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HOLY CROSS COLLEGE OF CALINAN, INC.

Davao-Bukidnon National Highway, Calinan, Davao City

FIRST TERM, FIRST SEMESTER

SY 2020-2021

A WORKBOOK IN FM 6: CREDIT & COLLECTION

KISSAH A. NERI, CPA

Instructor
E-mail address: [email protected]
Mobile No.: 09464019370
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Dear Students,

Praised be to God and may good health be with you in this time of pandemic!
Classes in the college department for the S.Y. 2020-2021 have just started and I
would like to thank you for bringing back your trust to the school as it continues to deliver
quality education amidst this health crisis. So, welcome to this course! Inasmuch as
face-to-face classes are highly discouraged for the meantime, we shall be shifting our
mode of instruction from our conventional routines to the new normal activities. For this
course, you shall be utilizing this module and in some other times, our Schoology, a
distance learning platform. Let’s then work together for your education. Keep safe
always!
For you to be guided in your activities, please, take heed of the schedules written
below.

SCHEDULE OF SUBMISSION OF ACTIVITIES

Unit/ Topic Page/s Date of Submission

Lesson No.
Unit1/ The Nature of Credit 1-12 August 28, 2020
Lesson 1
Unit 1/ Sources of Credit 13-23 September 15, 2020
Lesson 2

SCHEDULE OF EXAMINATIONS

FIRST SEMESTER

FIRST TERM (August 24, 2020 – October 23, 2020)

 Mid-term Examinations - September 22 and 23 (Tue & Wed)

 Final Examinations - October 22 and 23 (Th & F)

SECOND TERM (October 26, 2020 – January 12, 2021)

 Mid-term Examinations - November 24 and 25 (Tue & W)

 Final Examinations - January 11 and 12, 2021 (Tue & W)

SECOND SEMESTER

FIRST TERM (January 25, 2021 – March 26, 2021)

 Mid-term Examinations - February 22 and 23 (Tue & Wed)

 Final Examinations - March 25 and 26 (Th & F)
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SECOND TERM (April 4, 2021 – June 4, 2021)

 Mid-term Examinations - May 3 and 4 (M & T)

 Final Examinations - June 3 and 4 (Th & F)

December 19 – Jan. 3, 2021 - Christmas Vacation

January 13 - End of the First Semester
January 13 – 23 - Semestral Break
January 20 – 23 - Enrolment for the Second Semester
January 25 (M) - Classes start for the Second Semester
March 28 – April 3 - Holy Week
June 21 – 30 - Enrolment for the Summer Classes
July 1 – 30 - First and Second Term Summer Classes

Note: Please, comply your financial obligations during examination time. Kindly, show a
copy of the receipt to your subject teacher as your proof of payment.

RIZALITO H. PAGA, PhD

Dean of College
E-mail Address: [email protected]
Mobile No.: 09488156483
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COURSE DESCRIPTION

Credit and collection is an introduction to credit and its role in the economy. This
course covers the techniques of establishing the credit, obtaining and checking
information, servicing the loan, billing and collection of the amount due.
Moreover, this includes understanding consumer and business credit,
management and analysis of consumer and business credit and collection management
and control.

COURSE OUTLINE

Number of Hours Content

15 Unit 1. An Overview of Credit
The Nature of Credit
Sources of Credit
The Role of Credit
29 Unit 2. Credit Management
Credit Policies
Major Documents used in Credit Transactions
Credit Management and Analysis
Loans and Other Credit Services
10 Unit 3. Collection Management
Principles and Methods of Collections
Collection Policies and Procedures
Total No. of Hours: 54
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Table of Contents

Unit 1. An Overview of Credit

Lesson 1 The Nature of Credit 1
Lesson 2 Sources of Credit 13
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Suggested time allotment: 5 hours

Unit
AN OVERVIEW OF CREDIT
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LESSON 1 THE NATURE OF CREDIT

I. LEARNING OUTCOMES
 Define credit. (R)
 Identify the types of credit. (R)
 Discuss the importance of credit. (U)
 Point out the different bases of credit. (U)
 Discuss the impact of credit upon the creditor and the debtor. (U)

II. INPUT

DEFINITION OF CREDIT

Credit is generally defined as a contractual agreement in which a borrower

receives something of value now and agrees to repay the lender at a later date—generally
with interest.

