Credit period

Definition

The credit period is the length of time a seller allows a buyer to pay for goods or services purchased on credit. It typically ranges from 30 to 90 days depending on industry standards and the agreement between parties.

5 Must Know Facts For Your Next Test

1. Credit periods are crucial for managing cash flow in businesses.
2. A shorter credit period may indicate stricter credit policies.
3. Longer credit periods might be extended to attract or retain customers.
4. Credit periods affect the calculation of accounts receivable turnover ratio.
5. Failure to adhere to the credit period can result in penalties or interest charges.

Review Questions

• What is a typical range for a credit period?
• How does the length of a credit period impact cash flow?
• What could be a possible consequence of not adhering to the agreed-upon credit period?

Related terms

Trade Credit: A financing arrangement where suppliers allow buyers to purchase goods and pay later.

Accounts Receivable: Money owed by customers for purchases made on credit.

Working Capital: The difference between current assets and current liabilities, indicating short-term financial health.