The procedures for credit transactions are a little more complex than for cash transactions. Here, we shall focus on credit transactions where both the buyer and the seller are a business. We shall begin by looking at a credit transaction from the viewpoint of the seller. Then we shall look at the same type of transaction from the viewpoint of the buyer.
For any credit transaction, both parties to the transaction, buyer and seller, must agree what the credit terms should be.
For regular customers, a supplier will agree credit terms for the period of time the customer will be given before payment is required and, in addition, will set a credit limit for the customer. A credit limit is the maximum amount that the customer will be permitted to have outstanding, based upon the value of all unpaid purchases at that time. For example, suppose that Dilip's Deli is a food store that buys frozen pizzas on credit from a supplier, Tuscan Pizzas. Tuscan Pizzas may agree to allow Dilip's Deli 60 days to pay for deliveries of its pizzas, but set a credit limit of $2,000 on the account. This means that Dilip's Deli must pay for deliveries within 60 days and, in addition, the total amount it owes to Tuscan Pizzas at any time cannot exceed $2,000.
For 'one off credit transactions, the buyer and seller will agree credit terms for the individual order. This will consist simply of how much time the customer will be given to pay for the items purchased.
The credit terms are agreed by the credit controller or a senior manager in the selling business. Transactions above agreed limits and other transactions on credit need to be separately authorised.