What’s the difference between free trade credit and costly trade credit?

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What’s the difference between free trade credit and costly trade credit?

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What’s the difference between free trade credit and costly trade credit?

Explanation & AnswerSolution by a verified expert

Explanation

Trade credit also known as accounts payable is the amount that the company will pay in the future for the goods that are purchased on credit. Moreover, the company does not pay any interest on such deferment of payment.

Free trade credit - Trade credit is said to be as free trade credit when no extra amount is paid by the company to the creditors as the payment has been done within the given credit limit. In other words, it is the credit that the company has received during the discount period.
Costly trade credit - Costly trade credit is the credit taken by the company in addition to free trade credit. The cost of costly trade credit is equal to the amount of discount lost.

Verified Answer

All the trade credits that are available without any forgoing discounts or costs are referred to as free trade credit. Whereas, the trade credit which is given over and above free trade credit is referred to as costly trade credit.

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