What are Trade Creditors?
Trade creditors are suppliers or vendors from whom a business has purchased goods or services on credit, meaning the payment is due at a later date. These obligations are typically recorded under ‘Trade Payables’ or ‘Accounts Payable’ on a company’s balance sheet. Managing trade creditors efficiently is crucial for maintaining good supplier relationships and ensuring smooth business operations.
Key Characteristics:
- Short-term Obligations: Usually due within a year, often within 30 to 90 days.
- Recorded as Liabilities: Trade credit is recorded as a current liability on the balance sheet.
- Part of Operating Cycle: Integral to the ongoing operations of the business.
Examples
- Retailer Example: A clothing retailer orders inventory from a garment manufacturer with payment terms of 60 days. The manufacturer is considered a trade creditor until payment is made.
- Restaurant Supplier: A restaurant receives produce and supplies from a food distributor on credit, to be paid in 30 days. The distributor is a trade creditor to the restaurant.
- Construction Company: A construction firm gets building materials from a supplier with a 45-day credit term. The supplier is recorded as a trade creditor on the firm’s balance sheet until the invoices are settled.
Frequently Asked Questions (FAQ)
What is the difference between trade creditors and trade payables?
Trade creditors refer to the suppliers or vendors to whom money is owed, whereas trade payables refer to the actual amounts owed to those creditors.
How do trade creditors impact cash flow?
Trade creditors can ease cash flow by allowing businesses to manage payments over time, but delayed payments can also affect relationships and result in penalties if not managed properly.
Why is it important to manage trade creditors?
Effective management of trade creditors is vital to maintain good supplier relationships, negotiate better terms, and ensure a stable supply chain.
Can trade creditors have any impact on the balance sheet?
Yes, trade creditors increase the accounts payable listed as current liabilities on the balance sheet, affecting the business’s short-term financial position.
What terms are typically negotiated with trade creditors?
Common terms include the due date of the payment, discount for early payment, penalties for late payment, and overall credit limit.
Related Terms
Trade Payables: Amounts owed to suppliers and vendors for products or services purchased on credit, represented as a liability on the balance sheet.
Accounts Payable (AP): A broader term encompassing amounts due to any creditors for goods and services. It includes trade payables but also other types of payables.
Current Liabilities: Obligations of a business that are due within one year, including trade payables.
Credit Terms: The payment terms extended by suppliers including the time frame in which payments should be made.
Online References
- Investopedia - Trade Creditors
- AccountingCoach - Accounts Payable
- Corporate Finance Institute (CFI) - Trade Payables
Suggested Books for Further Studies
- “Fundamentals of Financial Management” by Eugene F. Brigham: An in-depth textbook covering principles of financial management, including management of payables.
- “Accounting Principles” by Jerry J. Weygandt: A comprehensive guide to accounting principles, including chapters on liabilities and payables.
- “Financial & Managerial Accounting” by Carl S. Warren: A textbook offering insights into financial accounting practices, including trade creditors and accounts payable management.
Accounting Basics: “Trade Creditors” Fundamentals Quiz
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