NECO Commerce 2022 Theory — Question 5

Model answer

(a) Sources of credit available to a sole trader: 1. Family and friends 2. Credit purchases (trade credit) 3. Bank loan 4. Overdraft (b)(i) Acceptance credit: An acceptance credit is a type of letter of credit paid by a time draft authorizing payment on or after a specific date, once the terms of the letter of credit have been complied with. (ii) Luncheon voucher: A luncheon voucher (LV) is a paper ticket (voucher) used by some employees to pay for meals in private restaurants; it is usually issued by the employer. (iii) Bill of exchange: a bill of exchange is a written order binding one party to pay a fixed sum of money to another party on demand or at some point in the future. (c) Advantages of hire purchase (to the seller): - It enables a person who does not have ready cash to be able to use an asset and make payment by instalments. - It increases the sales of the seller. Disadvantages of hire purchase (to the seller): - It is usually more expensive than cash sales, which may discourage some buyers. - A seller can lose a huge amount if the buyer is unable to make payments when due. - If a buyer absconds with the asset, it can be a great loss for the seller.