Credit also refers to an individual or business' creditworthiness or credit history. In

accounting, a credit may either decrease the assets or increase the liabilities and equity
on a company's balance sheet (Kenton, 2020).

Alminar-Mutya (2017) defined credit as the ability to obtain a thing of value in

exchange for a promise to pay a definite sum of money on demand or at a future
determinable time. This creates obligations and rights for both debtor and creditor.

From the definition, the following elements are present:

1. It is the ability to obtain a thing of value. The thing of value may be cash of
credit or merchandise of credit.

2. A promise to pay. The debtor makes a promise to pay to the creditor. For a
promise to be valid, it should be acknowledged in writing by both debtor and
the creditor. The promise should specify the principal amount, interest, and
the maturity date.

3. Definite sum of money. Credit involves an exact amount of money loaned

or money value for non-cash form of credit.
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4. Payable on demand or future time. A promise by the debtor for the

settlement of obligation may involve a future date, known as loan maturity,
or anytime the creditor demands the payment.

Characteristics of Credit

 It is a bi-partite or a two-party contract.

- Two parties are involved in the agreement-the debtor and the creditor.

 It is elastic.
- It can be increased or decreased by the creditor. Loan limit or elasticity
depends upon the capacity of the debtor and appraised value of his collateral.

 The presence of trust of faith.

- The basic element of credit is the creditor’s reliance on both the debtor’s ability
and willingness to pay his debt. This is also the risk factor in credit, particularly
when obligation remains unsettled during its maturity period.

 It involves futurity.
- Maturity date for settlement of obligation is a future time. The creditor puts his
trust in the debtor’s ability and willingness to fulfill an obligation when it falls
due (Alminar-Mutya, 2017).

Foundations of Credit
 Confidence. The creditor must trust the debtor’s personal character as a measure
of the latter’s capacity to pay.

 Proper facilities. In a credit contract, legal facilities must exist to make the
agreement valid. These are the credit information and credit document.

Credit information includes data about the debtor that are a gauge of his
paying capacity which can be gathered through a credit investigation.

Credit document is the written agreement signed by both parties identifying

principal loan, interest, and maturity date or other supporting papers to determine
the debtor’s credit rating such as copy of income tax return/withheld or employment
certificate for personal loans and financial statements for business loans.

 Stability of monetary standard. The purchasing power of money is considered

when extending credit. The more stable the value of money, the greater is the
possibility of approving credit.
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 Government assistance. Regulations protecting both parties are highly

considered for credit transactions. When evaluating, debtors are given more
protection since they cannot be imprisoned for non-performance of obligation, that
is, if they are insolvent or do not have any asset or property.

 Credit risk. This is the possibility that the debtor may not fulfill his promise for
payment. Credit risk shall be borne by the creditors (Alminar-Mutya, 2017).

PRACTICE EXERCISE

1. Who are the parties to a credit contract?

a. ______________________
b. ______________________

2. Give three (3) foundations of credit.

a. _____________________
b. _____________________
c. _____________________

CLASSIFICATIONS OF CREDIT

Alminar-Mutya (2017) provided the following classifications of credit.

I. According to Type of User

1. Consumer credit – used by individual to finance or refinance the purchase

of commodities for personal consumption.

a. Convenient form of payment – charge account involves purchases

from a retail store that are paid once or twice a month.

b. Aids in financial emergencies – helps helps a consumer through a

period of financial stress.

c. Buying durables on installment – financing the purchase of durable

goods by paying for them in installment.

Consumer credit can be:

a. Charge accounts – non-durables, payable within two months or

sixty day term in four payments.
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b. Installment accounts – durables, payable for more than 6

months to one or more years. Payment is monthly and a down
payment is needed before unit on credit is delivered.

c. Revolving credit – combination of charge and installment

accounts. Credit period is ninety days. The debtor can avail
renewal after ninety days, or within ninety days, for the paid
portion, provided he had not been delinquent in payment of the
original loan.

d. Lay-away plan – full payment of the product within a period is

required before delivery of the item is made.
Replevin – creditor’s right to repossess the item under contract
that is the durable good, in case that the debtor fails to fulfill his
obligation.

