Trade Credit

Trade Credit

See Also:
5 Cs of Credit
Credit Sales
Standard Chart of Accounts
Income Statement
Free Cash Flow

Trade Credit Definition

The trade credit definition refers to postponing payment for goods or services received. Another trade credit definition is buying goods on credit, or extending credit to customers. It is also receiving goods now and paying for them later. And trade credit is delivering goods to a customer now and agreeing to receive payment for those goods at a later date. Trade credit terms often require payment within one month of the invoice date, but may also be for longer periods. Most of the commercial transactions between businesses involve trade credit. This type of credit facilitates business to business transactions and is a vital component of any commercial industry.
If a consumer receives goods now and agrees to pay for them later, then the consumer purchased the goods with trade credit. Likewise, if a supplier delivers goods now and agrees to receive payment later, then the sale was made with trade credit. There are two types of trade credit: trade receivables and trade payables. Trade credit payables and receivables can become complex. It is important to manage trade credit properly and accurately.


[button link=”https://strategiccfo.com/25-ways-to-improve-cash-flow/” bg_color=”#eb6500″]Download The 25 Ways to Improve Cash Flow[/button]


Accounting Trade Credit

For accounting trade credit, the value of goods bought on credit is recorded on the balance sheet in an account called accounts payable, representing money the company owes for goods it already received. These are trade payables.
While the value of goods sold on credit is recorded on the balance sheet in an account called accounts receivable, representing the money owed to a company for goods it already delivered to customers. These are trade receivables.
Trade credit is essentially a short-term indirect loan. When a supplier delivers goods to a buyer and agrees to accept payment later, the supplier is essentially financing the purchase for the buyer. Trade credit is an interest-free loan. As long as the buyer postpones payment, the buyer is saving the money that would have been spent on interest to finance the purchase with a loan. At the same time, the supplier is losing the interest it would have earned had it received the payment and invested the cash. Therefore, the buyer wants to postpone payment as long as possible and the supplier wants to collect payment as soon as possible. That is why suppliers often offer discount credit terms to buyers who pay sooner rather than later.

Trade Receivables Definition

Trade receivables represent the money owed but not yet paid to a company for goods or services already delivered or provided to the customer. The goods were delivered. Then the company recorded the sale. But the cash was not yet received. Record trade receivables as an asset on the balance sheet in an account called accounts receivable.

Trade Payables Definition

Trade payables represent the money a company owes but has not yet paid for goods or services that have already been delivered or provided from a supplier. The goods were received, the expense was recorded, but the cash was not yet paid. Trade payables are recorded as a liability on the balance sheet in an account called accounts payable.
For more tips on how to improve cash flow, click here to access our 25 Ways to Improve Cash Flow whitepaper.

trade credit, Accounting Trade Credit, trade credit definition
[box]Strategic CFO Lab Member Extra
Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]

trade credit, Accounting Trade Credit, trade credit definition

ARTICLES YOU MIGHT LIKE

The Struggles of Private Company Accounting

Hiring the right accountant  When I meet a business owner operating at a successful $10 million in revenue, they often mention, “My CPA”… I immediately know that CEO/Entrepreneur is referring to their Tax CPA.  That is because one thing that all Entrepreneurs have in common is that they must file a tax return.  So, from

Read More »

IN CRISIS? GET A STRATEGIC CFO! – CEO Blindspots Podcast

Friend of the firm, Birgit Kamps, recently had Strategic CFO President, Dan Corredor, as a guest on her podcast, CEO Blindspots. CEO BLINDSPOTS HOST: Birgit Kamps. She was speaking five languages by the age of 10, and lived in five countries with her Dutch parents prior to becoming an American citizen. Birgit’s professional experience includes starting

Read More »

SHRM calls ICHRA the 401K for Group Health Benefits

Fed-up with group health insurance? ICHRA is the new way to offer great health benefits and avoid ACA penalties, SHRM calls it the 401K for group health benefits.  In 2020 the Department of Labor, HHS and IRS changed the rules for employer health benefits. They changed the Affordable Care Act mandates and penalties for every

Read More »

JOIN OUR NEXT SERIES

Financial Leadership Workshop

MARCH 28TH-31ST 2022

SHARE THIS ARTICLE

JOIN THE NEXT STRATEGIC CFO™ SERIES

Strategic CFO™ Financial Leadership Workshop
The Art of the CFO®

Days
Hours
Min

September 12-15th 2022