A company may accumulate several liabilities throughout its operations. Accounting standards require companies to classify these liabilities into non-current and current portions. While non-current liabilities are long-term, current obligations last for a year. Trade payable is one of the most prevalent items in current liabilities. These are a common occurrence for companies that make credit purchases.
What is a Trade Payable?
A trade payable represents a balance on the balance sheet. It comes from any amounts owed to a supplier from previous credit purchases. Usually, trade payables include unpaid invoices. In accounting, a trade payable is a liability arising from past events. This liability requires a future settlement. However, it only contains amounts payable to suppliers.
A trade payable can relate to any supplier that bills a company through a purchase invoice. As soon as companies receive that invoice, they must record an obligation for that amount. However, it only accounts for credit purchases. If a company settles the amount before the invoice is received, it will not create a trade payable balance. Similarly, when the company repays the amount, it must remove the balance from the balance sheet.
What is the accounting for Trade Payables?
The accounting for trade payables usually includes two stages. The first occurs when a company receives an invoice from a supplier for a credit purchase. At this stage, the company must create a trade payable balance in its accounts. The journal entry for when a company receives an invoice for credit purchases is below.
| Dr | Purchase |
| Cr | Trade payable |
The second stage for accounting for trade payables is when the company settles its unpaid amount. At this stage, the company must remove the balance created earlier. On the other side, it must also account for the settlement. This settlement usually occurs through cash or bank balances. The journal entry for this stage is as follows.
| Dr | Trade payable |
| Cr | Cash or bank |
What is the difference between Trade and Non-Trade Payables?
One of the primary issues with recognizing trade payables is differentiating them from non-trade ones. The difference between these two is the parties to which the payable balances relate. Essentially, trade payables only include obligations toward suppliers. On top of that, trade payables are also current liabilities and last for a year only. These payables come through the books of prime entry.
In contrast, non-trade payables are obligations toward any parties that don’t fall under the former category. These payables can be short- or long-term. On top of that, non-trade payables may also entail interest payments and include other terms. However, these obligations relate to non-business parties. These payables come through a journal entry.
Example
Trade payables include amounts payable to suppliers only. These amounts relate to purchases from those parties. Usually, these items relate to operations. Therefore, the trade payables of one company may differ from another. Some typical sources of trade payables include the following.
- Obligations for raw material purchased for production.
- Products acquired for resale by retailers.
- Services obtained from service providers.
The primary factor that these items must involve is a credit purchase with a settlement later.
Conclusion
Trade payables are obligations payable to suppliers for previous credit purchases. These amounts are current liabilities on the balance sheet. However, they differ from non-trade payables that are obligations to other parties except suppliers. The accounting for trade payables involves two stages. Trade payables are a prevalent item on the balance sheet for many companies.
Further questions
What's your question? Ask it in the discussion forum
Have an answer to the questions below? Post it here or in the forum
