Payables are debts which needs to be settled in a year or more depending on their nature. Business thrive through trading of goods or offering services. Such operations require support from suppliers or service providers. Raw materials or any business inputs are obtained on credit from suppliers. Even in case of retail business, a trader could not buy all the goods through 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 results in recording payables. Before focusing on distinction between trade payable vs non trade payables, lets take a moment to understand the below terms to move into the differences:
- Trade Payables
- Non-Trade Payables
Table of contents
- Trade Payables:
- How about an Example?
- How to identify and record the Accounts Payable?
- Understanding different terms
Trade Payable is a liability owed by an entity for the purchase of goods or services received. This payable is primarily current liability in nature.
In other words,
– It is a payable which accrues in the entity books
– for the trade of goods or services
– which happens as part of carrying business
Trade payable is a credit offered for 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. Credit Period is 30 days from date of purchase. Liability is settled on 28th December 20XX.
How to identify and record the 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 buyer and seller. If they are doing business for an long period, the credit period might be more. Further, it also depends on common practices in the industry in which buyer and seller operates.
Want to have a better understanding of Accounts Payable journal entries?
We will try to understand the journal entries with help of practical scenarios. Credit basis and Cash basis journal entries examples are below
Credit Basis Journal Entries
A) Recording Purchases on 4th December, 20XX
Purchases A/c Dr $10,000
To Trade Payable A/c $10,000
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
Trade Payables A/c Dr $10,000
To Bank A/c $10,000
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 corresponding credit to Bank A/c
Cash Basis Journal Entries
Purchases A/c $10,000
To Bank A/c
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 the transactions through payables even though the transaction happens without any credit. So, if transaction happens in Cash even then the above two journal entries under 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: Recording of Purchases for the full amount. However, the payment can be in more than one single transaction. So, there might be more than one payment entry depending on the terms between the buyer and sellers.
4) Is it a Current or Non- Current Liability?
Lets 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 for deciding upon the type of liability. For example, if the transaction relates to the trading of goods such as purchasing raw material (for manufacturing industries), the payable is a current liability.
Examples of current liability include Accrued Expenses (House-keeping expenses or Security Expenses), Short term loans (tenure less than 12 months), Rent payable and Wages payable to workers, etc.
Also Read: 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 Payable are called as Other Payable. So, the residual payables or Non-trade Payables are the synonyms for Other Payables.
The best examples for other payables are payables relating to indirect expenses like Repairs & Maintenance, Security expenses, Telephone charges, electricity expenses, broadband charges, periodicals, etc.
There is no exhaustive list for these other Payables. However, we can say all the petty expenses liabilities fall under this.
2. Trade Payables vs. Trade Creditors:
These can be used interchangeably because these two terms mean the same. All liabilities relating to the subject of the business falls 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 in relation to the supplies or materials, or services received. Accounts payable includes the trade payable amount and the amount incurred for all the indirect expenses as 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 material from “Zero” Company. This liability is 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 have an understanding of the Trade payable and non trade payable, let’s deep dive into the concept of trade payable vs non trade payable.
Trade payables are liabilities directly relating to business operations such as purchases of goods or services availed to carry out the main objects of the business. The non trade payables indirectly relates to business operations. So, the liabilities such as maintenance expense, interest payables for borrowings falls into the non trade payables.
Credit period for trade payables is in between 30-60 days in general. However, the number isn’t that specific for non trade payables. It could not be defined for non trade payables. If those are relating to running business expense, then those needs to be settled within a month.
If those are relating to some capex, then the credit period can be even more than a year. That’s because the value of amount involved is very huge that it could not be paid back in short period of a year.
Trade Payable is a liability relating to the activities for which the entity is solely existing. ABC Textiles main business is dealing in the textiles. Buying and selling textiles is the reason for floating a business. Such payments are relating to trading of business. Non Trade payable is quite opposite of the trade payables. These also support the business but not directly. Hope this article helps in understanding this concept better.