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BRIEF HISTORY OF CREDIT AND ITS DEFINITION Barter- is the exchange of goods or services to another goods or services. -It increases the productivity of tribal units particularly due to specialization. Money- serves as a medium of exchange .
BRIEF HISTORY OF CREDIT AND ITS DEFINITIONBarter- is the exchange of goods or services to another goods or services.-It increases the productivity of tribal units particularly due to specialization. Money- serves as a medium of exchange.According to Adam Smith, money originated in man’s rational effort to meet the necessity of finding some medium of exchange. Money is responsible for increasing the production and thus adds to the creation of wealth and also in accelerating consumption with the concomitant rise in the standard of living of the people. One of the unique features of our business system is that it operates to a large extent on promises called credit.Credit comes from the latin word “credere” which means to trust. Credit is akin to a two way street. In banking, credit is held to refer to “ an entry in the books of the bank showing its obligation to a customer” that is for the deposits made by the latter.In bookkeeping, credit is “ an entry showing that the person named has the right to demand some thing but not necessarily money”. In commerce, credit pertains to “an exchange transaction”.Credit is the ability to obtain a thing of value in exchange for a promise to pay definite sum of money on demand or future determinable time.Credit is defined as a transaction involving the transfer of goods, services, funds, property or rights, thereby creating an obligation on the part of those who receive them, that must be complied with in the future. Items Examples2.Goods Groceries, Appliances,medicines,etc3.Services Car repair, beauty parlor and the like4.Funds Cash loan from pawnshop, bank or friend5.Property Hammer for temporary use by a neighbor6.Rights Possession or use of a commercial store space bonds, stocks etc.Note: Not all of these 5 types of transactions would necessarily result in the creation of credit. Reasons for Concern. When a transaction is consummated and all parties are satisfied, there is no reason to be concerned. But since a transaction could turn sour, or pose a problem, or even create a legal dispute, such as when: 1.Goods delivered are spoiled or substandard.2.Services provided such as car repair are inadequate or technically defective.3.When the prices, for either goods or services, were not clearly understood by both parties.Note: It would be best to avoid problems by handling transactions properly, from the beginning, with the use of appropriate documents, free from defects. “An ounce of prevention is better than a pound of cure”. CHARACTERISTICS OF CREDIT1.It is a bi-partie contract.2.Presence of trust or faith.3.It involves futurity.4.It is elasticFOUNDATIONS OF CREDIT1. Confidence2. Proper Facilities3.Stability of Monetary Standard4.Government Assistance5.Credit RiskELEMENTS OF CREDIT1. Ability to obtain a thing of value.2. A promise to pay.3. Definite sum of money.4. Payable on demand or future time. ADVANTAGES OF CREDIT2.Credit facilitates and contributes to the increase in wealth by making funds available for productive purposes.3.Credit saves time and expense by providing a safer and more convenient means of completing transactions.4.Credit helps expand the purchasing power of every member of the business community.5.Credit enables immediate consumption of goods thereby providing for an increase in material well-being.6.Credit helps expand economic opportunities through education, job training and job creation. 6. Credit spreads progress to various sectors of the economy.7. Credit makes possible the birth of new industries.8. Credit helps buying become more convenient for customers.DISADVANTAGES OF CREDIT5.Credit, at times, encourages speculation.6.Credit also tends to contribute to extravagance and carelessness on the part of the people who obtain it.7.Because of credit, many entrepreneurs resort to over-expansion.8.Business can be expanded or contracted rapidly through the use of credit Calculating the True Costs of CreditThere are two common and distinct types of credit: Credit for merchandise sold, and Cash or Bank Loans. The most common term for merchandise credit is 2/10 N 30.Credit Period – the number of days until full payment is required.Cash Discount – A percentage deducted from the purchase price if the buyer pays within the specified time shorter than the credit period.Cash Discount Period – The number of days after the beginning of the credit period during which the cash discount is available. CLASSIFICATION AND SOURCES OF CREDITThere are equally important purposes in the classification of credit, first, as a quick guide to those who need them, as to where and how to get them, and second, to guide those who provide them as to where to find these users of funds. Credit is generally classified according to purpose for where the loan funds are intended to be used:5.Agricultural Credit.a. Time Loanb. Crop Loanc. Commodity Loans2. Commercial Credit 123doc.vn