Payables are debts that must be settled in a year or more, depending on their nature. Businesses thrive through the trading of goods or the offering of services. Such operations require support from suppliers or service providers. Raw materials or any business inputs are obtained on credit from suppliers. Even in the case of a retail business, a trader could not buy all the goods with cash. There comes the concept of allowing credit against the purchases. So, this credit policy holds good even for service providers. Thus, these inputs for the business result in recording payables. Before focusing on the trade payables vs non-trade payables, let’s take a moment to understand the following terms to move into the differences:
- Trade Payables
- Non-Trade Payables
Table of contents
Trade Payables
Trade Payable is a liability an entity owes for the purchase of goods or services received. This payable is primarily a current liability.
In other words,
- It is a payable that accrues in the entity’s books
- for the trade of goods or services
- which happens as part of carrying on business
Trade payable is a credit offered to the buyer against the purchase of goods or services received. The period allowed for credit depends on the relationship between the buyer and seller of goods or services. So, the credit period varies for each business.
How about an Example?
“After Company” purchased goods worth $10,000 from “Before Company” on 4th December 20XX. The credit Period is 30 days from the date of purchase. Liability is settled on 28th December 20XX.
How to identify and record Accounts Payable?
1) Who’s who?
After Company – Buyer
Before Company – Seller
2) Is the transaction in credit or Cash?
The transaction happened on a credit basis. If a transaction occurs in Cash, there is no point in recording the Accounts Payable.
Note: Business runs on a credit basis. The credit period depends on the relationship between the buyer and the seller. It might be longer if they have been doing business for a long time. Further, it also depends on standard practices in the industry where buyers and sellers operate.
Want to have a better understanding of Accounts Payable journal entries?
We will try to understand the journal entries with the help of practical scenarios. Credit basis and Cash basis journal entry examples are below
Credit Basis Journal Entries
A) Recording Purchases on 4th December, 20XX
When the obligation is paid, then Trade Payables liability is reduced to the extent of Cash Paid. This results in the following Journal entry:
B) Payment to settle the Trade Payables on 28th December, 20XX
Therefore, we can infer from the above entries that Trade Payables GL nullifies, and the resulting net transaction is nothing but a debit to Purchases A/c and a corresponding credit to Bank A/c
Cash Basis Journal Entries
Note: If the transaction happens in Cash, then there is no requirement to affect the trade payables GL. However, it’s common practice to route transactions through payables even though they happen without any credit. So, if the transaction occurs in Cash, then the above two journal entries under the Credit basis section will be recorded on the same day (4th December, 20XX) when the transaction happens.
3) What’s the transaction Amount?
Transaction Amount is $10,000
Note: The company records purchases for the full amount. The buyer may pay in more than one transaction, so the payment entries depend on the terms between the buyer and seller.
4) Is it a Current or Non-Current Liability?
Let’s understand the meaning of current liability. Liability that needs to be settled within 12 months will be termed as Current.
Further, the nature of the transaction is also considered when deciding upon the type of liability. For example, if the transaction relates to trading goods such as purchasing raw materials (for manufacturing industries), the payable is a current liability.
Examples of current liabilities include Accrued Expenses (Housekeeping expenses or Security Expenses), Short-term loans (tenure less than 12 months), Rent payable, and Wages payable to workers.
Also, read the: Substantive audit procedures article to understand the audit of account balances.
Understanding different terms
1. Non–Trade Payable or Other Payable:
Payables other than Trade Payables are called Other Payables. So, residual payables or Non-trade Payables are synonyms for Other Payables.
Other payables are the best examples of indirect expenses, such as Repairs and maintenance, Security expenses, Telephone charges, electricity expenses, broadband charges, and periodicals.
There is no exhaustive list of these other Payables. However, we can say all the liabilities for petty expenses fall under this.
2. Trade Payables vs. Trade Creditors:
These can be used interchangeably because they mean the same thing. All liabilities relating to the subject of the business fall under this category.
3. Trade Payable vs. Accounts Payable:
Accounts Payable and Trade Payables are synonyms in ordinary parlance. However, there’s a difference between those two accounts.
Trade Payable is the amount owed to the creditors for the supplies, materials, or services received. Accounts payable include the trade payable amount and the amount incurred for all the indirect expenses mentioned above. Therefore, Accounts Payable is a broad term that includes trade payable.
How about an example?
For instance, assume “Hero” is a company that prepares and sells various bakery items. XYZ purchases all the raw materials from the “Zero” Company. This liability is a trade payable.
Hero company operates its business in rental premises. It also has contracts with Security and housekeeping companies. Here, the liability is accounts payable.
4. Trade Payable vs Non-Trade Payable
Now that we understand Trade payable and non-trade payable, let’s explore the concept in more detail.
Trade payables are liabilities directly relating to business operations, such as purchases of goods or services used to carry out the main objects of the business. Non-trade payables indirectly relate to business operations. So, liabilities such as maintenance expenses and interest payables for borrowings fall into the non-trade payables.
The credit period for trade payables is generally between 30 and 60 days. However, the number isn’t that specific for non-trade payables. It could not be defined for non-trade payables. If they relate to operational business expenses, then they need to be settled within a month.
If those relate to some capex, then the credit period can be even more than a year. That’s because the value of the amount involved is so immense that it could not be paid back in a short period of a year.
Conclusion:
Trade Payable is a liability relating to the activities for which the entity solely exists. ABC Textiles’ main business deals with textiles. Buying and selling textiles is the reason for floating a business. Such payments relate to the trading of the company. Non-trade payables are quite the opposite of trade payables. These also support the business, but not directly. I hope this article helps you understand this concept better.
