Which of the following is not a constituent of the credit policy of a business firm?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Collection period
A firm’s credit policy is the set of decisions it takes on selling on credit: whom to give credit to, on what terms, and how to collect the dues. Its constituents are the credit standards, the credit terms and the collection policy. The collection period (the average time customers take to pay) is not a decision the firm sets; it is the result of the credit policy, measured afterwards through the trade receivables turnover ratio.
Option (1) Credit standard — A constituent of credit policy. It is the test a customer must pass (credit-worthiness) before credit is allowed.
Option (3) Credit terms — A constituent of credit policy. They fix the period of credit and any cash discount for early payment.
Option (4) Collection policy — A constituent of credit policy. It lays down how and when overdue amounts are followed up and collected.
Note: This question is not covered by any edition of the NCERT Accountancy books; credit policy is a part of working capital management in financial management.