SS2 Commerce Lesson Note on Credit Instrument

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Credit Instrument

Credit instruments are defined as written agreements between creditors and debtors. It is used as evidence of repayment in credit transactions.

They include the following:

1. Bill of exchange
2. Promissory notes
3. Letter of credit
4. Credit Cards
5. Debentures
6. Trading cheques
7. Vouchers
8. Hire purchase contract
9. Bonds
10. I owe you {IOU}
11. Mortgage agreements
12. Lease agreements
13. Bank draft.

Advantages of Credit Sales

• Credit sales increases turn over as customers buy more when they are required to pay in future.
• It enables customers to enjoy goods which they could otherwise not afford.
• It encourages saving habit as buyers have to save in order to redeem their instalmental payment.
• It facilitates the payment of durable goods.

Disadvantages of Credit Sales

• Goods bought on credit are often more expensive than cash payments
• Customers are often tempted to buy more than they are really needed.
• It leads to more clerical work and record keeping at extra cost.
• It encourages/leads to bad debt
• It may tie down capital for a long time.
• The buyer may likely lose the goods if he defaults in the last instalment.
• The seller may lose the goods or balance if buyer dies or change contract address without notice
• The seller may lose the goods or balance if buyer dies or change contact address without notice.
• There is fear of deflation in monetary value at the time of maturity of debts.
• There is the cost of litigation in case of default.

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