What is a trade creditor?

If you’re running a business, there are many aspects of bookkeeping and accounting that you’ll learn over time. For example, one of the terms you might have come across in your business venture is ‘trade creditor’, but what does it mean, and how will trade creditors impact your business? This article will answer those questions by diving into the following areas:

• What is a trade creditor?
• How do trade creditors impact a business?
• How do trade creditors work in practice?

Simply put, trade creditors are the money your business owes to other companies. Trade creditors are also commonly known as accounts payable or sometimes just creditors.

Some creditors you might come across could be an invoice to your suppliers that you haven’t paid yet. Or it could be to any lenders you owe, including your regular bills that haven’t been paid, car agencies for leasing work vehicles, or companies you have contracted for work such as electrical maintenance or ad hoc repairs. Generally, your trade creditor bills are things that do not accrue interest, like a bank loan. 

Your trade creditors are liabilities for your business. Therefore, you must manage these debts effectively and responsibly as they could impact your credit file if your debts are not paid efficiently. 

Paying your creditors regularly and on time is not only respectful to your suppliers, but it can help you create lasting business relationships. Paying on time consistently also helps maintain trust in your company’s ability to repay debts. So you could end up with more benefits from your working relationships with your creditors once you have built this trust.

As mentioned, trade creditors are more commonly known as accounts payable when doing accounting tasks. So be careful that you do not confuse accounts payable with accounts receivable when doing your bookkeeping. To clarify, accounts receivable is money you are owed and accounts payable/trade creditors are money your business owes. 

It might help to think about your trade creditors as lines on a list, and this list is where your unpaid invoices or debts are recorded until you pay them. 

Let’s look at an example of how to apply trade creditors in a business setting.

Let’s say you are a sole trader running a bakery. On the 1st of November, you have to call an engineer to fix the industrial oven you use.

The tradesman you’ve employed has to source some parts, then finishes fixing your oven on the 3rd of the month. They then issue you an invoice for the total cost of the parts and work.

The invoice could be a paper or a digital one. Many apps allow businesses to automate a lot of admin to make it much easier to reconcile the invoices once paid. Check out Countingup to see if there may be a more effective way for you to manage paying and issuing your invoices.

In the UK, the legal requirement for paying invoices is within 30 days of receiving the service/product. So in this example, you have 30 days from the 3rd of November to pay the invoice.

You could pay straight away if you so choose, but repairing a large bakery oven may cost a lot, and you might not have the cash flow available at that very moment. So in your bookkeeping records for that month, you should include an entry in your trade creditors list for the total cost of the invoice, dated from the 1st of November until you pay the invoice. You can use a simple spreadsheet to track your trade creditor entries and when you have paid them.

You may have to use the total value of all your trade creditors for specific reports or financial documents. To do this, add up the total of the trade creditors you owe. You should then record this value within your liabilities as trade creditors or accounts payable. 

You may then have to use these figures in your business balance sheet and cash flow statements. Using reports and statements such as these regularly will help you monitor the business’s financial health, and you will need to know your trade creditors total to understand your owed debts fully.

Once you have sufficient cash flow available, you can pay your invoice. 

After you pay, move the cost of the invoice out of your trade creditors total and your liabilities balance, as it is no longer owed, and the money will have left your business current account. Then, update your spreadsheet to reflect that the invoice has been paid, but keep the invoice details in case you need them for VAT or tax purposes later in the year.

Having detailed records of all paid and unpaid invoices is very important to running your own business smoothly, and apps such as Countingup can help you better understand your finances.

Establishing and growing a business takes time and effort, so save yourself hours of accounting admin so you can get back to running your business.

Countingup is the business current account with free, built-in accounting software. With all your financial information in one place, Countingup automates financial admin, saving thousands of business owners time and stress. 

The simple app comes with real-time profit and loss data and a receipt capture tool, so you can quickly and easily update and understand your financial records on the go. It also provides tax estimates and an automated expense categorisation feature so you can always be on top of your bookkeeping. Find out more here and sign up for free today.