Learn The Standard of Deferred Payments & Its Functions
Students preparing for higher studies in economics need to have clear information about some basic concepts. One such is the concept of the standard of deferred payment.
In fact, learning about the standard of deferred payment and its functions will enable you to learn about the money itself and take finance services assignment help.
Economics experts recommend you go through books like Applied Economics in Banking and Finance, written by H. Carter, Ian Partington, for a thorough understanding.
Interesting fact – Money as a standard of deferred payment is not a novel concept. William Stanley Jevons, a 19th-century economist, was the first to propose it. Moreover, Jevons was the first to recognize the standard of deferred payment as a primary, albeit secondary, the function of money.
Meanwhile, read this blog to get an overview of the standard of deferred payments –
What Does Standard of Deferred Payment Mean? – The Definition
A standard of deferred payment is one of the functions of money in economics. It serves as a widely accepted method of valuing a debt. Thus, the goods and services can be acquired now and paid for later.
In fact, most forms of money, including commodity money, representative money, and, most commonly, fiat money, can also serve as standards of deferred payment.
Furthermore, representative and fiat money are often available in both digital and physical forms, such as coins and notes.
The Role of Standard of Deferred Payment
Before you get into the in-depth knowledge of money, you must know what role the standard of deferred payment has as one of the functions of money.
Hence, check the pointers below:
- Because of how its value may change over time, the standard of deferred payment differs from the medium of exchange function. If payment is to be delayed, it should be denominated in a unit whose value is expected to remain stable.
Deferred payments necessitate durability in trade and a minimum of opportunity to defraud others, as demonstrated by the diamond and gold, for example.
- The standard of deferred payment is distinct because of its store of the value function, which is concerned with the saving, storing, and retrieval of value.
- Here, the unit of account function necessitates fundability for accounts of any size to be easily settled like an accounting dissertation.
The Standard of Deferred Payments in the Usage of Money
To understand the standard of deferred payment, one must think about the money in various ways.
It’s a universal fact that money is now one of the primary units used to settle future transactions and debts. I
n fact, any loan, investment, or future contract is arranged and finalized in monetary terms. Now, that is an example of money being used as a standard of deferred payment.
This essential secondary function of money applies to all use cases, such as interest, rents, salaries, pensions, insurance premiums. And so on, as any lending and borrowing process is performed or expressed in terms of money.
Hence, money’s general acceptability and ability to store and measure value are the primary reasons for its use as a standard of deferred payment.
Let’s find out some more –
- The fundamental idea behind the credit process is the concept of deferred payment standards. This monetary function is essential for debt valuation and is central to the ‘buy now, pay later’ concept.
- As a standard of deferred payment, money avoids the inconvenience and uncertainty associated with using commodities for transactions. Almost any type of money, commodity, representative, or fiat can be used for deferred payment.
- Inflationary pressures are a significant issue because they reduce the purchasing power of a country’s currency or money. Money ceases to be a reliable standard of deferred payment once its acceptability is reduced by inflation.
- One of the most common types of deferred payment is debt. Any type of money can be used to settle debts, but value and purchasing power are important considerations. Money’s value can fluctuate due to inflation and deflation rates. As a result, the total value of the deferred payments may fluctuate per those rates.
- Deferred payments are common in all economies. They have delayed payments that will be made in the future and involve various debts, borrowing, lending, and transactions.
Examples of Standard of Deferred Payments
If you have come this far to the blog, why not check some examples of the standard of deferred payments-
Before you proceed, know that a “deferred payment” loan or credit account is one for which the consumer does not pay the full amount right away.
Even many loans, including credit cards and mortgages, allow customers to defer payments for a set period of time.
Zero-interest credit cards are one example. The bank collects monthly payments without charging interest under this arrangement. Deferred payments, on the other hand, should be treated as accrued expenses, affecting accounting and payments for goods and services received.
A seller, for example, may offer a buyer a $1,500 sofa set on a deferred payment plan. The buyer would be able to take the sofa set without paying anything for the first six months.
The buyer would then pay the full amount or in installments. This arrangement is frequently used to attract new customers. Thus, this type of payment scheme is highly advantageous for both parties.
How Does the Accounting Process Work in Standard of Deferred Payments?
You have already learned in the previous section that a borrower does not pay the total amount immediately in a deferred payment arrangement. Now, this arrangement is prevalent in the retail industry.
- Deferred payments are also permitted in lease agreements.
- A retailer buys products with the promise to pay at a later date, such as 60 days after shipment.
- Tenants typically do not pay rent for the first three to four months before making regular payments when the balance becomes due.
Deferred payments are becoming increasingly popular among real estate investors, who are often wary of paying high-interest credit card bills. They do, however, have some advantages.
Furthermore, deferred payments allow you to spread the cost of purchases over longer periods, resulting in a lower payment amount. Therefore, deferred payments can be useful if you need time to figure out your finances.