2. Consumer credit – creditor and debtor are both businessmen.

 Businessman to another businessman
 Objects of credits are merchandise or goods which are
delivered on consignment basis or under a credit term.

3. Commercial bank credit – creditor is a commercial bank while the debtor

can be a business firm or private businessman. Purpose is for business
operations or expansion.

II. According to Purpose

1. Investment credit – extended by banks for company who intends to

purchase fixed assets.

2. Agricultural credit – intended for acquisition of fertilizers, pesticides,

seedlings, transportation of agricultural products and farm improvements.
Debtors are farm breeders and creditors are rural banks and loans can be
short-term or long-term maturity.

3. Export credit – uses “letter of credit” as a tool for financing international

trade. The letter of credit is issued by the importer’s bank, and it guarantees
the exporter payment of a specified amount of money.

There are two general types of LC:

 Import letter of credit – which requires payment to be made in

the importer’s currency.
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 Export letter of credit – which requires payment to be made in

the exporter’s currency.

4. Real estate loan – intended for the purchase of a house and lot, for house
construction or home improvement.

5. Industrial credit – intended to finance industries like logging, fishing,

mining and quarry.

III. According to Maturity

1. Short-term loans – payable within one year.

2. Intermediate term or medium term loans – payable within one to five

years.

3. Long-term loans – payable beyond five years.

IV. According to Form of Credit

1. Cash form of credit – is a short-term loan extended to a company by a

bank. It enables a company to withdraw money from a bank account without
keeping a credit balance. The account is limited to only borrowing up to the
borrowing limit. Also, interest is charged on the amount borrowed and not
the borrowing limit.

2. Merchandise form of credit – purchase of merchandise on credit.

PRACTICE EXERCISE

1. Narrate an experience/situation that shows an example of a lay-away plan.

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2. Identify three local organizations providing agricultural credit.

a. ____________________________
b. ____________________________
c. ____________________________
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THE ADVANTAGES AND DISADVANTAGES OF CREDIT

Miranda (2004) identified various advantages and disadvantages on the use of

credit which is presented below.

Advantages of Credit

1. Credit facilitates and contributes to the increase in wealth by making funds

available for productive purposes.

2. Credit saves time and expenses by providing a safer and more convenient
means of completing transactions.

3. Credit helps expand the purchasing power of every member of the business
community-from producer to the ultimate consumer.

4. Credit enables immediate consumption of goods thereby providing for an

increase in material well-being.

5. Credit helps expand economic opportunities through education, job training and
job creation.

6. Credit spreads progress to various sectors of the economy.

7. Credit makes possible the birth of new industries.

8. Credit helps buying become more convenient for customers.

Disadvantages of Credit

1. Credit, at times, encourages speculation. This happens when those in charge

of the savings of other people become careless and unscrupulous in their
eagerness and desire to expand credit and make huge profits.

2. Credit tends to contribute to extravagance and carelessness on the part of

people who obtain it. Since the person who obtains credit is not using his own
money, he is therefore charged with an obligation of the highest order. Many do
not understand such social responsibility and fail to appreciate that trust.

3. Because of credit, many entrepreneurs resort to over-expansion. Failure to

generate expected income can only cause a collapse which affects the nation’s
economy.
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4. Too much air of confidence and pessimism. Credit causes one businessman
to be dependent upon others. In order to obtain credit, he must have faith in other
businessmen and also in the future. Thus, it follows that if credit relations become
strained, many businesses may fail and a business recession may set in.

THE 5 C’s OF CREDIT

The five Cs of credit is a system used by lenders to gauge the creditworthiness of

potential borrowers. The system weighs five characteristics of the borrower and
conditions of the loan, attempting to estimate the chance of default and, consequently,
the risk of a financial loss for the lender. The five Cs of credit are character, capacity,
capital, collateral, and conditions (Segal, 2020).

