O Level Revision : Commerce - Terms Of Payment And Forms Of Credit

Terms of payment

1. Trade discount

• Is a deduction from gross price allowed by one trader to another trader.
• This discount is given to customers who buy to sell again.
• It is a margin of profit to the buyer.
• Given to encourage bulk buying and avoid reprint of catalogue.
• Because of trade discounts, buyers are attracted to the sellers.

2. Cash discount

• Is a proportion or a percentage of between 2% and 5% disallowance for prompt
• payment within a specific time frame.
• It encourages prompt payment for amounts due.
• Reduces bad debts.
• Reduces paperwork.
• Increases rate of stockturn and sales.

A supplier offers a retailer goods worth $1 000 for sale; less 20% trade discount and a further 5% cash discount.

The trade discount      =        $20 x 1000 
                                                    100

                                           =       $200

The cash discount       =       $800 x 5 
                                                  100

                                      =       $40

Forms of credit

1. Credit sale

• Credit sale is suitable for goods with little resale value.
• Clothing has little resale value.
• The buyer becomes the owner of the goods soon after the agreement is made.
• A regular instalment is paid weekly or monthly.
• The buyer owns the goods and may dispose of or sell them at any time.
• The seller cannot repossess the goods if the buyer defaults in payments.
• The seller may sue the buyer for the overdue or unpaid amount.

2. Hire purchase

• Is an agreement between the buyer and financier of the hire purchase item.
• The buyer is the hirer.
• The hirer pays a deposit and agreed fixed monthly payments over a specific
• period.
• Is for durable goods with resale value like vehicles and furniture
• Strictly controlled by law.
• A legislated deposit and evenly spread payments are paid.
• High interest rate is charged.
• The hirer can be funded by retailer, manufacturer or a finance company.
• A written agreement is completed, witnessed and endorsed by both parties.
• The seller can repossess the goods if buyer defaults on payments.
• The buyer becomes owner of the goods on payment of the last instalments.

A lorry cost $11 000. 20% cash discount was offered. For a hire purchase facility, a deposit of $2 000 was payable and the balance was paid over three years. The financier charged 10% interest per year.

Calculate:

(i)   the cash payment                                      (ii) balance after paying a deposit

(iii) interest                                                      (iv) monthly repayments

(v)  total amount paid on hire purchase.

(v) Total paid =  $(2 000 + 9 000 + 2 700)

=    $13 700

Advantages of hire purchase

(i)   To sellers

• Sale of durable, quality and expensive goods increases.
• Can repossess the item if buyer defaults in payment.
• Assured of payment through finance companies.
• Capital is not tied in stock.

(ii)  To customers

• Enjoy the use of the goods.
• Earn a high standard of living while paying for item.
• No need to save the full amount in order to buy the good.
• Earn income while paying for the good.
• Buy quality goods.

Disadvantages of hire purchase

(i)   To sellers

• A repossessed good is in second hand and poor state.
• Second hand goods have low rate of turnover.
• Risk of bad debts may be common.
• Finance charges or interest rates are high.
• Much paperwork is involved.
• Takes much time to sue a defaulter or to repossess goods.
• It is expensive to sue the defaulter.

(ii)  To customers

• Leads to impulse buying.
• Buyers are tempted to enter into many hire purchase agreements.
• May fail to pay the instalments.
• Goods become more expensive due to interest charges.
• Goods may be repossessed and money already paid is lost.

Ways to increase sales

• Reduce the prices of items.
• Sell on credit as well as cash.
• Advertise on electronic and print media.
• Provide free delivery.
• Sell a variety of items.
• Give cash discounts.

Multiple choice questions

1. Which items might be sold on hire purchase?
2. Books  B.   Carpets
3. Clothes                   D.   Radios
4. In a hire purchase agreement, the buyer
5. can lease the goods.
6. owns the goods.
7. can resell the goods any time.
8. enjoys the use of the goods after paying a deposit.

Use the following information to answer questions 5, 6 and 7.

A retailer sells goods worth $400 and gives 20% trade discount and 5% cash discount.

5. What is the trade discount?
6. What is the cash price of the goods?
7. $ 400  B.   $320
8. $304  D.   $300
9. Why do retailers give cash discounts? (i)  To get cash payment promptly

(ii) To increase bad debts

(iii) To  reduce paperwork

1. (i) and (ii)                                          B.   (i) and (iii)
2. (ii) and (iii)                                       D.   (i), (ii) and (iii)
3. Credit sales are suitable for

(i)   wall carpets. (ii) furniture. (iii) radios.

1. (i)  B.   (ii)
2. (iii)  D.   (i), (ii) and (iii)
3. Sales might increase if

(i)    prices are reduced.

(ii) goods are sold on credit. (iii) goods are advertised.

1. (i) and (ii)  B.   (i) and (iii)
2. (ii) and (iii)  D.   (i), (ii) and (iii)

Use the following information to answer questions 11 to 14:

Furniture  cost  $5 500. A deposit of $1 000 was paid and the balance was payable over three years. 10%  interest per year was charged on the balance.

Essay questions

1. Distinguish between trade discount and cash discount.
2. Explain features of hire purchase.
3. What are the advantages of hire purchase to: (i)  sellers?

(ii) buyers?

(iii) financiers?

4. Explain the features of a credit sale.
5. Explain how businesses can increase sales.
6. Distinguish between hire purchase and credit sale.

7.    Distinguish between cash sale and hire purchase trade transactions