Trade Credit is one of the largest sources of spontaneous financing that arises from ordinary business transaction. In the accounting viewpoint trade credit is referred as accounts payable.
It is one kind of short term financing normally for a period up to 90 days.
Trade credit is arisen from credit sales which are recorded by the seller as account receivable and by purchaser as account payable.
Those firms which practice such credit generally have a credit policy that includes certain term of credit.
For Example: 2/10 net 30.
The above term indicates that two percent discount is allowed for those customers which will pay the credit within 10 days. The discount is not allowed for those customers who want to enjoy the credit facilities for 30 days.
On the basis of the above discussion trade credit can be divided into two parts such as
(1) Free trade credit
(2) Costly trade credit
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