Trade Creditor Meaning
Trade Creditors (also know as Accounts Payable or Trade Payable) are when you have made a purchase with a supplier but not yet paid them.
So while a Trade Debtor sits on our Sales Ledger, a Trade Creditor sits on our Purchase Ledger.
As an example, say we purchased some new desks for our offices. The supplier will accept our order and give us 30 days for us to pay them.
A trade creditor will sit under Current Liabilities on the balance sheet.
Why is having Trade Creditors useful?
Having the ability to buy things on credit is very useful for a business as it makes it easier to manage your cash flow – which especially helps when most of your clients will likely pay in 30 days rather than at time of purchase.
While not advised unless necessary, you can push back the payment dates for suppliers if the bank account is looking low (maybe you’ve just done the months payroll and your still waiting for a big client to pay you!). It’s advised to avoid doing this if you can, as it can make suppliers reluctant to trade with you.
|Aged Creditors||90+ days||60 days||30 days||Current||Total|
|Hard drive Shop||500||500|
Here is an example of an Aged Creditors report for a small business. As you can see Desk Supplier is owed $5,000, which we should of paid over 30 days ago. We should make paying them a priority as they could end up refusing business with us or taking legal action.
Cleaners and Hard Drive Shop are classed as “current” on our report, meaning we don’t yet have to pay them. In order to keep a good relationship we should pay them on time. If we’re struggling for cash, they’d be ones we could look at postponing payment.