THE COST

THE COST OF
CREDIT
OF
CREDIT
The costs of credit are:

1.Interest

2. Credit and
collection expenses

3. Bad Debts
1. Interest

- Is the monetary charge

for the privilege of
borrowing money.

- Is the amount of
money a lender receives
for lending out money.
2. Credit and collection expenses

Examples of credit and collection expenses:

1. Cost of credit investigation/property appraisal/background
check
a. Salary of credit investigation
b. Travel expenses
c. Retrieval fee

2. Cost of recording and monitoring receivables

a. Salaries
b. Paper works

3. Cost of collection
a. Salaries c. Travel Expenses
b.
Telephone/telecommunication d. Legal fees
3. Bad Debts

- Are receivables that a

customer will not pay.
- Bad debt are possible whenever
credit is extended to customers.
- Arise under the following
circumstances:

1. When a company extends too

much credit to a customer that
is incapable of paying back the
debt, resulting in either a
delayed, reduced or missing
payment.
2. When a customer
misrepresents itself in obtaining
a sale on credit and has no
intent of ever paying the seller.
3. Bad Debts

- No company, in the course of doing business over

a considerable period of time, is immune of bad
debts.
- The most expensive of the 3 costs of credit is
bad debts.
Sales P25,000
Cost of goods sold 20,000
Gross profit P 5,000
Not only will the company lose the opportunity on
the P5,000 potential profit, it will also lose the
entire P20,000 cost of good sold.
3. Bad Debts

- Bad debts are not entirely lost.

 the creditor may attempt to
recover through judicial means.
 the creditor may also attempt to
recover through extra-judicial means.
- What is lost forever is the
account of a customer.