Define each of the following terms: i. Credit policy; credit period; credit standards; collection policy; cash discounts
Define each of the following terms:
Credit policy - It refers to the policies and procedures for granting and collecting the loan.
Credit period - It is the length of time between when a customer purchases a product and when the customer payment is due. If the credit period will increase, sales and accounts receivable will also increase.
Credit standards - It evaluates the minimum financial strength a customer is required to have to qualify for credit. Lower credit standards increase sales but also increase bad debts.
Collection policy - It is the process of collecting accounts receivable. A change in collection policy would affect sales, bad debt losses, and days sales outstanding.
Cash discounts - It is a reduction in the percentage of the sales price to encourage early payments by customers. It is usually represented in the form of 2/10, net 30 which means a 2% discount will be given if the receivable will be paid within 10 days.