What are Trade Creditors?

Wondering what trade creditors are in accounting? Here you’ll find out what the meaning of trade creditors (also known as trade payables), how they appear on the balance sheet and how to account for trade creditors in double-entry bookkeeping.

1. What are Trade Creditors?

It’s common for businesses to buy products/services on credit. A trade creditor is defined as a supplier who has made a supply, sent an invoice for their supply but has not yet been paid.

Trade creditors are a liability to the business and appear on the balance sheet. They are also known as trade payables. It’s similar to trade debtors, which is a record of customers who have been sent an invoice but not yet paid it.

2. Where Do Trade Payables Appear on the Balance Sheet?

Trade payables or trade creditors appear as a liability on the balance sheet. Due to the short credit terms normally offered they will be shown as a current liability since they would normally be payable within a year.

In the example accounts below, trade creditors are included in ‘creditors: amounts due within one year’ and appear in note 5 as trade creditors of £12,000.

3. An Example of Trade Payables

A business has a financial year-end of 31 December 2020. On 28 December a supplier sends an invoice for £300 including VAT which has 30 days credit. On 31 December 2020, the figure for trade creditors in the balance sheet would include the amount owed to this supplier of £300.

4. Why Are Trade Creditors Important?

It is important for a business to monitor how much is owed to suppliers but not yet paid to:

• Keep on top of cash flow;
• Ensure suppliers are paid on time to avoid disruption and exceed credit terms which can end in legal action;
• Be able to take advantage of all the payment terms offered to maximise working capital;
• Pay suppliers promptly in case future suppliers are monitoring creditor days to decide on what payment terms are best to offer the business.

5. Aged Creditors Reports

In accounting, aged creditors reports are a list of individual suppliers owed by a business at any point in time, along with lists of outstanding invoices, grouped by supplier name. Aged creditors reports are also referred to as trade creditor listing, aged payables or creditors ledgers.

Computerised accounting systems run aged creditor reports. But where manual accounting systems are used the purchase day book is firstly updated when purchase invoices (source records) are received. The Individual purchase ledgers would then be updated separate, which is a record kept for each supplier logging invoices raised and payments made. That way it is clear how much money each supplier is owed.

6. What is a Trade Creditors Reconciliation?

A trade creditors reconciliation is a cross-check that the trade creditors control account and aged creditors listing agree. And if they do not agree, differences must be identified to understand why the two numbers do not match.

7. Accruals v. Trade Creditors

An accrual is a provision for expenses that have been incurred but not yet been invoiced. For example, your financial year-end is 31 December 2018. On this date, you receive an invoice from a supplier for £500. You also know a consultant has worked for you but not sent you a bill for their time of £1,000.

As at 31 December 2019, your trade creditors will be £500 for the invoice you received. Accruals will be £1,000 since you owe the consultant money but they have not sent you an invoice.

8. Creditors v. Trade Creditors

In business, you will have a range of different creditors for different reasons. Anyone you owe money to is a creditor, but unpaid supplier invoices specifically are included in trade creditors. Other creditors include things like:

• Tax liabilities;
• Loans and overdrafts;
• Accruals.

These are not related to buying goods and services but still represent money that is owed.

9. Does Trade Creditors Include VAT?

Trade creditors must include VAT if the supplier is VAT registered. If they are registered for VAT then the supplier invoice will include VAT and the VAT-inclusive amount will be the total amount owed.

10. What is the Double Entry for Trade Creditors?

The double entry for trade creditors, for a business that is registered for VAT is:

• Dr Expense (profit and loss account)
• Dr VAT
  • Cr Trade Creditors

If the business is not registered for VAT, then the double entry is:

• Dr Expense (profit and loss account)
  • Cr Trade Creditors

Related:

• Source Records in Accounting
• How to Calculate Creditor Days