 Character. This refers to the personality of the debtor, including his mental and
moral attitudes that determine his credit rating.

 Capacity. This signifies the person’s willingness and capacity to repay a loan. This
is a measure of his income level as basis of his paying capacity.

 Capital. This consists of the person’s real and personal property which can be a
strong foundation for credit approval. His capital serve as his liquid assets in case
of non-payment or non-fulfillment of obligation.

 Collateral. This is something of value or the debtor’s assets that can be used as
pledge. The common practice is for collateral to be 40 percent higher than the
amount of loan. The collateral protects the creditor in the event of the debtor’s
inability to discharge his loan obligation.

 Conditions. This may include local business conditions or economic conditions

during the time of loan application. During wide fluctuations of money value, it is
unwise for creditors to grant loans.

Read more about this topic at https://www.investopedia.com/terms/f/five-c-credit.asp

PRACTICE EXERCISE

1. What are the 5 C’s of credit and why are they important?
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THE CREDITOR AND DEBTOR RELATIONSHIP
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Who are Creditors and Debtors?

In business, the terms creditor and debtor refer to the parties involved with
borrowed funds such as bank loans, credit extended, notes payable, or bond sales. A
creditor is a party who lends money or extends credit to another party, the debtor.

Creditors and debtors may be individuals, or they may be legal entities such as
public or private corporations, registered companies of another kind, a chartered or
registered organization, or a government. All of these can legally borrow and lend funds.

The critical requirement of the creditor-debtor relationship in business is a debt

agreement (or contract) stating explicitly the legally binding rights, responsibilities, and
obligations of both parties. Business debt agreements typically enumerate also the legal
remedies available should either party fail to meet its responsibilities (Business
Encyclopedia, 2020).

Creditor and Debtor in a Legal Relationship

According to the Business Encyclopedia (2020), the defining characteristics of the

formal creditor-debtor relationship is the existence of a legally binding agreement (or
contract).

 Banks that make loans to individuals or business become their creditors in a formal
legally-binding relationship.

 Merchants who sell goods and services on credit, or with an invoice payable at
some future date, become legal creditors to their customers.

 Companies can loan funds to customers or other firms in the form of notes payable.
A note payable represents a legally-binding creditor-debtor relationship.

 Any purchase by one party from another represents a legally-binding creditor-

debtor relationship when both parties sign a legal contract for the sale.

In business, these agreements almost always include an unambiguous and

detailed description of the following:

Timespan for the Relationship

A loan contract will state the timespan over which the specific creditor-debtor
relationship should exist.
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o With bank loans, for instance, this includes a payment schedule with
specific calendar dates.
o Credit card plans specify payment timing requirements.
o Bond investors receive a statement with their purchase with the issuer's
commitment to interest payments and the bond's maturity date.

Contract Flexibility

The contract will describe legal changes, if any, that can be made to the
time frame or payment terms during the life of the relationship.

o Such a change might include, for instance, a clause allowing the debtor to
make an early payoff.
o Allowable changes may include the creditor's right to recall (revoke or take
back) the loan before the end of its planned life.

Debtor and Creditor Rights and Responsibilities

The contract will state certain rights and responsibilities of both debtor and creditor,
clearly, unambiguously, and in complete detail. Both parties affirm agreement to these
terms with hand-written signatures on paper, and these may or may not require signed
witness by a responsible third party, such as a Notary Public. Some contracts instead call
for affirmation or agreement by electronic signature.

 In the case of a secured loan, the creditor ultimately has some claim to the loan
collateral or other of the debtor's assets, if the debtor fails to repay the loan as
agreed.

 Companies or individuals who buy bonds, for example, are lending money to the
issuing organization and become its creditors. If a bond-issuing company shuts
down and liquidates, the company must pay the claims of bond holding creditors
before it pays preferred share stock owners. In liquidation, owners of common
stock shares have the lowest payment priority. As a result, common stock
shareholders are paid only if liquidation funds remain after paying higher priority
creditors.

PRACTICE EXERCISE

1. In your own understanding, what is a creditor and a debtor?

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