Buying things on credit gives businesses an opportunity to take control of their cash flow.
You get to choose when the money goes out, giving you the flexibility to pay when you have cash on hand—so long as it aligns with your payment terms.
This practice is referred to as accounts payable and trade payable. Although these terms are used interchangeably, they actually refer to different things.
What’s important is that both give you the ability to optimize your cash flow (if used correctly). Read on to get equipped with the info you need to use accounts payable and trade payable in your operations.
What is accounts payable?
Accounts payable is the outstanding debt a business has from any purchases made on credit.
It doesn’t matter what the expenses are. Operational expenses, overhead expenses, and capital expenditures can all be categorized as accounts payable so long as it’s a purchase made on credit directly from a vendor or supplier.
However, if the business makes a purchase with financing, like a loan from a bank, that’s considered a loan and not accounts payable.
When is accounts payable used?
Accounts payable is a coverall term for anything purchased from a vendor or supplier on credit.
If you received an invoice with a payment date after the purchase, it’s likely accounts payable.
But if there’s a financing structure, like a loan or payment plan with interest, it’s no longer considered accounts payable.
Where is accounts payable reported?
Accounts payable is reported on the balance sheet, in the liabilities section.
Some businesses use an accounts payable ledger to track their accounts payable in greater detail.
The ledger is a clear breakdown of all accounts payable transactions such as incoming invoices, payments, and adjustments.
What is trade payable?
Trade payable is a subset of accounts payable.
Specifically, trade payable includes only the purchase of any costs of fulfillment like inventory or manufacturing materials on credit.
This means that all trade payables are accounts payable, but not all accounts payables are trade payables.
What’s defined as trade payables varies by business type and industry.
An accounting firm and a coffee shop both buy coffee beans, but only the coffee shop would consider the purchase to be trade payables since it’s part of the product they’re selling.
When is trade payable used?
For a purchase to be considered trade payables, what was purchased can only be used in the manufacturing process once.
A tailor uses a sewing machine and fabric to make a suit. While the machine can be used repeatedly to make a suit, the fabric can only be used once.
For a tailor, the purchase of fabric on credit would be trade payable, but the purchase of a new sewing machine would be accounts payable.
Where is trade payable reported?
Trade payable is reported on the balance sheet in the liabilities section.
In some cases, businesses lump trade payables in with their accounts payable. They may track trade payables separately somewhere else, but in terms of their financial reporting, they aren’t separate on financial statements.
Other businesses treat trade payables as a separate account. Trade payables transactions are categorized differently and reported separately on the balance sheet.
There’s no requirement for how a business treats trade payables. However, if they are going to be tracked in a separate account, the accounts payable team needs to be extra diligent to not miscategorize invoices or record them twice.
Comparing accounts payable vs trade payable
To help understand where accounts payable and trade payable are similar and different, we’ve compiled them in the table below.
As you can see, there is one essential difference: what the expense is.
When trying to figure out whether a purchase is accounts payable or trade payable, look at what was bought and how it’s used in the business.
Accounts payable vs trade payable: examples
To illustrate the difference between accounts payable and trade payable, let’s look at some fictional examples.
A coffee shop has one supplier that they use for beans, single-use cups, and equipment. They’re invoiced for the order and pay on net 30 terms.
Each month, they place an order to top up on beans and single-use cups. Since these are direct costs of selling cups of coffee, these invoices have historically been treated as trade payables.
But last month, their espresso machine broke so they’ve added a new one to the order.
They receive the invoice and it looks like this.
This invoice needs to be broken down into individual parts before it can be turned into a journal entry.
The coffee shop already knows that bulk beans and paper cups are treated as trade payable.
However, the machine is not a single-use item. As with their last machine, it’s going to make as many cups of coffee as it can until it breaks.
Because it’s not exhausted in the production of their goods, the machine is categorized as accounts payable. The shop notates the invoice to make it clear what should be bucketed where.
Now that they have a clear breakdown, they can make the journal entry.
Other examples by industry
Let’s take a look at some other examples of trade payables by industry:
- Retail stores: Any goods to be sold
- Restaurants: Food and alcohol to be sold
- Manufacturers: Materials used in the production of goods
- Mechanics: Parts used in repairs that are billed to the customer
- Healthcare: Medical supplies, pharmaceuticals, or drugs
- Hotels: Complimentary items and foods or beverages provided in rooms
An improved way to track outstanding payments
Buying more things on credit means having more outstanding invoices.
More outstanding invoices means more payments that can be missed if you aren’t diligently tracking your payables.
If you upgrade your accounts payable tool, those concerns are a thing of the past. With BILL, you can automate the accounts payable process and get reminders for any upcoming due dates so they’re never missed.
Win back time with automation, simplified approvals, and in-platform payment options that let you settle outstanding amounts at the click of a button.
Try BILL to see how it can help you master your payables process and save you from extra manual steps.
