The formula to calculate the Credit Period is:
\[ \text{CP} = 365 \times \left(\frac{\text{UI}}{\text{SR}}\right) \]
Where:
Let's say the unpaid invoices (UI) are $50,000 and the sales revenue (SR) is $200,000. The credit period (CP) would be calculated as follows:
\[ \text{CP} = 365 \times \left(\frac{50000}{200000}\right) = 91.25 \text{ days} \]
So, the credit period is approximately 91.25 days.
The credit period refers to the duration of time in which a buyer is allowed to pay for a purchased item or service. This time frame is agreed upon by both the buyer and the seller before the purchase is made, and it serves as an essential element of trade. By providing a credit period, sellers offer their customers the convenience of purchasing goods or services without making an immediate payment. This flexibility allows buyers to acquire necessary items, even when they may not have sufficient funds available. It essentially enables customers to access goods or services immediately and pay for them at a later date.
