(a) Messrs Ola and Musa are both merchants. Ola trades on cash basis only while Musa allows credit. Give four reasons each why Ola insists on cash payment a...
Question 1 Report
(a) Messrs Ola and Musa are both merchants. Ola trades on cash basis only while Musa allows credit. Give four reasons each why Ola insists on cash payment and Musa allows credit sales.
(b) Distinguish between cash discount and trade discount.
Answer Details
(a) Reasons for cash and for credit
Four reasons why Ola insists on cash payment
- To avoid bad debts arising from customers who fail to pay.
- To have ready cash always available to run the business and restock quickly.
- To avoid the cost and trouble of keeping records of debtors and chasing them for payment.
- To be able to sell at lower prices, since he ties up no capital in credit and bears no risk of default.
Four reasons why Musa allows credit sales
- To attract and retain more customers and so increase his volume of sales.
- To meet competition, since rival traders who give credit would otherwise take his customers.
- To sell high-priced goods that customers may not be able to pay for in a lump sum.
- To earn extra income, because credit prices are usually higher than cash prices.
(b) Distinction between cash discount and trade discount
| Cash discount | Trade discount |
|---|---|
| An allowance given to a customer for paying promptly or within a stated period. | An allowance given by a manufacturer or wholesaler to a retailer (trader) off the catalogue price. |
| Given to encourage prompt payment of debts. | Given to enable the trader to resell at a profit, and for buying in bulk. |
| Deducted at the time of payment and shown in the cash book/ledger. | Deducted on the invoice before the net price is arrived at; it is not recorded in the books. |
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