In accounting, financial transactions are the essence of the whole process. These usually occur when a company deals with other parties with a monetary impact.
In other words, a financial transaction is an event that has an amount attached to it. For most companies, these events occur through cash or in credit. The latter comes under the accruals concept in accounting.
Credit transactions are crucial for companies to survive in the long run. For most companies, these include selling and purchasing goods from third parties.
However, they do not pay the underlying amounts when the transaction occurs. Instead, credit transactions involve a settlement at a later date. Companies record these amounts are receivables or payables on the balance sheet.
When companies purchase goods for credit, they record them as accounts payable. In some cases, companies may also term them as trade creditors on the balance sheet. Before understanding the accounting for trade creditors, it is crucial to study it.
What Are Trade Creditors?
Trade creditors represent various account payable balances from different suppliers. These balances signify how much money a company owes its suppliers.
In other words, trade creditors are the sum of credit purchases from suppliers. However, they do not represent all transactions with those suppliers. Instead, trade creditors include unpaid invoices at a specific date.
Trade creditors also appear on the balance sheet as accounts payable. They represent debts toward suppliers for unpaid invoices from past transactions. Essentially, trade creditors are liability balances on the balance sheet.
However, they differ from other obligations based on their source. Trade creditors only include money owed to suppliers. It does not consider other parties when reporting a company’s liabilities.
Trade creditors generate from the operations and activities of a company. Companies accumulate them from past purchases from suppliers.
Usually, it reports balances for various suppliers as a single item on the balance sheet. Companies do not provide a breakdown for these amounts in the notes.
Companies may also acquire items and goods for non-operating needs. However, any unpaid balances from those transactions don’t fall under trade creditors.
Overall, trade creditors represent the sum of unpaid invoices to suppliers. These balances come from the operating activities of a company. Companies record these balances in the balance sheet as a liability.
As they repay these amounts, companies will remove them from trade creditors. Usually, trade creditors are the most prominent item under current liabilities.
How Do Trade Creditors Work?
When a company acquires goods or services from suppliers, it must record purchases. However, these items must be for operating needs. In some cases, they are also classified as expenses.
For the other side of the transaction, companies must record a settlement. If this settlement occurs through cash, the transaction completes at that time.
However, companies also acquire goods for credit. In that case, they must create a payable balance to the supplier. This balance falls under trade creditors in the balance sheet.
For the company, it represents a liability to the supplier in the future. Once it repays that amount, the company removes it from its accounts. However, it may remain for a long time before getting settled.
Trade creditors only include suppliers and vendors. Any other third parties to whom a company owes money do not fall under these balances.
Essentially, they are payable amounts that relate to operations. Under that definition, lenders and other creditors do not fall under trade creditors. Usually, companies possess a list of the suppliers and vendors that classify under these balances.
Companies also report trade creditors as accounts payable or creditors. The term used in the balance sheet may differ based on a company’s choice.
However, the underlying balance follows the same definition. It includes any unpaid invoices to suppliers and vendors. Companies may also consist of other payables under this term. However, they will not use trade payables to represent it on the balance sheet.
What Is the Accounting for Trade Creditors?
The accounting for trade creditors involves various stages. It begins when a company purchases goods or services from a supplier.
Consequently, the company records those items in its books. If it uses cash to settle the transaction, the accounting for trade creditors will not apply. Instead, the company will decrease its cash balance and complete the transaction. In this case, it will be a cash transaction.
However, companies usually buy goods and services for credit. In this case, the settlement occurs later than when the transaction occurs. This form of a deal falls under the definition of a credit transaction.
Instead of recording a decrease in cash, companies recognize a trade creditor balance. This balance creates an obligation to pay the supplier at a future date.
The payment for trade creditors occurs at a later date. This date depends on the terms provided by suppliers. Usually, companies repay the trade creditor balance within 15-60 days.
Some suppliers may allow an even longer period to settle their due amounts. In most cases, companies pay their suppliers within a few months. Once they reimburse the supplier, companies must remove any payable balance from trade creditors for that transaction.
Companies can settle every invoice or pay a lump sum amount to the supplier. This deal depends on the agreement with the supplier.
Nonetheless, once the payment occurs, companies must record it. This transaction prompts the second stage for accounting for trade creditors. In this case, companies recognize a decrease in liabilities while reducing their cash balances.
Is Trade Creditors a Current or Non-Current Liability?
Trade creditors meet the definition set by accounting principles for liabilities. Essentially, they are obligations coming from past transactions with suppliers. Therefore, these balances meet the first part of the liability definition.
Secondly, they also result in an outflow of economic benefits in the future. This outflow occurs when a company reimburses its suppliers for the due amount. However, some may wonder if trade creditors are current or non-current liabilities.
In most cases, trade creditors are current liabilities. Accounting standards require companies to classify their obligations based on the expected settlement date. Although companies may not settle those amounts within the estimated time, they must still account for them accordingly. Therefore, if a company expects to pay a trade creditor balance within a year, it must classify it as current liabilities.
Under this definition, trade creditors may also fall under non-current liabilities. It occurs if a company expects to pay a supplier after 12 months.
However, instances where suppliers allow credit terms longer than a year are significantly rare. In most cases, companies settle their trade creditor balances within a few months. Therefore, they report trade creditors as current liabilities on the balance sheet.
Sometimes, companies may pay advances to suppliers that fall within trade creditors normally. In those cases, companies record the amounts as assets rather than liabilities. Usually, they fall under current assets. However, they will not appear under the trade creditors heading. In most cases, trade creditors fall under current liabilities on the balance sheet.
Trade creditors represent the sum of any invoice owed to suppliers. Any amounts payable to other parties do not fall under this heading. In accounting, trade creditors meet the definition of liabilities.
However, some may wonder if they are current or non-current. In most cases, trade creditors are current liabilities. Therefore, companies report them on the balance sheet under that heading.