Trade payable is also called creditors. The name change is a result of convergence from local accounting standards to international financial reporting standards. In this article, let’s explain this term.
Definition of Trade payable
Trade payable means debts from goods purchased by a business on credit terms. It occurs as a result of the entity’s purchases of goods or inventory in the ordinary course of business.
Key Explanations of Trade Payable
Trade payable differs from other payables. Here, it refers to goods the business normally deals with. If the business sells rice. Then whenever the business owner or a representative purchases rice for resale on credit terms, it is referred to as trade payables. However, other payables arise from debts not relating to normal business activities.
For example, if the business is owing electricity bills, this falls under other payables. With this, it can be concluded that accrued expenses and prepaid income are classified as other payables. In a financial statement, more specifically, in the balance sheet (statement of financial position) trade payable and other payables are combined and stated as a line item under current liabilities.
Trade payable refers to creditors and suppliers. Goods are bought by the entity through its suppliers and creditors. The individuals sell them because they believe that the entity can repay within a year. This is why it is classified as current liabilities (debts within a year) in the balance sheet.
They are classified under accounts payable in most accounting software. But accounts payable is a broader term and includes debts owed by the firm for acquiring other resources other than goods or inventory. For example, an account payable includes a creditor for the plants the entity acquired. Also accounts payable consists of accrued expenses and prepaid income.
However, for clarity certain types of account payables are treated separately in the statement of financial position. Some of these are dividend payable and current tax liabilities.
Examples of Trade Payables
The primary examples of trade payables are:
- Creditors for goods
- Suppliers for goods
- Bill of exchange (bills payable)
In summary, trade payables are creditors and suppliers of goods with which the organization normally deals. Also, they are part of account payables. In the balance, this term is combined with other payables and stated as a line item under current liabilities.