Chapter 12 : Trade Payables

Question 1

Explain the term trade payables

Answer 1

Trade payables is the amount owed to suppliers when the business buys goods and non-current assets on credit.

Question 2

Explain why business buys on credit instead of paying cash

Answer 2

When a business buys goods and non-current assets on credit, it can receive the goods and non-current assets first and pay later. Thus, cash can be used for other operations of the business

Question 3

Explain the term trade discount

Answer 3

Trade discount is a reduction to the list price of goods to encourage bulk purchase, customer patronage and customer loyalty

Question 4

Explain the term cash discount

Answer 4

Cash discount is a reduction to the invoice price of goods to encourage prompt payment of debts by customers

Question 5

Explain the differences between cash and trade discount

Answer 5

• Trade discount is a reduction to the list price of goods while cash discount is a reduction to the invoice price of goods.
• Trade discount is given to encourage bulk purchase, customer patronage and customer loyalty while a cash discount is given to encourage prompt payment within a specified time by customers
• Trade discount is not recorded in the ledger while cash discount is recorded in the ledger as discount allowed or discount received.