ACCT 212 Week 3 DQ 2 Trade Credit - Accounts Payable

Trade Credit - Accounts Payable (graded)

The ability to extend trade credit is a benefit to both sides of the transaction. The seller can increase sales while the buyer can conduct business without spending cash immediately. (For example, imagine you own a business the sells wood to construction companies that build homes. Using trade credit, the construction company can purchase the wood without spending cash immediately and you as the owner have more sales!) It sounds like a perfect relationship and it would be if people were not involved.

Let’s take a look beyond the obvious and discuss the pros and cons of Accounts Receivable. Why do companies offer trade credit, and what are the problems?