Economic and Management Sciences Notes

1. ACCOUNTING CONCEPTS

No.	Accounting Concepts	Description/Examples
1	Credit Sales	When goods are sold on credit with the aim of increasing clientele and turnover
2	Debtors	Customers who owe money to the business
3	Credit Agreements	Specifies the credit limit, payment terms, and penalties
4	Invoice	Document issued to customers when goods are sold for credit
5	Credit Bureau	Private business which collects the credit records of customers
6	Repayments	Money owed is paid back
7	National Credit Act	Aims at preventing people from spending money they do not have.
8	Creditworthiness	Having a good credit record and affordability
9	Credit reference	Process conducted by businesses when a customer wants to buy goods on credit to make sure they are trustworthy and can pay the debt.
10	Term of Credit	The time or the period that the debtor must pay their account.

2. NATIONAL CREDIT ACT

The National Credit Act, Act 34 of 2005 ("the NCA")

The NCA became fully operational in South Africa on 1 June 2007.

The NCA in brief:

To educate consumers so that they are empowered to make informed choices, borrow responsibly and within their means.
To enforce affordability assessments within the lending process to prevent reckless lending and/or borrowing.
To protect consumers who feel they have been unfairly treated in a credit agreement by giving them access to a National Credit Regulator and the National Consumer Tribunal.
To provide a debt counselling process for consumers who are not able to find a solution for their inability to repay their debts, in conjunction with their credit providers.

The Credit Act is there to prevent people from spending money they don't have. It's there to help the banks manage the massive DEBT this country has and help stop RECKLESS LENDING by the banks.

It compels the banks and other credit providers to ensure that their clients do not over extend their credit limit.

The act makes the credit providers legally responsible for checking the applicant's full credit situation.

On credit application, clients will be asked to declare their income as well as their expenses. The client must declare all debt, for example car repayments, credit cards, retail accounts and any other debt the client may have.

What the Credit Act means for you!

There's no denying that credit is a good thing. It gives you that extra edge when you want to buy those things that have always been out of your reach. Without access to these additional funds how would you afford that dream lifestyle?. The problem comes in where debt can quickly spiral out of your control. So the trick, manage your finances.

Only borrow what you can afford.
The NCA focuses on protecting people from becoming financially overcommitted. As such it prevents businesses from lending money without ensuring that:

They know your debt repayment history.
You understand the costs, risks, and responsibility of your credit agreement.
You can afford to repay your debt.
You have supplied details of your income and expenses when applying for credit.

3. CREDIT BUREAU

A Credit bureau is a private business which acquires records, maintains and makes available to contracted subscribers, information concerning the manner in which consumers conduct their credit and business dealings.

Everyone who has ever applied for credit is listed with the credit bureau. When you apply for credit with a company that subscribes to a credit bureau, that company will have access to your credit history, which is provided by the credit bureau. The company can then make an informed decision and assess their risk in granting you the said credit. Most companies will not grant credit to individuals who have negative listings.

What is a CREDIT RECORD?

It shows your entire credit history which includes what loans you have applied for and what accounts you have opened as well as any negative credit listings where you may have fallen behind on payments or if have a judgment or several judgments against you.

Credit Sales:

The primary objective of any business is to maximize profit.
Profits are generated from sales.
Many people cannot afford immediate payment-therefore traders have to sell on credit to maximize sales.
Credit customers receive the goods immediately but make payments at a later date.
The customer to whom the goods are sold is called a debtor.
Granting a credit carries an element of risk because there is always a possibility that the customer may not pay.
The trader will evaluate the debtor’s credit-worthiness.
If the trader is satisfied that the debtor is creditworthy it will enter into a credit agreement with the debtor.
As soon as a credit sale takes place, a credit invoice is issued to record the transaction.
Credit invoices serve as proof that the debtor owes money.

Credit Agreement: Specify the following:

The credit limit: The maximum amount the debtor can owe on a specific date.
The payment terms: When the debtor should pay his account, e.g. in 30 days, 60 days, and so on.
Incentives given to the debtor: Discount if the amount is settled earlier or on time.
Interest charged on an overdue account.
Penalties: The amount the debtor must pay if he/she does not meet the payment terms.

Activity

1. Define the term creditworthiness.
2. What is the purpose of the National Credit Act?
3. What information is contained in a credit record?
4. Explain the risks associated with granting credit to customers.
5. What is the role of a credit bureau in the credit application process?