is quite same as open account, the only difference is that it has to be properly documented and signed by the purchase. It also consist then maturity of the loan and agreement of pay the money within said
- Trade Acceptance:
If sellers don’t know the purchasers or have little concerned about their creditability then they may not send the goods in advantage. In this cases, business uses trade acceptances draft which is an agreement prepared by the seller and then they send it to the buyer for signature. Until getting the sing of purchaser-seller never makes the delivery of goods.These sorts of the trade acceptance letter have to have marketability and one can exchange it with the bank for liquid cash.