What are trade payables? Definition and Explanation

Trade payables are short-term liabilities for which the amount to be paid is more often known than uncertain (such as for reserves). Businesses, almost without exception, take into account any type of trade payables in their statements of financial position.

Trade payables definition

Trade payables are what a company owes its vendors for inventory-related goods. Items that are usually included under trade payables are: trade payables, amounts paid for obligations based on the law, such as social security, obligations, and deductions. These items are presented under the heading “Trade and other payables” in the statement of financial position. Thus, the trade payables definition is quite simple. 

Trade payables explanation

Every accountant must know an answer to “What are trade payables?”. Most trade payables fall under the definition of financial liabilities and must comply with the recognition and measurement rules that apply to such liabilities. 

An entity must recognize trade payables when they become part of the instrument’s contractual provisions. Enterprise’s obligations for trade payables are usually easily identifiable, and the nature of recognition is clear.

How to work with trade payables

Accountants often ask how to audit trade payables. Most of the obligations are legally valid and arise under a contract agreement. This includes amounts owed on assets purchased or services received (accounts payable to suppliers), and obligations to provide goods and services when an external party has made an advance payment.

Obligations are often imposed by law. The company must recognize these obligations on the basis of notifications and payment requirements from the competent authorities. Obligations arising from practice should be recognized on the basis of amounts promised to third parties.

The company often assumes obligations in the form of financial guarantees and performance guarantees. For example, an enterprise may sell its receivables but retain some of the credit risk associated with those receivables through guarantees.

Recognition of guarantees depends on their nature. Financial guarantees that provide payments that will need to be made if the debtor is unable to make payment at the agreed time should be recognized as part of the provision or should be recognized as contingent liabilities when the recognition criteria are not met.

Items classified as trade and other payables are usually not re-evaluated because the liabilities are usually known in advance with a high degree of certainty and are settled in a short time.

Financial guarantees that provide for payments that will need to be made if the debtor is unable to make payment within the agreed time period should be re-evaluated to a greater extent between the amount recognized in accordance with IAS and the amount initially recognized (i.e., fair value) less, where necessary, accumulated depreciation recognized following IAS.

Derecognition occurs when a contractual obligation is canceled, expires, or terminated, for example, after payment of the amount owed or when the counterparty forgives the debt.

Trade and other payables should be recorded as separate items in the statement of financial position. Such items are classified as short-term liabilities, even if they are due within twelve months after the end of the reporting period.

For the classification of assets and liabilities, the duration of the operating cycle is the same. If it is not possible to identify the normal operating cycle of an organization, it is assumed that it is equal to twelve months.

Examples of short-term liabilities are financial liabilities classified as “held for trading”, bank overdrafts, and the short-term component of long-term financial liabilities, accrued dividends, income taxes, and other payables.

What are trade payables? Definition and Explanation

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